Making UPI Viable For Both The Public And The Facilitators

Even though there is no fee for a transaction on UPI, this does not mean that there is no cost for maintaining and operating the UPI system. It is the banks and the RBI to a certain extent who are absorbing the cost. The same is due to the zero-Merchant Discount Rate ['MDR'] policy mandated by the government which means that the banks are not permitted to charge the merchants, the recipient of the money, a fee for facilitation online transactions. This zero-MDR policy costed the digital payment aggregators, a total loss of INR 5,500 crores. RBI states that it will absorb such costs from the money that is saved by handling less cash as people have moved towards digital payments. For the same, government has been allocating a budget every year as subsidies to incentivize the banks and other digital payment aggregators to grow their UPI business. However, the allocation made (Rs. 1,500 crores for FY 2021-2022) is not enough to even cover the operational cost incurred by the banks. Such high losses on a yearly basis and lack of subsidies led to the PCI pushing for a roll back of the Zero MDR policy. To discuss the possibility of introducing charges on UPI, RBI released a discussion paper in 2022.

This discussion paper not only discusses the policy of charges on UPI but also on NEFT, RTGS IMPS, debit and credit card transactions as well as different kinds of charges that can be levied other than the MDR such as the convenience fee, surcharge, and interchange. As can be seen from the discussion paper, a transaction through UPI is the quickest when compared to other forms of payments and much more convenient for the payee, payer, and the merchant. However, it also has the greatest number of participants involved who are the digital payment aggregators.

A UPI transaction involves the payer PSP ['Payment Service Provider'] (such as Google Pay and PayTM), payee PSP, remitter bank, beneficiary bank, NPCI, bank account holders (payer and payee/merchant) and Third-Party Application Providers ['TPAPs'] (such as Amazon Pay which provides UPI services through a PSP Bank). The discussion paper also noted that collectively, the stakeholders incur at average a total cost of 0.25% of the total transaction value for processing a Payer-to-Merchant ['P2M'] UPI where the payer bank incurs a cost of 0.1% of the transaction value, the beneficiary bank incurs a cost of 0.07%, the PSP and the TPSAP collectively incur 0.06% and 0.02% for NPCI. It was also noted that the cost that the merchant needs to incur is also low as there is no requirement to install a PoS Machine for debit and credit card payments.

Further given that the UPI settlement among participant banks requires the banks to put in place adequate systems and processes to address the settlement risk which involves cost to the system, it is imperative to provide compensation for the same. However, within a few days of this discussion paper being floated, the finance ministry issued a clarification on Twitter contradicting this discussion paper and stating that UPI is a 'digital public good' and that there is no consideration in the government to levy charges for UPI based transactions. It was also stated that the concerns of the service providers have to be met through other means.

The finance ministry labelled UPI as a 'digital public good'. This term has not been defined by the by any law or any Court of India. However, it can be traced back to 2017 when it was used to define new technologies that can be implemented at a national scale to improve the services for citizen as well as achieve Sustainable Development Goals ['SDGs']. Further, it has been defined by the United Nation's Roadmap for Digital Cooperation to include open source software that include adhere to privacy and other applicable laws and best practices, do no harm, and help attain the SDGs.

It can be understood from these definitions that the Finance Ministry aimed to say that since UPI is an open source API regulated by the RBI which is furthering SDGs 8 and 9 which are decent work/economic growth and building resilient infrastructure to foster innovation, respectively. UPI should be free of cost to keep it accessible for the public. This stance of government is reasonable and keeping UPI an open source software is justified. However, what parts of a UPI transaction constitute as a public good is something that needs to be considered.

As discussed before, a UPI transaction involves 2 PSPs/TPAPs, a remitter bank, a beneficiary bank, and NPCI other than the transactors. Other than NPCI, all the other facilitators are usually private companies which have aim to generate a profit and are paying a fee for every transaction. It is unreasonable to categorise them as a part of the 'digital public good' which should be free for the general public. The same was recognised in the RBI's discussion paper which stated PSPs in any payment system should earn income for continued operations of the system to facilitate investments in new technologies, systems and processes. This is applicable irrespective of the system being operated by a public sector or a private sector entity.

To ensure continuity of business for the PSPs, banks and the TPAPs, it is imperative to find middle ground and introduce a reasonable fee that the private stakeholders can charge while keeping the UPI economical for the public. Since the part played by the NPCI in a UPI transaction can be labelled as a digital public good, the government can subsidize the same and allow the PSPs, banks and the TPAPs to recoup their costs. As discussed before, the average cost of a UPI transaction is 0.25% of the transaction value out of which 0.02% is incurred by the NPCI, if the amount incurred by the NPCI is subsidized, the transaction cost comes down to 0.23%.

If the same is divided amongst both the payer and the payee/merchant, it comes down to 0.115% per transaction party. Given that the maximum limit of a UPI transaction is Rs. 1 Lakh, and if this model is followed, the maximum transaction fee per party would be Rs. 115 that too for the maximum amount permissible. At the same time, transactions below Rs. 200 can be made free of cost. Given the accessibility and existing widespread usage of UPI, it is unlikely that such a small transaction fee will hinder the public from using the payment interface even though the charges of IMPS are lesser. Such a fee can only be implemented for transactions with merchants and businesses and P2P transactions between individuals can be kept free of charge.

Given the amount of investment that has been put in by the digital payment aggregators into UPI, which has played a vital role in making the payment accessible and successful. It is important to provide them with incentives which makes it viable and attractive for them to invest further in this technology to sustain the reach of UPI. If the digital payment aggregators can recoup the cost for facilitating a transaction, the RBI can also regulate the current method of revenue of these digital payment aggregators which comes from data trade and data mining of their users. Not only will this lead to more investment from the private players, to attract more users to UPI which will further India's progress for achieving the SDGs. It will also free up the budget that has been allocated for subsidies for the digital payment aggregators.

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