In a significant move aimed at bolstering digital payments and providing a fillip to small businesses, the Modi government has approved an incentive scheme with an estimated outlay of ₹1,500 crore for promoting low-value BHIM-UPI transactions. The scheme, titled “Incentive Scheme for Promotion of Low-Value BHIM-UPI Transactions Person to Merchant (P2M),” will be applicable for the financial year 2024-25, running from April 1, 2024, to March 31, 2025. This initiative intends to encourage digital payments among small merchants and further the government’s agenda of a cashless economy.
What is the UPI Incentive Scheme?
The newly approved scheme focuses on incentivizing person-to-merchant (P2M) UPI transactions up to ₹2,000 made to small merchants. Under this scheme, acquiring banks and other stakeholders involved in the transaction will receive an incentive of 0.15% of the transaction value. This incentive is specifically targeted at small merchants to ensure they can offer UPI-based payments to their customers without incurring any additional costs, as the government continues to enforce a zero Merchant Discount Rate (MDR) policy for these transactions. Large merchants will also benefit from the zero MDR policy on transactions up to ₹2,000 but will not be eligible for the 0.15% incentive. Transactions exceeding ₹2,000 will remain MDR-free but will not qualify for any incentives.
The government, in its official release, stated that this scheme aims to promote the indigenous BHIM-UPI platform and achieve a total UPI transaction volume of ₹20,000 crore by the end of FY25. This initiative builds upon the government’s previous efforts to eliminate MDR on RuPay Debit Cards and BHIM-UPI transactions since January 2020 to encourage digital adoption across the country.
Defining Small Merchants
For the purpose of this incentive scheme, the government, through the National Payments Corporation of India (NPCI), has defined small merchants as those with a projected inward UPI transaction value of less than or equal to ₹50,000 per month. This definition ensures that the benefits of the scheme primarily reach the intended segment of small-scale businesses that are often price-sensitive and might be hesitant to adopt digital payment methods due to potential transaction costs.
How Will the Scheme Help Small Merchants?
The UPI incentive scheme is poised to benefit small merchants in several ways:
- Zero Transaction Cost: By providing a 0.15% incentive to the acquiring banks for transactions up to ₹2,000 with small merchants, the government ensures that these merchants do not have to pay any MDR. This eliminates a potential barrier for small businesses to adopt UPI payments, making digital transactions cost-free for them.
- Increased Customer Base: As digital payment methods become increasingly popular among consumers, the ability to accept UPI payments without any extra charges will enable small merchants to cater to a wider customer base, including those who prefer cashless transactions.
- Improved Cash Flow: Digital payments through UPI offer faster and more secure cash flow compared to traditional cash transactions. This can help small merchants manage their finances more efficiently and reduce the risks associated with handling large amounts of cash.
- Enhanced Access to Credit: The adoption of digital payment methods creates a digital footprint for small merchants, which can be beneficial for accessing formal credit from financial institutions in the future.
- Level Playing Field: This scheme helps to create a more level playing field for small merchants by enabling them to offer the same digital payment convenience as larger businesses without incurring additional costs. This can improve their competitiveness in the market.
Mechanism of Incentive Distribution and Conditions
The ₹1,500 crore incentive will be routed through the acquiring banks, which will then distribute it among the issuer banks, payment service providers, and app operators involved in the UPI transactions. The disbursement of the incentive will follow a structured model. For each quarter of the scheme, 80% of the admitted claim amount by the acquiring banks will be disbursed unconditionally. The remaining 20% of the claim amount will be contingent upon the acquiring banks meeting certain performance criteria. Specifically, 10% will be provided if the technical decline rate of the bank is below 0.75%, and another 10% will be given if the system uptime is above 99.5%. This condition-linked disbursement aims to ensure the reliability and availability of the UPI payment infrastructure.
Industry Concerns and Perspectives
While the government’s initiative has been welcomed by many as a positive step towards promoting digital payments, some industry players have expressed concerns regarding the adequacy of the allocated funds. The Payments Council of India (PCI) stated that the ₹1,500 crore incentive might be insufficient to sustain the growth of the digital payments ecosystem, especially considering the zero MDR policy. They estimate that ₹4,000-₹5,000 crore in incentives might be required to cover the processing costs effectively.
Vishwas Patel, Chairman of PCI and Joint MD of Infibeam Avenues, remarked that with the zero MDR on UPI and the government allocating only ₹1,500 crore for processing transactions worth ₹246.82 lakh crore in 2024, the entire ecosystem could face a funds crunch, hindering scaling and growth. He suggested that the government should consider introducing a controlled MDR of 25 basis points on UPI P2M transactions for merchants with a turnover of more than ₹40 lakh while continuing zero MDR for smaller merchants.
However, other industry voices have expressed optimism. Jatinder Handoo, CEO of the Digital Lenders Association of India (DLAI), welcomed the decision to incentivize low-value transactions for small merchants and expressed hope for a market-driven sustainable pricing framework in the future.
Government Objectives and Long-Term Vision
The primary objective of the UPI incentive scheme is to promote the widespread adoption of digital payments, particularly through the indigenous BHIM-UPI platform. The government aims to achieve a transaction volume of 200 billion in FY25, with a total transaction value of ₹20,000 crore. Beyond these targets, the scheme also seeks to strengthen the digital payments infrastructure, expand UPI penetration in tier 3 to tier 6 cities and rural areas through innovative solutions like UPI 123PAY for feature phones and offline payment tools like UPI Lite and UPI LiteX.
The government believes that this initiative will not only benefit small merchants and consumers by providing convenient, secure, and cost-free digital payment options but will also contribute to formalizing the economy and promoting greater transparency through digitally recorded transactions. The performance-linked incentive structure for banks also underscores the government’s commitment to ensuring the reliability and efficiency of the digital payment ecosystem.
The Modi government’s approval of the ₹1,500 crore UPI incentive scheme is a significant step towards empowering small merchants and accelerating the adoption of digital payments in India. While some industry stakeholders have raised concerns about the quantum of the incentive, the scheme is expected to provide substantial benefits to small businesses by eliminating transaction costs and enabling them to participate more fully in the digital economy. This initiative aligns with the government’s long-term vision of a less-cash economy and reinforces India’s position as a global leader in digital payments.
