The Payments Council of India (PCI) has cautioned payment service providers (PSPs) about their financial sustainability being at severe risk, a day after the government slashed the outlay under the scheme for the promotion of low-value BHIM-UPI transactions (Person-to-Merchant) by more than half.
The incentives for transactions up to ₹2,000 for small merchants in the financial year 2024-25 has been slashed from ₹3,500 crore in FY24 to ₹1,500 crore in FY25.
Without a viable revenue model, some fintech players may need to scale back operations, slow down innovation, or reassess their market presence, which could impact the broader digital payments landscape, according to a statement by the representative body of non-bank payment system participants in India.
The council underscored that the ₹1,500-crore allocation for FY25 is insufficient to meet the needs of the rapidly expanding digital payments infrastructure.
‘Not enough’
Currently, only UPI (P2M) transactions up to ₹2,000 for small merchants are covered under the ‘Incentive Scheme or Promotion of Low-Value BHIM-UPI Transactions Person to Merchant (P2M).’ A 0.15 per cent incentive is provided per transaction value.
“The payment service providers are already struggling with increasing deployment, servicing, and regulatory compliance costs….the ₹1,500 crore allocated incentive is inadequate for the industry to sustain,” said PCI.
Given the current state of payment services, the industry was expecting either higher incentives or the introduction of a controlled MDR for large merchants (with a turnover of more than ₹40 lakh), but neither has materialised.
Payment system providers are third party entities that enable merchants/businesses to accept electronic payments. They operate across various payment networks, ensuring seamless link between different financial institutions and payment systems.
Merchant Discount Rate (MDR) is a fee charged from merchants by a bank or a payment aggregator when they receive payments from customers via digital methods.
‘May hinder progress’
Referring to Zero MDR on UPI, Vishwas Patel, Joint MD, Infibeam Avenues, and Chairman of PCI, emphasised that the allocation of only ₹1,500 crore for processing transactions worth ₹246.82 lakh crore in 2024 is much less than what is required.
“It will hamper the ecosystem from accessing funds needed for scaling and growth. The ecosystems’ expectation was for a higher incentive than last year’s ₹3,500 crore, and the current allocation of ₹1,500 crore may fall short of sustaining the pace of progress,” he said.
PCI cautioned that sustaining long-term investments in payment processing, customer acquisition, and operational management remain a grave concern.
“As it stands, the current incentive structure is not a sustainable revenue model, placing the survival of many fintechs at a serious risk without adequate support,” per the council’s statement.
The council called for a long-term, sustainable solution to ensure UPI’s growth. It noted that large merchants are accustomed to controlled MDR on different modes of digital payments.
PCI observed that the absence of MDR on Rupay and UPI is resulting in entities not being able to invest in acquiring new customers, thereby restricting their growth, broader adoption, and long-term viability of UPI.
