How does UPI really work?

Summary

In this video, the speaker explains how the Unified Payments Interface (UPI) works and why businesses may be overpaying when using UPI as a payment method. While payment processors like Razorpay and Stripe charge transaction fees for UPI, the speaker reveals that UPI itself is actually free for both merchants and customers, thanks to the government's Zero MDR (Merchant Discount Rate) policy. The speaker demonstrates how businesses can optimize payment costs by integrating UPI directly into their platforms, avoiding the high transaction fees typically charged by third-party services, and retaining more revenue in the process.

Takeaways

• 😀 UPI (Unified Payments Interface) is the most popular payment method in India, used for both personal and business transactions.
• 😀 UPI's popularity is driven by its speed and convenience, especially for payments like bills and peer-to-peer transfers.
• 😀 Many businesses using UPI for transactions are potentially overpaying due to transaction fees that can be avoided.
• 😀 Payment gateway providers like Stripe and Razorpay charge transaction fees for UPI, with rates around 2% to 2.36%, which businesses may find high.
• 😀 Formon is a platform where creators can sell courses and accept payments through UPI, with a revenue-sharing model in place.
• 😀 UPI transactions are governed by government policies, such as the zero Merchant Discount Rate (MDR) policy, which makes UPI transactions effectively free for businesses and customers.
• 😀 Despite UPI’s zero MDR policy, payment providers still charge businesses fees for their services (e.g., Razorpay charges 2% + GST).
• 😀 UPI is an infrastructure controlled by the National Payments Corporation of India (NPCI), and businesses can avoid transaction fees by implementing UPI integration directly with banks.
• 😀 A major discovery is that businesses can bypass transaction fees by integrating directly with UPI infrastructure, rather than relying on third-party payment providers like Razorpay or Stripe.
• 😀 UPI’s unique feature is its ability to facilitate free transactions through a simple process: users can pay via QR codes or Virtual Payment Addresses (VPAs), avoiding additional charges for businesses.
• 😀 The government subsidizes the UPI infrastructure, enabling zero MDR for businesses, which significantly reduces costs when processing high transaction volumes.

Q & A

What is UPI and why is it so popular in India?

UPI, or Unified Payments Interface, is a digital payment system in India that allows users to send money quickly and easily. It is popular because it is convenient, fast, and works across various platforms, including personal and business transactions.

How does UPI differ from traditional payment gateways like Stripe or Razorpay?

UPI is not a payment gateway but an infrastructure that allows for direct bank-to-bank transactions. Unlike traditional gateways like Stripe or Razorpay, which charge a transaction fee, UPI can be used without additional fees under certain conditions, such as the Zero MDR policy.

What are the transaction fees when using payment gateways like Stripe or Razorpay?

Payment gateways like Stripe and Razorpay typically charge around 2% for transactions made with Indian cards, with additional GST applied. The fees for international cards are higher, with Stripe charging around 3% for transactions outside India.

What does Zero MDR mean and how does it apply to UPI?

Zero MDR refers to the Zero Merchant Discount Rate policy, which means UPI transactions do not carry the same transaction fees as traditional payment methods. This policy, set by the Government of India, makes UPI cost-effective for both customers and businesses.

How can businesses save on transaction fees when using UPI?

Businesses can save on transaction fees by directly integrating with UPI, avoiding third-party payment providers that charge additional fees. The UPI infrastructure is free for use, which allows businesses to bypass fees like the 2% + GST charged by providers like Razorpay.

How do payment service provider apps like Google Pay or PhonePe interact with UPI?

Apps like Google Pay and PhonePe are Payment Service Provider (PSP) apps that facilitate UPI transactions. These apps connect with banks and allow users to make payments using QR codes or Virtual Payment Addresses (VPAs). They act as intermediaries but do not control the UPI infrastructure.

What is the role of NPCI in UPI transactions?

The National Payments Corporation of India (NPCI) manages and maintains the UPI infrastructure. It ensures that transactions between different banks, such as from SBI to HDFC, are processed securely and efficiently, acting as a central body overseeing the UPI network.

Why are businesses potentially overpaying for UPI transactions through third-party providers?

Businesses may be overpaying for UPI transactions through third-party providers because these providers often charge a transaction fee (e.g., 2% + GST), even though UPI itself, under the Zero MDR policy, can be used without such fees. This can lead to unnecessary costs when businesses could directly integrate with UPI.

What alternatives are available for businesses to reduce payment processing costs with UPI?

Businesses can reduce payment processing costs by integrating UPI directly with a bank’s API, bypassing third-party providers like Razorpay or Stripe. This setup allows businesses to use the UPI infrastructure at no additional cost, thus saving on transaction fees.

How does UPI's transaction model help businesses processing high volumes of transactions?

UPI's Zero MDR policy is particularly advantageous for businesses processing high transaction volumes. By avoiding the 2% + GST fee, businesses can save significant amounts. For example, processing a large volume of transactions could lead to savings in the range of lakhs, making UPI a cost-effective option for businesses.