The government’s stand against bringing back charges on Unified Payments Interface (UPI) transactions has brought to the fore the tussle between banks and non-bank payment service providers (PSPs) on splitting of compensation for such transactions.

The Payments Council of India (PCI) is now seeking an increase in the total compensation amount for UPI and RuPay debit cards to Rs 8,000 crore.

In response to a tweet by the Ministry of Finance on Sunday that the government has provided compensation for revenue loss on digital payment transactions, Vishwas Patel, executive director, Infibeam Avenues, and chairman of PCI, said banks have not been sharing any part of the compensation with other PSPs.

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“…all the support money provided by the finance ministry has been appropriated by the banks only (no single bank has even a significant single digit volume in UPI)… none of the payment aggregators or facility provider (sic) received anything,” Patel tweeted.

Payment industry executives FE spoke to said banks have received the subsidy amount for three months, which works out to roughly Rs 900 crore. The understanding between banks and other service providers was that once the subsidy came in, entities on the merchant acquiring side would get 0.1% and those on the issuing side would get 0.15%. Payment aggregators and facility providers were expecting 0.05% from what acquirers got.

“If we compare UPI and RuPay debit cards to MasterCard and Visa debit card MDR (merchant discount rate) as prescribed by the RBI, the total subsidy required to be paid by the finance ministry should be Rs 6,000 crore for UPI and Rs 2,000 crore a year for RuPay debit card,” Patel told FE. The MDR is the fee paid by a merchant who accepts digital payments to the bank for offering the payments infrastructure, which is split further among other entities involved in a transaction.

Two third-party app providers – PhonePe and Google Pay – account for over 80% of all UPI transactions. Before the government abolished the MDR on UPI and RuPay debit card transactions in January 2020, UPI transactions of over Rs 100 attracted an MDR of 0.3%, capped at Rs 100.

Ahead of the FY23 Budget, the PCI had requested a Rs 4,000-crore compensation to cover revenue losses worth Rs 5,500 crore on account of the zero-MDR regime.

The Reserve Bank of India’s (RBI) discussion paper on digital payment charges released last week, which has triggered a discussion on the issue of MDR on UPI, said the government has budgeted Rs 1,500 crore each for FY22 and FY23 to compensate for the MDR forgone on UPI and RuPay debit card transactions.

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The ministry’s response has put the payments industry in a fix over how to respond to the discussion paper. “The industry had been planning to respond in favour of a market-linked pricing regime, as that is one of the options mentioned in the discussion paper. We had thought that if we can persuade the RBI, they might help get the change made through the next Finance Bill. Now, the industry will have to look at its options,” another executive said on condition of anonymity.