The payments industry’s initial response to the RBI’s discussion paper on charges in payments systems seems to be positive, with most saying that the suggestive nature of the proposals indicates the central bank is seeking more views from market stakeholders.

“The RBI has been refreshingly very neutral in its tone. This is important so that we have a balanced assessment of what needs regulation,“ said Mandar Kagade, Founder-Principal of Black Dot Public Policy Advisors.

As such, the fact that the central bank pointed out that charge-free transactions are not a feasible model for payments systems is being seen as the first step towards a more sustainable business model for these platforms.

“The RBI has said at multiple places in the paper that payment service charges should retain incentives for both users and service providers, and that there is limited justification for a free service,” said Goldman Sachs Equity Research in a note.

Industry players believe the RBI is unlikely to regulate charges as it usually does not sit well with market participants, both in terms of consumers and payments participants.

The suggestion to regulate the interchange part of the MDR is a step in this direction, they said, adding that currently MDR charges are skewed towards the issuer.

Charges on UPI transactions?

In terms of UPI transactions, too, the central bank could regulate the categories of transactions or market participants that may be charged, thus allowing a more open market system for price discovery.

“Charges on UPI transaction is inevitable as cost of processing is a reality. It would ideal for the RBI to introduce upper cap on this from a consumer protection perspective, but not regulate pricing as such. “The market will determine the right price through healthy competition and customer appetite eventually across different segments and type of payments,” said Jaikrishnan G, Partner-Financial Services Consulting at Grant Thornton Bharat.

However, these charges are likely to be phased in and implemented in certain buckets in a manner similar to MDR charges, as the central bank would also want to incentivise smaller merchants to remain a part of and join the formal economy without impacting their margins.

“The RBI has asked whether merchants can transfer the cost of payments and share it with customers, depending on the payment instrument used. That’s a good idea to consider. There is going to be an inflationary impact, but it will be efficient cost sharing and support merchant adoption,” said Kagade, adding that the RBI has a ready template in terms of the turnover or GST-linked thresholds for merchants, currently in force.

While there may be some initial pushback from merchants, UPI charges will have a positive impact on the ecosystem from a long-term perspective, said market players. They added that the charges are likely to be nominal, given the large volume of transactions, which may not necessarily impact UPI usage, as a large segment of population is already used to the convenience and benefits offered by UPI.