Tuesday, June 18, 2024

New fee on some UPI payments doesn’t address industry’s main challenges

The interchange fee proposed by the National Payment Corporation of India on digital payments from prepaid paying instruments using the Unified Payment Interface (UPI) is irrational and does not address the real challenge that payment operators face. Every UPI payment – big or small – costs money and should be paid for, ideally by the government, the Reserve Bank of India and the banks involved.

Interchange fee is the fee charged to a merchant, typically for a credit or debit card transaction. Large merchants with proportionately large turnovers absorb this cost while small traders, who operate on wafer-thin margins, often pass on this fee by charging the customer 2% extra for card-based transactions.

NPCI has now proposed that UPI payments of over 2,000 made from prepaid payment instruments, such as e-wallets, be charged an interchange fee of 1.1%. It has also proposed a fee of 15 basis points for filling the e-wallet. But there is no charge on UPI payments made directly from one bank account to another, including business accounts.

This fee structure is designed to kill the wallet business. Since payments from one bank account to another won’t attract a fee, why will anyone want to continue operating an e-wallet?

The whole structure is illogical, too. When a UPI payment is made, whether from a wallet or directly from a bank account, money flows from one account to another, through the NPCI’s switch. There are a number of players involved in this transaction – the payer’s bank, the payee’s bank, the payer’s payment aggregator, the payee’s payment aggregator (payment aggregators supply the QR codes and enrol merchants into the UPI ecosystem), payment gateways (providers of software applications that enable payments), the payment system operator (NCPI in the case of UPI, and Visa and Mastercard in the case of card networks), and the telecommunication infrastructure used to transmit the payment signals. All these players incur a cost when a transaction is made. They ought to be reimbursed to cover the costs of maintenance, research and development, and given a mark-up to ensure they can make a profit.

Payment aggregators, who sign up merchants and promote the use of QR codes, incur the highest costs and forgo the most revenue. Imposing an interchange fee on wallet payments will not compensate for the revenue they lose on millions of small PPI transactions or transactions made directly from one bank account to another.

These intermediaries should be compensated for all payments, not just those above 2,000 made from wallets and other PPIs. The money should come not from merchants or consumers, but those who gain the most from digital payments – the government, the RBI and commercial banks.

Digital payments are transparent and leave an audit trail. This makes for better data analytics and realisation of the economy’s tax potential, so the government stands to gain immensely from additional tax revenues.

The RBI, too, is a major gainer. Its job is to print currency notes, supply them as per banks’ requirements in every region, retrieve and destroy soiled notes, and guard against counterfeit notes. The more payments go digital, the less money it needs to spend on these things.

Commercial banks also gain immensely from the shift to digital payments as they need fewer tellers and less real estate. The huge costs of stocking ATMs, clearing cheques and the like are all averted and accounting becomes more automated.

These represent significant savings for the government, the central bank and the commercial banks. A tiny sliver of these savings can be used to compensate companies in the digital payment ecosystem. That is the way to encourage digital payments, not selectively imposing interchange fees on transactions above a threshold from prepaid instruments. This brings in regulatory discrimination against some payment operators, namely wallet providers.

A fairer, non-arbitrary method is to compensate every player in the digital payment ecosystem from a pool of money to which the government, the central bank and commercial banks contribute. The per-transaction compensation should be fixed, rather than proportionate to the value of the transaction.

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