Incentivizing Promotion Of Low-Value BHIM-UPI Transactions Approved

The incentive scheme for promotion of low-value BHIM-UPI transactions (P2M) will be implemented at an estimated outlay of 1,500 crore, from 01.04.2024 to 31.03.2025.

Jatinder Handoo, CEO, DLAI,

FinTech BizNews Service

Mumbai, March 19, 2025:  The Union Cabinet chaired by the Prime Minister Shri 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 in the following manner:

             i.        The incentive scheme for promotion of low-value BHIM-UPI transactions (P2M) will be implemented at an estimated outlay of 1,500 crore, from 01.04.2024 to 31.03.2025.

            ii.        Only the UPI (P2M) transactions upto 2,000/- for Small Merchants are covered under the scheme.

           iii.        Incentive at the rate of 0.15% per transaction value will be provided for transactions upto Rs.2,000 pertaining to category of small merchants.

          iv.        For all the quarters of the scheme, 80% of the admitted claim amount by the acquiring banks will be disbursed without any conditions.

            v.        The reimbursement of the remaining 20% of the admitted claim amount for each quarter will be contingent upon fulfilment of the following conditions:

a)    10% of the admitted claim will be provided only when the technical decline of the acquiring bank will be less than 0.75%; and

b)    The remaining 10% of the admitted claim will be provided only when the system uptime of the acquiring bank will be greater than 99.5%.

Benefits:

i.      Convenient, secure, faster cash flow, and enhanced access to credit through digital footprints.

ii.     Common citizens will benefit from seamless payment facilities with no additional charges.

iii.    Enable small merchants to avail of UPI services at no additional cost. As small merchants are price-sensitive, incentives would encourage them to accept UPI payment.

iv.    Supports the Government's vision of a less-cash economy through formalizing and accounting the transaction in digital form.

v.     Efficiency gain- 20% incentive is contingent upon banks maintaining high system uptime and low technical decline. This will ensure round-the-clock availability of payment services to citizens.

vi.    Judicious balance of both the growth of UPI transactions and the minimum financial burden on the Government exchequer.

Objective:

·        Promotion of indigenous BHIM-UPI platform. Achieving the target of 20,000 crore total transaction volume in FY 2024-25.

·        Supporting the payment system participants in building a robust and secure digital payments infrastructure.

·        Penetration of UPI in tier 3 to 6 cities, especially in rural & remote areas by promoting innovative products such as feature phone based (UPI 123PAY) & offline (UPI Lite/UPI LiteX) payment solutions.

·     Maintain a high system uptime & minimize technical declines.

Digital Lenders Association of India has been actively  advocating  for a remunerative MDR and the need for an incentive framework for Payment Service Providers (PSPs)  for low-value (sub INR 2000 ) BHIM-UPI transactions(P2M). Jatinder Handoo, CEO, DLAI, explains the impact: "The last mile adoption of digital payments is crucial for expanding the reach of digital financial inclusion to every nook and corner of India. We welcome the cabinet decision to incentivise  low  value transactions upto INR 2,000 at the rate of 0.15% for small merchant category. This will aid in further promoting small ticket size transactions on BHIM-UPI. We are  hopeful that in the future a market driven sustainable pricing framework (MDR regime) for low value (P2M)  transactions will evolve to appropriately incentivize all market participants."

According to Chairman of Payment Council of India Vishwas Patel, “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 INR 1500 crores for processing transactions of INR 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. We were expecting the government incentive to be above INR 5,000 crores, a little higher than last year's incentive of INR 3,500 crores, but 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. 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. UPI P2P can continue to have zero charges. Why should the government incentivize 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.” 

Background:

Promotion of digital payments is an integral part of the Government's strategy for financial inclusion and provide wide-ranging payment options to the common man. The expenditure incurred by the digital payment industry while providing services to its customers / merchant is recovered through the charge of Merchant Discount Rate (MDR).

As per RBI, MDR upto 0.90% of transaction value is applicable across all card networks. (for Debit cards). As per NPCI, MDR upto 0.30% of transaction value is applicable for UPI P2M transaction. Since January 2020, to promote digital transactions, MDR was made zero for RuPay Debit Cards and BHIM-UPI transactions through amendments in section 10A in the Payments and Settlement Systems Act, 2007 and section 269SU of the Income-tax Act, 1961.

In order to support the payment ecosystem participants in effective delivery of services, "Incentive scheme for promotion of RuPay Debit Cards and low-value BHIM-UPI transactions (P2M)" has been implemented with due approval by the Cabinet. Year-wise incentive payout by the Government (in Rs. crore) during the last three financial years:

The incentive is paid by the Government to the Acquiring bank (Merchant's bank) and  thereafter shared among other stakeholders: Issuer Bank (Customer's Bank), Payment Service Provider Bank (facilitates onboarding of customer on UPI app / API integrations) and App Providers (TPAPs).