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Make UPI remunerative

A tiered charge is an ideal halfway house, balancing digitisation with adequate compensation for banks

That amount is insufficient, given the Payments Council of India’s estimate of around Rs 5,500 crore MDR forgone.
That amount is insufficient, given the Payments Council of India’s estimate of around Rs 5,500 crore MDR forgone.

The Reserve Bank of India has done well to formally initiate a consultative process on transaction charges in India’s digital payment ecosystem, while enumerating the various options for devising fee structures. The most closely watched part of the discussion paper issued on Thursday is the section on the National Payments Corporation of India (NPCI)-operated Unified Payments Interface (UPI). RBI has uniquely identified it as a payment channel that is both a funds-transfer as well as a merchant-payment system. Since January 2020, merchants accepting UPI payments have had to pay no fee to their banks and payment service providers (PSPs), thanks to a government diktat. The outcome of the government’s zero-merchant discount rate (MDR) policy for UPI is evident in the numbers. UPI has edged out debit and credit cards as the preferred mode of payments at storefronts and checkout pages online. In July, UPI clocked three billion merchant transactions worth Rs 2.3 trillion, while debit and credit cards put together recorded 452.5 million swipes worth Rs 1.4 trillion. A report by HDFC Securities earlier this year said UPI accounts for nearly three-fourth of all transaction volumes below Rs 500.

Obviously, this growth has come at a cost for banks and PSPs. While they do not earn anything from the most widely used merchant payments channel, they have to keep paying the NPCI a switching fee, not to mention the cost of expanding and maintaining their payments infrastructure. The government has budgeted Rs 1,500 crore each for FY22 and FY23 to compensate for the MDR forgone on UPI and RuPay debit card transactions. That amount is insufficient, given the Payments Council of India’s estimate of around Rs 5,500 crore MDR forgone.

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The government’s decision to withdraw MDR for better adoption of digital payments was well-intentioned. But, it must now take the lead in stepping up its support for revenues forgone by the industry, considering it is a major beneficiary of the digitisation game. Starving companies of their fair share of revenues for too long could push them to look at other options. Some of that is already at play, with the distinctions between payment companies and credit intermediaries turning blurry in pockets of the market. Another negative outcome of the zero-MDR regime is the increased incidence of transaction failures across UPI platforms. The lack of revenues means UPI app owners have little incentive to invest in upgrades that must accompany an explosion in usage. A dispute resolution mechanism for UPI failures is set to be launched soon, but the return of MDR might be more effective by helping reduce the incidence of failures.

There is a view in some circles that the UPI transactions should remain free for faster digitisation of the payment ecosystem as there is an element of public good here. One of the suggestions in the discussion paper is to impose a tiered charge for merchants, based on different amount bands. This could be an ideal halfway house, balancing the agenda of digitisation with that of adequate compensation for the industry which has to bear additional costs. Of course, UPI’s exponential growth could slow down temporarily, but banks and PSPs will be encouraged to invest more, making it a good long-term bet. All the same, the government must exert itself a little more to make good the losses of the past two-and-a-half years.

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First published on: 20-08-2022 at 04:30 IST
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