UPI transactions should be charged but in a gradual and calibrated manner without disincentivising usage
A sustainable and efficient payment system can be built only if the usage charges are fixed at a level that balances the interests of both users and operators. . The Reserve Bank of India’s discussion paper on charges in payment systems addresses this issue through a comprehensive enumeration of the cost structure across NEFT, RTGS, IMPS, debit and credit cards, pre-paid wallets and UPI-based payments. The discussion on UPI-based payments is particularly important since a zero-charge framework has been mandated by the Centre for these transactions since 2020. This was done with a view to speed up the digitisation of money transfers and payments and to reduce cash usage; neither users nor merchants are currently charged for UPI-based transfers or purchases. This leeway had the desired effect with the UPI channel currently accounting for 82 per cent of retail credit transfer volume and 23 per cent of the value; there is a surge in UPI usage especially in smaller-ticket purchases. Given this, it may not be a bad idea for the central bank to give it some more time before considering charges on these transactions so that digital payment habits get well-entrenched. The RBI also needs to consider if imposing a charge on UPI will be counter-productive to the Centre’s objective of pushing digital payments.
That said, a zero-charge payment system is unsustainable over the long-term. As the RBI points out, in an UPI fund transfer transaction worth ₹800, entities in the payment chain including the payer’s and beneficiary’s banks, UPI app providers, payment and settlement providers and NPCI incur cost worth ₹2. These costs include infrastructure, manpower and other operation cost borne by these entities. While the Centre has been allocating funds over the last two fiscal years to reimburse the charges borne by the payment service providers for RuPay debit card and UPI transactions, this may not work over the longer term. Imposing charges on UPI transactions is certainly necessary going forward. But the RBI can try and soften the impact on the retail users by imposing tiered charges only above a certain transaction value. Else, the central bank can allow a fixed number of free UPI transactions to each user every month and charge the rest. The merchant discount rate (MDR) charged on UPI transactions should be a factor of transaction value and can be market determined. But the RBI should set an upper limit on the MDR to protect users.
The paper has also flagged an important issue relating to the higher MDR charged in credit cards and payment wallets. The MDR for these instruments needs to be higher to compensate the issuer for the interest-free credit given to the user and the credit risk borne. But currently there is no transparency in the cost of credit computation, and the mark-up appears higher given the prevailing interest rates. The central bank needs to ensure that MDR on these instruments move lower by laying down an upper limit, which could be linked to the policy rate. The RBI could consider charging the banks for using the RTGS and NEFT systems as the central bank incurs capital as well as recurring expenses to facilitate these services. Also as the paper points out, the time-varying charges in RTGS transactions can be used to direct transactions to the non-peak hours. With regards to MDR on other instruments, the central bank can allow these to be market determined, intervening only when the rates charged become prohibitively high.
Published on August 19, 2022