ICICI Bank has informed payment aggregators (PAs) that from August 1, it will start charging a fee for handling UPI transactions made by merchants. This move could reduce the profit margins of payment companies and may lead to increased costs for small businesses in the future.

Other major banks like Axis Bank and Yes Bank may also follow this step, making UPI payments more expensive for the ecosystem, even though UPI is supposed to be free for merchants.

A founder of a payment company said, “Every bank is already charging in different ways, like account fees, platform fees, or reconciliation charges. We (payment companies) end up paying these and recover them in some form.”

Technically, there should be no Merchant Discount Rate (MDR) for UPI payments; this is a rule by the government. MDR is the fee merchants usually pay to banks and payment companies when a transaction happens. While UPI is supposed to have zero MDR, banks and PAs seem to be charging under different names, like convenience fee or technology fee, which creates confusion.

What exactly is ICICI Bank charging?

ICICI Bank will charge payment aggregators 2 basis points (0.02%) per transaction, capped at ₹6, if they maintain an escrow account with the bank; otherwise, the charge will be 4 basis points (0.04%) per transaction, capped at ₹10.

These charges will apply only where PAs use ICICI Bank to manage merchant payments. Because the fee is quite small, most PAs might absorb it for now instead of passing it to merchants.

Who suffers the most?

While large merchants often get these charges waived due to high balances or turnovers, small and mid-sized merchants usually end up paying. And due to government rules, they cannot charge customers any extra fees for UPI payments.

Some payment companies say small merchants can still manage because the fee is tiny. Others feel that banks should charge something to stay accountable and offer better service.

However, payment firms also point out that keeping large sums in nodal accounts (which may reduce charges) is not ideal because the interest they earn on these accounts is very low. Even though UPI is supposed to be free, hidden fees are creeping in, and that may affect small merchants the most.