NPCI set to abolish PSP fee for P2M transactions: How will G-Pay and PhonePe make money via UPI?

After abolishment of the Merchant Discount Rate (MDR), banks have been lobbying for a zero switching fee and payment service provider fee (PSP). While the National Payments Corporation of India (NPCI) is yet to give any mandate on switching fees, it’s all set to abolish PSP and interchange fees till April 30.

According to minutes of the NPCI working committee meeting released on February 14, the organisation will release a circular to waive-off interchange and PSP fee and it will be effective from Jan 1, 2020. The decision was endorsed by the working group members. 

This essentially means that April 30 is an interim measure and the move will be implemented with retrospective effect of Jan 1, 2020. If retrospective, what happens then to the fees already collected, if it is implemented?

Now the beneficiary banks (banks that received payments on the transaction) will not make any money on UPI-based transactions (peer-to-merchant or P2M). As of now, beneficiary banks make Rs 0.25 on transaction up to Rs 1,000, Re 1 on a transaction worth Rs 25,000 and Rs 5 on up to Rs 75,000.

Waiver of PSP fee would leave no room for companies like Google Pay, PhonePe, Amazon Pay and Paytm to earn anything on UPI transactions. On average, they make about Rs 0.30-0.35 through PSP fee on every P2M transaction.

NPCI also mentioned that the steering committee meeting will be held in April to discuss and decide the future course of action, in case the MDR issue isn’t resolved. 

The government had already abolished MDR on transactions via RuPay debit card and UPI from December 30, 2019. Since banks aren’t charging MDR on RuPay and UPI transactions, they have no funds to pay to any other stakeholder — be it a network (NPCI) or third-party apps — to make money.

PhonePe, Google Pay, Bharatpe and Amazon Pay who have been spending several million dollars every year to capture a high market share in the UPI ecosystem will not be able to make a single rupee out of it. Theoretically, after removal of the PSP fees, there will be no future revenue model that exists for third-party apps such as Google Pay, PhonePe, Paytm, Bharatpe and Amazon Pay in the merchant-based UPI ecosystem.