What A Free UPI Regime Means For The Economics Of Payments
An RBI discussion paper seeking views on UPI charges has incensed people on both sides of the debate.
The Reserve Bank of India's discussion paper on charges for digital payments has stirred vigorous debate, especially when discussing the unified payments interface.
On one side is a group of active UPI users who say that they will abandon the ubiquitous digital payment mechanism if any charges are levied, while on the other are companies which have been taking on losses for over two years.
The banking regulator did not take any sides. In its discussion paper released on Aug. 17, RBI put a list of questions to stakeholders on whether charges should be introduced for digital payments and, if so, how should they be implemented.
While the paper covers multiple digital payment mechanisms such as cards, prepaid payment instruments, real-time gross settlement, national electronic fund transfer system, and immediate payment system, it is UPI which has incensed people on both sides of the debate.
The paper actually does a disservice to the industry, said the chief of a digital payments firm on the condition of anonymity. If the RBI is in favour of the payments industry earning a reasonable profit through an economic activity, then it should say so, the person said.
On its part, the government has already clarified that it does not have any plans yet to introduce charges on UPI.
To be sure, the government in January 2020 announced the zero merchant discount rate regime for transactions on UPI and RuPay debit cards in India. The MDR refers to the cost a merchant has to pay while accepting digital payments. Later, in December 2021, the government announced that it would subsidise the MDR lost on RuPay debit card transactions and UPI transactions worth less than Rs 2,000.
This incentive amount from the government works out to Rs 1,300-1,500 crore, people directly in the know said.
According to the calculations in the RBI's discussion paper, an average peer-to-merchant transaction of Rs 800 would cost the system Rs 2. While the average peer-to-merchant transaction is worth between Rs 750-800, most transactions are worth much more.
UPI recorded Rs 2.3 lakh crore worth of peer-to-merchant transactions in the month of July. Of this, transactions worth Rs 1.58 lakh crore were more than Rs 2,000 each, according to data available with the National Payments Corporation of India.
"Frankly, if we compared UPI or RuPay debit card to MasterCard or Visa debit card rates, as prescribed by the RBI, the total subsidy required to be paid by the finance ministry be should Rs 6,000 crore for UPI and Rs 2,000 crore a year for RuPay debit card," said Vishwas Patel, chairman of Payments Council of India. "Rs 1,500 crores is too less."
According to Patel, due to the zero MDR regime on UPI and RuPay debit cards, payment aggregators have reported large losses. On the other hand, the incentive from the government is being used to provide MDR-free transactions at large merchants like Flipkart and Amazon.
Of Rs 2.3 lakh crore of peer-to-merchant transactions, just 13% is below Rs 500 per transaction. So it can be safely assumed that mom-and-pop stores only account for 13%, said Deepak Abbot, co-founder at Indiagold.
"So in my opinion, 0.1% MDR for transactions above Rs 500 will not hurt the merchants. Free below Rs 500 will take care of smaller ones," Abbot said.
But what do these charges solve? Apart from the fact that companies engaged in the payments business will get paid more than what they get today, the charges are expected to bring in better quality infrastructure and thereby efficiency in payments.
According to data available with the NPCI, India's largest lender State Bank of India, also the largest remitter on the UPI ecosystem, accounted for 171 crore transactions in July. However, the bank's success rate on these transactions was only 92.06%, with the rest of the transactions either failing due to issues at the bank end or with the UPI platform.
It could be argued that the charges will help the system improve on the success rate of these transactions, while also aiding the development of better security features. However, none of the participants in the system have committed to such improvements yet, said a person who works closely with the RBI.
In its various discussions with stakeholders, the regulator is yet to receive a concrete reason to introduce charges, this person said. In future, banks may be asked to share the government incentives with the rest of the participants in a more equitable manner. This, the person said, may address a majority of the concerns.