Payment Aggregators Negotiate for Larger Share of UPI Transaction Fees

Payment aggregators (PA) are negotiating with their sponsor banks for a larger share of the acquiring bank’s cut of the new merchant discount rate (MDR) on UPI transactions , with discussions centred on retaining 50-80% of the bank’s share, people aware of the matter said. The negotiations are expected to be completed before the new MDR takes effect on October 15. Under the framework notified by the government and the National Payments Corporation of India ( NPCI ), merchants will pay an MDR of 0.4% on UPI transactions above Rs 2,000. Of this, 0.12% accrues to the acquiring bank, while the PA’s share has to be carved out of the bank’s portion. This means a Rs 10,000 UPI transaction would generate Rs 40 in MDR, of which the acquiring bank would receive Rs 12. At the rates being negotiated, the PA could retain Rs 6-9.60 of this amount. The framework does not provide for a separate, direct share of the MDR for payment aggregators, prompting them to negotiate individually with banks. The outcome of these negotiations is likely to depend on the business PAs bring to banks. Aggregators with large transaction volumes, sizeable merchant floats and deeper technology relationships with banks are expected to have greater bargaining power, a senior executive at a payment aggregator said. PAs that also provide payment-processing technology to their sponsor banks could command the upper end of the 50-80% range, people aware of the discussions said. The size and profile of a PA’s merchant base will also determine how much it can earn. Large e-commerce merchants selling higher-value products generate more transactions above the Rs 2,000 threshold and therefore more MDR income, the executive said. At the same time, categories such as railways, telecom, insurance and fuel, where the charge is a flat Rs 5 per transaction, can provide aggregators with a more predictable stream of fee income. The new revenue arrangement is therefore likely to intensify competition among large PAs such as Razorpay, Cashfree, PayU and Pine Labs , while smaller players could have less room to negotiate with banks. PAs already follow a similar model for card payments, where larger players are able to secure better commercial terms from acquiring banks because of the volumes they bring. “The larger aggregators have always had that advantage, even in credit cards,” said an executive at another large payment aggregator. However, the negotiations could eventually lead to a larger structural change in the UPI ecosystem. Some payment aggregators are considering approaching NPCI to seek direct membership as acquirers, which would potentially allow them to retain the entire 0.12% acquiring-bank share rather than splitting it with a sponsor bank, an executive at a payment aggregator said. Such a move would require regulatory approval. Under the current arrangement, the acquiring bank provides the settlement account and connectivity to NPCI, while much of the technology and payment infrastructure is handled by the PA. Direct access, payment firms argue, could allow them to roll out new products and innovations faster. There is already a precedent in the card ecosystem. In July, Glomo, a payment service provider licensed in GIFT City , became the first non-bank acquirer in India to obtain principal membership of Visa, allowing it to process Visa transactions for merchants directly rather than through a bank’s acquiring licence. Payment firms such as Adyen also operate as direct acquirers with Visa and Mastercard in several overseas markets.