Insurance premiums won't get costlier despite new UPI fees
What's the story
The National Payments Corporation of India (NPCI) has announced a 0.4% merchant discount rate (MDR) on select high-value person-to-merchant UPI transactions, with a cap of ₹300 per transaction. However, insurance payments above ₹2,000 will be exempted from this fee as they fall under a separate category defined by NPCI. Instead of the standard MDR, these transactions will incur a flat fee of ₹5.
Impact analysis
How will this work?
For instance, if a customer pays an insurance premium of ₹50,000 via UPI, the merchant-side charge under the standard 0.4% MDR would have been ₹200.
But since insurance has been given a separate treatment, the applicable fee is just ₹5.
This way, policyholders won't see their bills increase due to these charges as banks and payment service providers have been instructed by the government not to pass on such costs to consumers.
Special treatment
Why is this significant?
Insurance premiums are usually high-value payments but they are also a necessary financial product, unlike discretionary retail consumption.
A percentage-based MDR could become significant on large annual premiums. For example, a 0.4% charge on a ₹1 lakh premium would be ₹400, even though the standard MDR is capped at ₹300.
The flat ₹5 structure greatly reduces the payment-processing cost for insurance transactions, especially given the industry's heavy reliance on recurring premiums.
Sectoral exemptions
Other sectors that enjoy concessional treatment
Apart from insurance, other sectors like fuel, railways, and certain utility payments also enjoy concessional treatment instead of the standard 0.4% MDR.
The ₹5 charge is an MDR payable on the merchant side.
In an insurance transaction, it is borne by the insurance company or relevant merchant/payment arrangement as part of their cost of accepting digital payments and not an extra premium paid by policyholders.