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MUMBAI, Sept 22: Walmart-backed PhonePe and Google Pay could earn hundreds of millions of \u200bdollars a year in extra revenue from India\u2019s move to allow merchant fees on its widely used Unified Payments Interface (UPI) digital payment network, entrenching the dominant apps\u2019 lead over \u200csmaller rivals.<\/strong><\/p>\n The end of UPI\u2019s six-year reign as a free network will give PhonePe and Google Pay, which together accounted for 80% of UPI payment values last month, the firepower to expand to rural areas, while prompting rivals to chase higher-value transactions to draw users and fees.<\/p>\n But the boost for the dominant incumbents could also renew focus on the level of market concentration regulators may be comfortable with.<\/p>\n UPI, used by over 500 million people in India to pay for everything from roadside cups \u200bof tea to iPhones, will cease to be free from October 15 after regulators last week permitted a 0.4% fee to be charged to merchants on transactions exceeding 2,000 rupees ($21).<\/p>\n The new fee, called \u200bthe merchant discount rate (MDR), is expected to generate annual revenue of up to $1.1 billion for payment apps by March 2028, according to estimates by brokerage Bernstein. \u2060That would mean PhonePe and Google Pay would get about $900 million of that sum, based on their market share.<\/p>\n \u201cThe introduction of MDR is a positive step towards offsetting substantial operational costs and liabilities,\u201d said Rahul \u200bChari, co-founder at PhonePe.<\/p>\n<\/blockquote>\n The change marks a shift for an ecosystem built around free payments, whose rapid adoption was driven by factors including India\u2019s 2016 demonetisation, which withdrew a large chunk of high-denomination currency from circulation, the \u200bCOVID-19 pandemic and heavy customer incentives.<\/p>\n It also brings UPI closer to the models of global retail payment systems such as China\u2019s Alipay, Singapore\u2019s PayNow and Pix in Brazil, where fees range from 0.6% to 1.5%.<\/p>\n But the UPI fee has also drawn political criticism and prompted concerns that merchants could pass the cost on to consumers, potentially encouraging a shift back to cash in Asia\u2019s third-largest economy.<\/p>\n The new revenue pool could give PhonePe and Google Pay greater incentive to expand \u200bbeyond large urban centres into rural India, an expansion that was previously less commercially viable, according to two industry sources familiar with internal discussions at the firms.<\/p>\n Payments outside large urban areas may be smaller, but \u200btransaction data can help companies offer tailored loans and other financial products to bring in revenue, one of the sources said.<\/p>\n Google Pay did not respond to an email seeking comment, while PhonePe did not share specifics about its plans. \u200cThe sources \u2060spoke on the condition of anonymity as they are not authorised to speak to the media.<\/p>\n Greater firepower for the two players, though, could also revive questions over whether regulators will try again to check their dominance in UPI payments.<\/p>\n The National Payments Corporation of India, a quasi-regulator and operator of UPI, has twice deferred a decision on imposing a 30% market-share cap.<\/p>\n Smaller rivals, meanwhile, are likely to target higher-value transactions such as ticket bookings, business payments and utility bills, while expanding credit offerings on UPI, executives and analysts said.<\/p>\n \u201cNow I can give a direct reason to my team why we should continue to invest and grow the UPI ecosystem,\u201d said Bipin Preet \u200bSingh, co-founder of MobiKwik, which ranks 15th on \u200bthe tally of most frequently used apps for \u2060UPI payments.<\/p>\n He expects the fee to push players towards bill payments and online commerce, as the industry shifts toward person-to-merchant payments over promoting peer-to-peer transfers.<\/p>\n Some venture investors, though, caution that the reform arrives late and may be skewed towards larger players.<\/p>\n \u201cIt might on the margins help smaller players with existing distribution, but the largest \u200bbenefits are likely to accrue to large firms like PhonePe or Google Pay,\u201d said Joseph Sebastian, vice president for investments at Blume Ventures.<\/p>\n While regulations prohibit \u2060merchants from explicitly passing on the cost, industry executives expect some degree of indirect pass-through.<\/p>\n But the Indian central bank, analysts at Bernstein, industry executives and half a dozen retail merchants Reuters spoke to in Mumbai said that a shift back towards cash is unlikely.<\/p>\n Govind Rawal, manager at a large clothing retailer named Suvidha in Mumbai\u2019s Dadar area, said about 80% of his shop\u2019s daily revenue of about 2 million rupees ($21,000) flows via UPI and he does not \u2060intend to \u200bpass on the cost.<\/p>\n \u201cCustomers are too used to UPI and the cost is quite small, so it doesn\u2019t make too much difference,\u201d \u200bhe said.<\/p>\n In another Mumbai locality, 31-year-old Mahendra Vishnoi, who was shopping for household items, said he mostly uses UPI for everyday payments and hopes merchants do not raise prices to offset the fees, even though a small increase would not necessarily send him back \u200bto cash.<\/p>\n \u201cThe fees shouldn\u2019t keep rising in the future though. If it stays where it is for a few years, it should be fine.\u201d<\/p>\n<\/div>\n\n
MAKING A RURAL PUSH VIABLE<\/strong><\/h3>\n
MERCHANTS EXPECT TO \u200bABSORB FEE COSTS<\/strong><\/h3>\n