Cabinet approves Rs 1,500 crore UPI incentive, fintechs express disappointment

Cabinet approves Rs 1,500-crore incentive for UPI

The Union Cabinet on March 19  approved a Rs 1,500 crore incentive scheme aimed at promoting small-value BHIM-UPI transactions for the financial year 2024-25.

The move is expected to further accelerate the adoption of digital payments, particularly among small merchants, by incentivising transactions of up to Rs 2,000.

Under the scheme, small merchants will receive a 0.15% incentive per transaction, ensuring that digital payments remain an attractive and cost-free option for businesses that are traditionally price-sensitive.

"The Union Cabinet chaired by the Prime Minister Narendra Modi today approved the ‘Incentive Scheme for promotion of low-value BHIM-UPI transactions Person to Merchant (P2M)’ for the financial year 2024-25," said government in a statement.

The scheme, which will be in effect from April 1, 2024, to March 31, 2025, is part of the government’s broader strategy to deepen financial inclusion and reduce cash dependency. While merchants accepting payments above Rs 2,000 will not receive any incentive, the initiative targets smaller businesses that may still be hesitant to fully transition to digital transactions.

To ensure seamless implementation, 80% of the incentive claims submitted by acquiring banks will be reimbursed upfront. The remaining 20% will be disbursed only if banks meet performance benchmarks, including maintaining a technical decline rate below 0.75% and ensuring system uptime above 99.5%, the officials note.

The government also aims to use the initiative to expand UPI’s reach in smaller towns and rural areas by promoting feature phone-based UPI 123PAY and offline payment solutions like UPI Lite and UPI LiteX.

"The move also aims at expanding government's indigenous payment infrastructure , with the goal of achieving a total transaction volume of Rs 20,000 crore via BHIM-UPI in FY25," it added.

Meanwhile, UPI transactions continue to surge, with January 2025 recording nearly 1,700 crore transactions valued at over Rs 23.48 lakh crore—the highest monthly figure ever.

Industry seeks higher allocation for UPI growth

However, industry stakeholders argue that the Rs 1,500 crore allocation is inadequate to meet the ambitious growth targets for UPI.

Vishwas Patel, chairman of the Payments Council of India (PCI), criticised the move, stating, "Continual growth, progress and penetration of UPI to the next 300 million Indians should be the only aim and goal for all of us. With Zero MDR of UPI and the government allocating a paltry Rs  1500 crores for processing transactions of Rs 246.82 lakh crores 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."

Patel said the industry was expecting the incentive to be above Rs 5,000 crores, a little higher than last year's incentive of Rs 3,500 crores. "This paltry Rs 1,500 crore is a grave injustice. With funding winter continuing for the fintech industry, it will be very difficult to get the next set of Indians on the Digital payments bandwagon as well as deploy acceptance mechanisms in the heartland of our country," he said.

Fintech firms have also been making a case for charging MDR on UPI transaction for large merchants.

MDR is the commission that merchants pay to banks and other payment companies for facilitating a transaction. There is no MDR on UPI payments, while debit cards have an average of 0.75 percent and credit cards around 1.75 percent per transaction.

Merchant payments are over thrice those of credit card spending in the country every month. The average ticket size though is much smaller, creating stress in the banking system that has to process around 17 billion transactions in a month. Hence, everyone in the ecosystem is looking for ways to monetise the payments system enough to cover the cost.

"With increasing deployment and servicing costs as well as increasing RBI compliance 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," Patel said.

The NPCI, which operates UPI, and the RBI classify any merchant who records more than Rs 20 lakh annual turnover as a large merchant.

"Why should the government incentivise us with taxpayers' money for processing transactions for large merchants? UPI dominates as India’s most favourite payment option and every merchant will continue to offer UPI even by paying a mere 25 BPS as processing charges as they are anyways paying 2% for credit cards and other options," he added.

The idea was also brought up in a meeting with the Reserve Bank of India (RBI) governor on March 5, Moneycontrol had learnt.

Fintechs explore charging merchants for UPI in talks with RBI

RBI governor Sanjay Malhotra had discussed the payments ecosystem with non-bank Payment System Operators and fintechs and also their expectations from the central bank.

“Given that the absence of MDR charges on UPI impacts small and big merchants differently, the regulator and the government will take a look at this issue, especially if the lack of such charges are leading to other obstacles,” one of the participants had told Moneycontrol on condition of anonymity. “There is a case for MDR on UPI, we have to see how can we have a pricing mechanism (for small and large merchants).”