Govt approves incentives for UPI payments up to Rs 2,000, PCI chairman fumes

The Indian government has approved a new scheme to encourage small merchants to use digital payments through the BHIM-UPI platform. This scheme, called the 'Incentive Scheme for Promotion of Low-Value BHIM-UPI Transactions (P2M), will run from April 1, 2024, to March 31, 2025, with a budget of Rs 1,500 crore.

The main goal is to promote digital transactions for payments of up to Rs 2,000 and reduce reliance on cash. This plan is specifically designed for small businesses to ensure they benefit from the digital payment system without extra costs.

Banks that handle these transactions will also receive incentives. Each quarter, banks will get 80% of their incentive claims immediately, while the remaining 20% will depend on their service quality. If a bank keeps its technical errors below 0.75% and ensures its system is available at least 99.5% of the time, it will receive the full incentive.

This will push banks to improve their digital payment infrastructure and provide better service.

For customers, this scheme makes payments easier, safer, and faster without additional fees. Small merchants, who may be hesitant to use digital payments due to extra costs, will now find it more beneficial. The scheme also supports the government's vision of a cashless economy, helping to formalize financial transactions and improve transparency.

By linking incentives to banks' performance, the government aims to ensure that digital payment services remain reliable and widely available. The scheme also hopes to expand UPI use in smaller towns and rural areas by promoting feature phone-based payments and offline solutions.

“With Zero MDR of UPI and the Government allocating a paltry Rs 1500 crore for processing transactions of Rs 246.82 lakh crore in 2024 to the entire ecosystem is just not going to be enough. It will choke the entire ecosystem for funds for scaling and growth. We were expecting the government incentive to be above Rs 5,000 crore, a little higher than last year's incentive of Rs 3,500 crore, but this paltry Rs 1,500 crore is grave injustice,” said Vishwas Patel, Joint MD of Infibeam Avenues and Chairman of Payments Council of India.

“With increasing deployment and servicing costs as well as increasing RBI compliances costs, it will choke the growth. We don’t want to survive on government incentives. The only solution is for the government to allow us to charge a low controlled MDR of 25 BPS on UPI P2M transactions only for merchants with more than Rs 40 lakhs turnover. The incentives can continue for smaller merchants by offering them Zero MDR, added Patel.

According to NPCI data, UPI handled 131.12 billion transactions worth Rs 200 trillion in the financial year 2024 (FY24). Over 400 million people use UPI for real-time payments, and it now accounts for 75% of all digital transactions in India.