On Wednesday, the Reserve Bank of India sought the public’s opinion on fees and charges for digital payment systems. He stressed that these fees should be reasonable and competitively determined for users, to ensure wider acceptance of digital payment methods.
Payment systems include IMPS, NEFT, UPI, and debit cards, among others.
In just six years of launch, payments made using UPI have become commonplace, with the platform boasting over 26 crore unique users and 5 crore merchants.
According to a report by payment company Worldline, person-to-merchant UPI transactions have become the most popular payment method among consumers, holding a market share of 64% by volume and 50% by value. in the first quarter of 2022. .
One of the main reasons for UPI’s popularity is the zero merchant discount rate. This is a commission levied on merchants for processing payments.
The government has mandated a zero-fee framework for UPI transactions
The government imposed a zero fee framework for UPI transactions effective January 1, 2020. As such, UPI fees are zero for users and merchants.
But the RBI explained that different stakeholders collectively incur a cost of Rs 2 to process a UPI transaction between a person and a trader with an average value of Rs 800.
The RBI has recognized that in any payment system, payment system providers or PSPs should earn revenue for the ongoing operations of the system to facilitate investment in new technologies, systems and processes.
The various participants in the UPI include the issuing and beneficiary banks, the payer’s and recipient’s UPI application providers, their PSP banks, and the National Payments Corporation of India. The system facilitates the settlement of trades using a combination of these participants.
While reiterating that the RBI has taken no specific position or opinion on the issues raised in the discussion paper, it posed several questions for comment.
Can a tiered fee structure be imposed for the IPU based on different amount brackets?
In the context of zero charges, is cost subsidy a more effective alternative?
If UPI transactions are charged, should the merchant’s discount rate be imposed based on the value of the transaction or should a fixed amount be charged regardless of the value of the transaction?
Further, he sought comments on whether the RBI should decide on fees or whether the market should be allowed to determine whether such fees are introduced.
According to Siddharth Dani, CFO of Easebuzz, fees can be phased in on the merchant. The fee should be a percentage of the transaction value. There may be a cap on large value payments.
Bhaskar Chatterjee, VP, Product Management, Ezetap, small merchant deserves to have zero MDR, merchant size can be categorized by payment value and volume, fixed fees become prohibitive for payments from low value.
The industry says the era of free UPI transactions cannot last forever, but at the same time, they are not in favor of the government subsidizing it through the budget every year. Experts say P2P payments should remain free while fees can be recovered from merchants for P2M transactions.
Although there is a difference of opinion on what the ideal price structure might be, protecting small traders and encouraging small transactions remains the priority.
Industry leaders believe that prices should be market determined through competition, with the RBI only intervening if monopolistic trends are observed.
Despite its meteoric rise, UPI still has a long way to go in terms of adoption. Therefore, choosing a pricing mechanism will be a balancing act between the growth of digital payments and the incentive of the system.