The impact of charging for UPI transactions in India is a topic of significant interest. Let’s explore this based on recent articles and reports:
Unified Payment Interface (UPI) Revolution:
- The Unified Payment Interface (UPI), launched by the National Payments Corporation of India (NPCI) in 2016, has revolutionized digital payments in India. UPI enables citizens to transfer money from one bank account to another instantly.
- India leads globally in terms of real-time payment transactions, with 48.6 billion transactions processed in 2021.
- Since its inception in April 2016, UPI has saved the Indian economy approximately $67 billion.
- Notably, UPI transactions have seen tremendous growth, with 9.41 billion transactions, worth INR 14.89 lakh crore ($181 billion), processed in May 2023 alone.
- This translates to approximately 3,600 transactions per second, reflecting a 58% year-on-year increase in the number of transactions.
Factors Driving UPI Adoption:
- Digital Infrastructure: Deep penetration of internet and mobile phones, along with smartphone usage, has facilitated widespread adoption of digital payments, including UPI.
- Convenience and Safety: Technology advancements, security layers (such as tokenization, dual-factor authentication, and biometric-based payments), and virtualization of payment addresses have built trust and safety among consumers.
- Government and RBI Initiatives: Various guidelines and initiatives, including reducing merchant discount rates (MDR) and making UPI transactions free, promote digital payments.
- FinTech Innovations: The increasing number of FinTechs and PayTechs has enhanced accessibility and usage of various payment instruments.
Charging for UPI Transactions:
- Cost Burden: Merchants would need to account for these charges as part of their operating costs, potentially impacting their profit margins.
- Consumer Behavior: Charging fees might alter consumer behavior, leading to potential shifts in payment preferences.
- Financial Inclusion: Ensuring that any charges do not hinder financial inclusion remains crucial.
NPCI’s Circular on Interchange Fee:
The interchange fee of 1.1% will have no impact on end-customers, and UPI transactions will remain free for them. Peer-to-peer (P2P) and peer-to-merchant (P2PM) transactions between bank accounts and prepaid payment instruments (PPIs) will not require an interchange fee.
Arguments For Charging Fees:
- Cost Recovery for Service Providers:
- Supporting Infrastructure: Maintaining and enhancing the UPI ecosystem requires investments in technology, security, and infrastructure. Charging fees could help service providers recover costs associated with these efforts.
- Sustainability: Ensuring the long-term sustainability of UPI services necessitates a revenue model that supports ongoing operations.
- Leveling the Playing Field:
- Similar to IMPS: The Reserve Bank of India (RBI) discussion paper suggests that UPI, as a fund transfer system, is akin to IMPS (Immediate Payment Service). Therefore, proponents argue that charges for UPI should be similar to those for IMPS1.
- Equitable Treatment: Charging fees could create a level playing field by aligning UPI with other payment systems.
Arguments Against Charging Fees:
- Financial Inclusion and Public Good:
- UPI’s Role: UPI plays a crucial role in financial inclusion by providing a convenient and cost-effective digital payment platform for all users.
- Government Stance: The Government of India has emphasized that UPI is a digital public good with immense convenience for the public and productivity gains for the economy. It has no plans to levy charges for UPI services.
- Short-Sightedness: Levying fees on UPI could hinder financial inclusion and limit access for economically vulnerable segments.
- Consumer Behavior and Adoption:
- User Behavior: Charging fees might discourage users from adopting UPI, especially if they perceive it as an additional cost.
- High Adoption: UPI has witnessed rapid growth, with billions of transactions each month. Any fee imposition could impact this momentum.
- Trust and Safety:
- Security and Trust: UPI’s success is partly due to its safety features, including tokenization, dual-factor authentication, and biometric-based payments. Charging fees might erode trust among users.
- Government Support and Mandate:
- Zero-Charge Framework: The government mandated a zero-charge framework for UPI transactions from January 1, 2020. This means that charges in UPI are nil for users and merchants alike.
- Promoting Digital Payments: The government’s financial support aims to encourage adoption of digital payments and user-friendly platforms.
Also Read: Unveiling UPI Lite: Exploring the Differences and Similarities with UPI
Regulatory Intervention for Remunerative Transactions:
Context: Payments service providers under the UPI ecosystem recently sought regulatory intervention to make transactions remunerative. This move aims to encourage smaller players to invest in the UPI space.
Dominance of Major Players: The UPI payment ecosystem is currently dominated by two major players:
- Google Pay, commanding a substantial 47% market share.
- PhonePe, a Walmart subsidiary, holding a significant 37% share.
Challenges for Smaller Players: This duopoly poses challenges for smaller UPI service providers in gaining traction and competing effectively.
Proposed Measures:
Merchant Fees for Larger Shops: Smaller players in the UPI ecosystem have proposed that they should be permitted to charge a transaction fee on larger shops. This proposal aims to address the absence of merchant discount charges, which is not financially viable for small players competing with larger platforms.
Revenue Model: Smaller entities emphasize the need for a revenue model, stating that expanding operations without one is challenging.
Customer Acquisition Costs: Despite incurring customer acquisition costs, UPI service providers are currently not imposing any fees on customers.
Government Policies and Challenges:
Government Stance: The government discourages charges on UPI transactions, emphasizing UPI as a digital public goodwith immense convenience for the public and productivity gains for the economy.
Financial Viability: While the absence of fees benefits users, it poses financial challenges for smaller players.
RBI’s Role:
Meeting with RBI Officials: Representatives from banks, NPCI, third-party app providers, and technology service providers met with RBI officials, including Governor Shaktikanta Das and Deputy Governor T. Rabi Sankar.
Discussion Focus: The discussion centered on widening and deepening the adoption and usage of UPI. Strategies for scaling up UPI infrastructure, expanding product portfolios, and addressing challenges were explored.
Innovative Solutions: The RBI sought innovative ideas from UPI players to integrate potential users into the digital payment ecosystem.
Challenges Ahead:
NPCI’s Volume Cap Proposal: In November 2022, NPCI proposed a 30% volume cap on third-party app providers by the end of two years. However, smaller UPI service providers may find it challenging to scale up by the December 2024 deadline when the two-year period ends.
In summary, while cost recovery and equitable treatment are valid considerations, policymakers must balance these with the broader goals of financial inclusion, trust, and sustained UPI adoption. While balancing financial viability and user convenience, regulatory measures are being discussed to ensure a sustainable UPI ecosystem that benefits both users and smaller service providers. 🌐