The fact that wallets were not allowed to be a part of the Unified Payments Interface (UPI) has been a bone of contention with players for over a year and a half. Now that wallets are allowed to function on the UPI with the revised guidelines from the RBI, there are some issues that players need to take into consideration.

What about merchants?

The RBI guidelines give clarity that wallet-to-wallet transactions (i.e. money from a Paytm account can go to MobiKwik account and vice versa) and wallet-to-bank accounts transactions (and perhaps cut down the fee wallets charge while transferring to bank accounts) will be possible via the UPI.

But no clarity was given in the guidelines on how the UPI will work for wallets and their merchants. The issue can be crystallized from a question from MediaNama’s Aroon Deep:

Can the BHIM payment app be used to pay a merchant on Paytm’s network through the UPI? 

QR code payments were pioneered by wallet players in India but are closed networks which do not allow users to pay at merchants using various payment modes. However, wallet players were not allowed on the BharatQR as well by card networks. But now, the National Payments Corporation of India (NPCI) mandated that QR codes generated by the UPI will be merged with the ones generated by BharatQR. The NPCI also asked companies to ensure that their applications be equipped to read both UPI QR as well as BharatQR by 15th September 2017. Will the NPCI also ask wallets to embed UPI credentials in their QR codes as well?

So far, it looks like Paytm CEO Vijay Shekhar Sharma seems to have shown willingness to open up their closed merchant network through their QR codes.


Who’s MDR is it anyway?

If wallets are allowed to be on the UPI and open up their merchant network, then it begs the question, what kind of MDR should be charged for digital transactions? MDR is an interbank fee levied by banks on merchants to facilitate a digital transaction.

The UPI and BharatQR have different merchant discount rates (MDR) so it will be a challenge for card networks and the NPCI to sort out where the transaction is originating and charge merchants accordingly.

On the UPI, merchants are charged a merchant discount rate (MDR) of 0.25% for payments below Rs 1,000 and 0.65% for all other charges. Meanwhile, the RBI is proposing a differentiated MDR for card networks which use QR codes. More on that here.

Wallets, due to their closed merchant networks, did not charge an MDR for merchants. But what will happen if a Freecharge user pays a merchant on the MobiKwik network? Should the merchant bear the cost for interchange or should the user bear the cost? 

Can wallets become a Payments Service Provider (PSP) on UPI?

The RBI guidelines also have not defined whether wallets can now become a payments service provider (PSP). Right now, the NPCI says that only banks and payment banks can become PSPs. To recap, a PSP is a certified and trusted entity which provides technology, SDKs, and platforms for other players as well. 

To give an example, PhonePe is an application provider and has a wallet licence, but its sponsor bank for the UPI is YES Bank which acts as a PSP and provides the necessary SDKs. All users of PhonePe will be given a xxx@ybl handle on the UPI and the payments will be processed on the YES Bank’s backend.

With due apologies to MobiKwik CEO Bipin Preet Singh, right now, the RBI guidelines have evened the playing field for banks and wallets to an extent but banks still control the rails on how interoperability will occur different payments systems.

Right now, payments banks such as Paytm Payments Bank, Airtel Payments Bank, Fino Payments Bank – all of them who have wallet licences – still have the upper hand as they can become PSPs and introduce new payment products. While pure wallets will still have to rely on banks and payment banks for access to the UPI.

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