SBI expects new UPI merchant fee to cover costs and yield a small surplus

State Bank of India (SBI), the country’s largest lender and the largest issuing bank in the UPI ecosystem, is expected to recover the costs it incurs in processing and facilitating UPI transactions through the merchant discount rate (MDR) to be introduced on person-to-merchant (P2M) transactions from October 15. The revenue could leave a small surplus after covering these costs, a senior SBI official said on condition of anonymity.

The official said it was too early to assess the impact of MDR on UPI transactions. However, the charge could prompt merchants to change how they collect payments, particularly for transactions close to or above the MDR threshold. Merchants may ask customers to split a single large payment into multiple smaller transactions to avoid the charge. This could increase transaction volumes even as the overall value of UPI transactions grows at a slower pace.

The National Payments Corporation of India’s (NPCI’s) decision to levy a 40-basis-point (bps) MDR on P2M UPI transactions above Rs 2,000 is expected to generate upwards of Rs 15,000 crore in revenue for the payments ecosystem, with some brokerages estimating the figure at over Rs 20,000 crore. A sizeable share is likely to accrue to banks that are large merchant acquirers and payment service providers (PSPs), with SBI, Yes Bank, Axis Bank and a few others expected to be among the major beneficiaries.

Banks have long complained that they bear significant costs in supporting the UPI ecosystem without earning anything from the transactions they process and settle, despite the substantial load UPI places on the banking system.

Under the proposed structure, a merchant would pay up to 0.40 per cent of the transaction value as MDR, which would then be distributed among the various players in the UPI ecosystem. For a Rs 10,000 transaction, the merchant would pay Rs 40. The acquiring bank would receive the Rs 40 but pay Rs 28 to the issuing bank, leaving it with Rs 12. The issuing bank would receive Rs 28 but pay Rs 12 to the payer-side PSP, leaving it with Rs 16. The PSP would receive Rs 12 and pay Rs 8 to the app provider, retaining Rs 4. In other words, of the Rs 40 generated as MDR, the acquiring bank retains Rs 12, the issuing bank Rs 16, the payer-side PSP Rs 4 and the app provider Rs 8.

In the UPI ecosystem, SBI is the largest issuing bank, followed by Bank of Baroda, HDFC Bank, Union Bank of India, Punjab National Bank, Canara Bank, Axis Bank and others. Meanwhile, Axis Bank has a market-leading position in the UPI payer-side PSP space, with a market share of around 38 per cent by volume. The bank is also among the largest players in merchant acquiring in India, with a market share of 22.1 per cent. Yes Bank is the second-largest PSP in the UPI ecosystem. It provides the underlying UPI infrastructure for multiple digital payment platforms, allowing it to participate in transactions routed through UPI.

Meanwhile, SBI has mobilised around $10 billion in FCNR(B) deposits under the RBI’s concessional swap window and will have little difficulty deploying the funds given the size of its loan book, the official said. However, the large inflows could pose a challenge for smaller banks that have mobilised significantly higher amounts relative to their balance sheets, he said. With relatively smaller corporate loan books, these banks could be pushed towards faster retail lending, potentially leading to rapid credit growth in the segment.

SBI mobilised $10 billion in FCNR(B) deposits

State Bank of India, the country’s largest lender, has mobilised around $10 billion in FCNR(B) deposits under the Reserve Bank of India’s concessional swap window and will have little difficulty deploying the funds given the size of its loan book, the official said.

However, the large inflows could pose a challenge for smaller banks that have mobilised significantly higher amounts relative to their balance sheets, he said.

With relatively smaller corporate loan books, these banks could be pushed towards faster retail lending, potentially leading to aggressive credit growth in the segment.