UPI: Who will Pay for it?

Penned By: Harshit Agrawal

Rarely anyone cared about the costs while making a payment through UPI. But the news of authorities considering charging UPI transactions raised many ears. The Government soon came to address the issue. Read along to find out more.

INTRODUCTION

The Ministry of Finance, though twitter, clarified that the Government is not considering any charges to be imposed on UPI transactions. The tweet called UPI ‘Digital Public Good’ having ‘immense convenience for the public and productivity gains.’ The clarification came after public speculations based upon the discussion paper released by the Reserve Bank of India (RBI). The regulator, earlier sought consultation regarding the policy framework for levying charges on digital payment systems including RTGS, IMPS, Credit/Debit Cards and UPI.

IS UPI REALLY FREE?

UPI or Unified Payments Interface provide Peer to Peer (P2P) and Peer to Merchant (P2M) immediate money transfer services through mobile devices. UPI platform is owned and operated by National Payments Corporation of India (NPCI). NPCI is a ‘not for profit’ company incorporated by RBI and Indian Banks’ Association (IBA). Other stakeholders in the process includes Payment Service Provider Bank, Beneficiary’s/User’s Bank and Third-Party Application Providers (UPI app providers, Ex – Paytm, GPay).

As per the estimate of RBI, collectively the stakeholders incur an average cost of 0.25% of the value. Currently, NPCI charges banks marginally based upon the participation. Banks and other stakeholders also incur multiple costs in handling the transactions, providing the adequate infrastructure, customer on-boarding costs etc.

In January 2020, the Government imposed a zero-charge framework for RuPay & UPI transactions. The action directed at promoting digital payments barred the stakeholders from charging Merchant Discount Rate (MDR) for the transactions. MDR is the charge recovered by the payment service provider from the final recipient of the money i.e., the merchant. The receipt of the charge is shared by the service provider with other intermediaries.

To compensate the stakeholders for the loss of MDR, the Government announced a financial support of 1500 Cr (approx.) for RuPay & UPI transactions for each of the FY22 & FY23. The RBI through its discussion paper is seeking public consultation on 40 questions including whether to reintroduce the earlier policy.

The stakeholders are currently splitting the costs. The financial support provided by the Government is too little to sustain the sophisticated infrastructure required for the system. Further, the space requires continuous innovation and investments in new technologies. With zero-charge policy, the private players might show reluctance to further invest in the space. Private banks usually have resistance in issuing RuPay Cards because of the similar zero-MDR rule.

CAN GOVERNMENT MAKE UP FOR THE LOSSES?

In July 2022, UPI saw highest ever 628 Cr transactions worth INR 10.63 Lakh Cr on the platform. This data point suggests the rapid adoption of digital payment system across the country. UPI, therefore, is an important tool in digitising and regularising the Indian economy. Reduced dependency on cash coupled with an electronic trail brings transparency to the system increasing the potential tax collection for the government.

The reach of UPI to semi-urban and rural areas furthers the goal of financial inclusivity. It reduces the burden on the already stretched public banking system by easing up the pressure of operating more physical branches and ATMs.

Supporters of the no charge policy argue that the above income of the government and the banking system should be utilised to subsidise the digital payment system.

SHOULD GOVERNMENT SUBSIDIZE: THE PUBLIC GOOD DEBATE

While taking a neutral stand, RBI in the discussion paper suggested that no free service could be justified in any economic activity, including payments systems, unless there is an element of public good and dedication of the infrastructure for the welfare of the nation. Interestingly, Finance Ministry in its tweet called UPI a ‘Digital Public Good.’

Nobel laureate Paul Samuelson divided all goods into two categories: Public & Private Goods. Based upon his work and contributions made by other economists, public goods are defined as: “Public goods are those that are available to all (‘non excludable’) and that can be enjoyed over and over again by anyone without diminishing the benefits they deliver to others (‘non rival’).”

Some of the most common examples of public good include environment and defence system of a nation. Firstly, no one can be prevented from enjoying the benefits of the defence system. Secondly, the defence system provides similar protection to all the citizens without any decrease in benefits for the other because of its use by one. Being a public good, defence system is funded by the common pool of funds, tax collections.

UPI is certainly ‘non-rival’ as the use of UPI by one does not limit its usage for any other consumer. The question is whether it is ‘non-excludable’? Here, UN supported, Digital Public Goods Alliance helps by defining digital public good as an open-source software available to all for commercial/non-commercial use.  

UPI is an open source application programming interface (API) owned by NCPI. Currently, UPI API is available only to member banks and not to all interested parties. The banks could collaborate with other organisations to provide the payment services. This limitation makes it difficult to suggest UPI as non-excludable and therefore a public good.

CONCLUSION

UPI brought a revolution in digital payment space of the country. The huge acceptance of platform in all sections of the economy came because of the ease and zero charges associated with it. Any attempt to directly charge the consumer or the merchant may reduce the popularity of the platform amongst the people. At the same time, ability and legitimacy of the government to subsidize the platform in the long run is questionable. Also, lack of motivation of high returns will limit the new investment in the system. Therefore, there is a need to look for innovative solutions to balance the interests of all the stakeholders.

REFERENCES

https://www.imf.org/en/Publications/fandd/issues/2021/12/Global-Public-Goods-Chin-basics

https://digitalpublicgoods.net/digital-public-goods/

https://www.livemint.com/money/personal-finance/upis-dominance-in-payments-landscape-what-data-shows-11661277926180.html

https://finshots.in/archive/is-rbi-going-to-strangle-upi/

https://www.bqprime.com/business/what-a-free-upi-regime-means-for-the-economics-of-payments

The Economics and International Business Club of IIM Indore

Apoorva | Jeevan | Priyank | Rajdeep | Sakshi | Shelly | Varnika

Anjaney | Harshit | Krithik | Pranita | Ragavan | Srishti | Vishal

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