It has been the government versus industry in the debate around charging for digital payments, mainly the ubiquitous UPI or unified payment interface. Banks, payment apps and payment infrastructure providers have strongly batted in favour of imposing charges on UPI. But will they be able to convince the government to budge on its stand?

In mid-August, the Finance Minister said that UPI was a digital public good and hence will likely remain a free-of-charge product. But will UPI fit into the definition of public good and, more importantly, can the service be provided at no cost?

Defining public good

What is defined as a public good tends to vary country-to-country. Usually, national security, defence, education, healthcare and public infrastructure are classified as public goods across countries. Essentially, they are made available to people across all walks of life and are reckoned as non-excludable and non-rivalrous. The state has absolute say over these goods. But are public goods necessarily available at zero cost?

Not quite. We indirectly bear the cost of public goods in the form of taxes. In specific cases such as healthcare or education the dynamics are different. While basic or entry level public goods are usually available free of cost, specialised healthcare treatment or higher education usually does come at a cost. It’s likely that when a public institution provides these services, the costs are lesser than what a private player charge. But such a practice also indirectly lays down certain artificial usage barriers.

For instance, free education or education at a low fee is an option only to households of a certain socio-economic strata. But take the case of roads and toll roads. Anybody buying a vehicle, whether two-wheeler, car, tractor or lorry, must pay road tax. Similarly, access to tolls, comes at a cost.

Is UPI ticking the boxes?

UPI has gone a long way in enabling the digitalisation of India’s payments economy. It has added layers of convenience in the way people transact with money. More importantly, UPI being an indigenous ‘Made in India’ product has helped India find its unique place in the globe in the digital payments arena. Touted to be a $180 billion market by 2026, India is among top nations in this space. With UPI expanding beyond the borders, it has certainly brought a lot of pride to the nation. But does that warrant its treatment as a digital public good?

UPI has neither reduced the cost of money or currency, nor has it propelled a mass-scale substitution of physical cash with UPI. Just as toll roads may help you reach your destination faster, UPI is a means to accelerating formalisation and digitisation of the economy. But if the government’s objective is to ensure that UPI finds acceptance and relevance across larger ticket sizes and economic strata, all the players in the UPI ecosystem need to be incentivised.

To extend the parallel, when toll roads were initially introduced, the government followed traditional models of rewarding the service providers — subsidies and compensation fee. But when these failed, it warmed up to the idea of user-based pricing. The concessionaire has been allowed to price the toll based on the user segment. The Mumbai-Pune Expressway is one such successful example where the travel time has drastically reduced, the concessionaire is constantly upgrading the roads and yet, toll-way is one of the most profitable and well-maintained projects in the country.

The payments industry is unhappy with the current free-UPI model because the cost of its investments in infrastructure don’t get recovered. As a result, incremental investments to upgrade it aren’t coming in, and this is partly why UPI now has such high transaction failure rates, and payment rejection rates are increasing. From less than a per cent about four years back, rejection rates are almost at two per cent now.

As a result, even if up to ₹1 lakh can be transferred through UPI, the payment mode is currently restricted to much lower value transactions. Transactions up to ₹200 account for over 70 per cent of total monthly UPI use cases. In effect, it has at best replaced low-denomination rupee notes and not really cash as a payment mode. A pricing mechanism, just like with tolls, would help remedy this problem.

The government’s defence is that the current reimbursement fund is adequate to take care of this issue. However, neither does the fund consider the constant cost of upgrading the back-end systems of the payment providers and nor does the money reach everybody in the ecosystem. While banks end up getting their costs refunded, payment apps and infrastructure providers are often left to fend for themselves.

Other advantages

Data trade and data mining end up accounting for a third of total revenues for payment apps. With the RBI and the government trying to clamp down on companies making gains out of the consumer’s personal data, introducing charges on UPI transfers could help address this.

What’s more, the NPCI has been having a tough time in capping the market dominance of players in the payment interface. A mechanism to charge payments can help address this issue too. For instance, the NPCI could levy an additional user fee on payment companies which have breached the permissible transaction threshold. Such levies are usually passed on to customers, and this itself would help cap individual player market shares at 30 per cent.

If the government’s intention is to increase the use case and acceptability of UPI, it cannot afford to be populist. After all, all good things do come at a cost.

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