UPI is the future of payments, or is it?
Unified Payments Interface (or UPI), has been one of the greatest success stories in India’s payment history. The government of India takes pride in this indigenous technology that has revolutionised the payments market in India for its citizens, merchants, and banks alike. It is so popular that other countries such as UAE, France, Singapore, Bhutan & Nepal are following or at least trying to replicate the model in their countries. Last month alone, in July 2022, India witnessed 200 million transactions or 10.62 lakh crores in value terms.
UPI as a fund transfer system enables the real-time movement of funds. UPI as a merchant payment system facilitates real-time settlement, as against the T+n settlement cycle for card settlements. Facilitating this settlement requires the PSO and banks to implement adequate systems and processes to address the settlement risk. This involves additional costs to the system.
There is a perception that service providers do not incur any cost for UPI payments. While the cost is lower than debit cards, it is not entirely free. In January 2020, Govt of India decided to do away with payments merchants need to make for transactions using two of India’s home-grown payments systems: UPI and RuPay Debit cards. The idea — place India’s digital payments story on steroids. Another term worth knowing is MDR or Merchant Discount Rate, which is the charge paid by the merchants to the bank, point-of-sale provider and the payment gateways for transactions. It stood at 0.9% of transaction value on RuPay debit cards and 0.3% for UPI transactions. The govt. decided to scrap this and bear the cost on its book. This zero charge framework helped customers and merchants to use this technology but devoid banks and technology providers with potential benefits. UPI as a % of the total transaction has grown over the years while traditional methods such as cash withdrawal and IMPS have plateaued or decreased owing to the ease of UPI transactions (figure below).
Source: https://www.npci.org.in/PDF/npci/statics/RETAIL-PAYMENTS-STATISTICS-Jul-22.xlsx
In its paper published on 17th Aug 2022, RBI asked a few questions that challenged this notion of zero charge framework and its sustainability. RBI goes further in arguing that UPI is like IMPS. Therefore, it should be charged like one. Even a tiered system could be imposed based on different transaction values. The cost incurred by various stakeholders in a UPI transaction is as follows (shown below).
Thus, it shows that it does cost, not to us, but to the businesses to complete the transaction. Some speculations popped up on social media that UPI would be chargeable in the future. But the tweet from the Ministry of Finance (shown below) on 21st Aug 2022 put an end to those speculations (for now).
In her budget speech in July 2019, finance minister Nirmala Sitharaman expressed, “…RBI and banks will absorb costs from these transactions to the businesses on account of handling less cash as people move to these digital modes of payment”. Govt. of India announced in Dec 2020 that it would pay 1300 Cr to reimburse banks. However, the aggregators or the facility providers miss out on this remittance.
The question that remains to be answered is whether the RBI will be able to convince the govt on the sustainability of the UPI model and implement a tiered fee structure or will the govt continue to provide remittances from “other means” and keep the UPI free.
