Why has the RBI put the charges in payment system under review? Is there merit to charging for payments?

The failure rate with UPI transactions is increasing (at over 1.4 per cent) as the efficiencies of the existing systems cannot be improved in the current cost structure. Levy of charges may de-bottleneck this situation. From a user perspective, it makes sense to swap the carrying cost of cash with the cost of making payments through a card or mobile phone. Therefore, the RBI’s thought process of monetarily rewarding the stakeholders in the payments ecosystem for their efforts in aiding increased digitisation of payment infrastructure holds merit.

What categories of digital payments are under review for their charges?

Levies across all categories of digital payments – IMPS, NEFT, RTGS, UPI and payment instruments such as debit cards, credit cards and prepaid instruments are under review. There are four types of charges – merchant discount rate (MDR), intercharge (carved out of MDR and shared with the payment issuer), convenience fee (charged by merchants for providing service) and surcharge (charged for processing a transaction through a certain payment mode in addition to MDR). Much of the discussions revolve around MDR and intercharges.

Is RBI is the one-stop authority for all payment modes?

No. RTGS and NEFT are owned and operated by the RBI. IMPS and UPI (and RuPay which issues cards) are owned and operated by National Payments Council of India (NPCI, a non-profit entity promoted by banks). Debit and credit cards are operated by card networks such as Visa and MasterCard.

How should the regulator relook at the charges?

There are three components to digital infrastructure – capital expenditure (capex), operating costs (opex) and technology upgradation costs. RTGS and NEFT are well-entrenched payment modes, and their capex is fully absorbed. Charges pertaining to RTGS and NEFT don’t warrant for changes. Same may hold true for IMPS. Debit and credit cards are issued by deep-pocketed card networks, where the capex was long absorbed. The operating costs are getting covered through MDR. But is the quantum of levy justified?

Given that debit cards don’t incur high costs or risks, charges should be rationalised like NEFT or RTGS. Credit cards enjoy the steepest MDR. But as banks slap the highest rate of interest on credit cards, it’s not fair to combine the cost of processing payments with credit risk, which is the current practiced. There is a need to segregate these costs and charge only the payment related costs to the customer, which may work similar to MDR on debit cards. With regards payment wallets like Paytm or Amazon, it’s a new segment created to offer payment convenience to customers. Hence RBI isn’t delving much into this.

The contentious issue is restoring MDR on UPI after being struck down in January 2020. According to the RBI, payer’s bank, beneficiary’s bank, NPCI and UPI app collectively incurs Rs 2 as cost for transaction value of Rs 800. With UPI’s total transaction value exceeding Rs 10 lakhs crore a month, that may work to roughly Rs 30,000 crore of annual cost. The capex for UPI is NPCI’s cost which has almost been recovered. If the intention is to ensure efficiency in processing, only the opex should be charged to the customer.

Who should monitor these charges?

Wherever the technology is well-evolved such as IMPS, RTGS, NEFT and cards (debit and credit) its better if buck stops with the RBI whether on the regulations or charges. Given that NPCI has the backing of all stakeholders involved in the digital payment ecosystem, UPI may be better handled by NPCI.

Should the charges be fixed by RBI or market-determined?

Charges should be a flat rate determined by the market forces. When the cost involved in Rs 800 or Rs 20,000 ticket size transaction isn’t very different, the need to have a graded charge mechanism would leave room for inefficiencies. Likewise, if digital payments are a play on technology, then players who can offer best technology at competitive price points should be rewarded.

Will the relook of charges on payment system necessarily be detrimental to users?

No. In case of debit and credit cards, there is a case made out for reducing MDR. In case of RTGS, IMPS and NEFT, charges are unlikely to increase because there is no need for higher charges. Even in case of UPI, if intermediaries can carve out the opex and only charge that to the customer, the ultimate cost of transaction may not increase much.

What is the government's stand on charging UPI transactions?

In Union Budget 2019, the government decided to withdraw charges on UPI transactions, and this has been in force since January 1, 2020.

In fact, on August 21, the finance ministry explicitly categorised UPI as a ‘digital public good’ which offers immense convenience for public and productivity gains for the economy, thereby declining the possibility of imposing charges on UPI transactions.

The government believes that the current compensation structure to payment service providers (paid as a reimbursements) is adequate.

According to industry observers, the government’s retort may be because RBI’s discussion paper on levying charges on UPI could have hit a raw nerve given that the former has a completely different view on this issue which has been implemented since 2020.