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In a new effort to boost the usage and the economic viability of digital payments, the Reserve Bank of India (RBI) has announced plans to update its payment system fees, connect feature phones to its instant payment infrastructure and enable offline payment for low-value transactions.
In a Statement on Developmental and Regulatory Policies, the RBI sets out various initiatives aimed to improve the usage of digital payments in India, including its instant payments service Unified Payments Interface (UPI).
Launched in 2016, UPI has been a key contributor to digital payments growth in the country. In the first ten months of 2021, UPI recorded 30bn transactions, up from 19bn in the full year of 2020. This makes UPI the largest instant payments service globally in absolute terms, according to VIXIO research.
Consultation on payment system fees
Although the increasing adoption of UPI is welcome, the RBI stresses digital transactions should be “affordable to users and economically remunerative to the providers”.
Current restrictions prevent payment service providers (PSPs) from charging fees to Indian merchants accepting UPI or RuPay, India’s domestic card scheme, meaning PSPs are effectively subsidising their usage. There are also restrictions on wallet providers from charging end users to initiate UPI transactions.
The central bank is now taking a comprehensive view of the charges involved in the usage of retail payment instruments, and will issue a discussion paper within a month, analysing “all aspects” related to charges involved in various channels of digital payments such as credit cards, debit cards, prepaid cards, wallets and UPI.
“While there are both advantages and disadvantages of customers bearing these charges, they should be reasonable and should not become a deterrent in the adoption of digital payments,” the statement reads.
The paper will also seek feedback on issues related to convenience fees, a charge that some merchants impose on customers for e-commerce and other transactions.
This is definitely an “interesting space to watch” and is “a complex subject and discussion item”, said Balakrishnan Mahadevan, consultant and ex-chief operating officer of the National Payments Corporation of India.
The consultation may initiate a discussion on merchant discount rates (MDR), a fee charged to merchants by their acquirer for accepting and processing payments, and could possibly pave the way for the re-introduction of these fees when using RuPay debit cards and UPI at merchants, Mahadevan noted.
“I don’t know how this will play out but there are three possible actions with regard to MDR,” Mahadevan told VIXIO.
“The RBI could expand the current fee restriction to include prepaid cards by treating them similar to debit cards, which could impact a number of players in the market whose revenue relies on this channel. They could also look to reduce fees on credit cards. As of now, MDR for credit cards are not regulated in India. Another possibility — they could bring back MDR for RuPay debit cards and UPI merchant payments again in line with RBI’s earlier issued directive on a differentiated MDR regime by working with the government of India.”
Currently, debit cards issued on Visa and Mastercard networks can still charge MDR.
According to Mahadevan, the industry is hoping that the RBI will bring back MDR for RuPay debit cards and UPI merchant payments so that there is some incentive for stakeholders to enable digitalisation.
In addition, the consultation will enable a discussion on whether third-party service providers could be allowed to charge end-user customers for initiating UPI transactions.
“This could be a great opportunity for India to set a fair and reasonable price structure where costs are shared between stakeholders in the transaction chain keeping in mind the interest of all stakeholders,” Mahadevan explained.
Connecting feature phones to UPI
Although the adoption of UPI has grown significantly in the past few years, there is still a large portion of customers who cannot connect to the service because they do not have smartphones.
According to the RBI, out of the 1.18bn mobile users, around 740m use smartphones, which means more than one-third of all mobile phone users still have feature phones.
The country has already taken steps to give feature phone users access to basic payment services on UPI through typing a short code (*99#), but the service has not gained widespread adoption.
However, participants in the first cohort of the RBI-run regulatory sandbox have proposed new solutions to help connect feature phone users with the UPI network. The RBI believes this will enable UPI-based digital payment solutions on feature phones and promote wider digitisation.
The central bank said it will announce more details on this initiative “shortly”.
Offline small-value transactions
One of the initial objectives of UPI was to replace cash for low-value transactions.
According to the RBI’s transaction data analysis, 50 percent of the transactions that go through UPI were below INR200 (£2), indicating strong success in meeting this objective.
These low-value transactions, however, require significant system capacity and resources, and connectivity issues often cause transaction failures. Therefore, the RBI now proposes an “on-device” wallet in the UPI app for low-value transactions.
Finally, the RBI proposes to increase the transaction limit for payments through UPI for Retail Direct Scheme and IPO applications from INR2 lakh to INR5 lakh.
“All in all great steps by RBI to further digital payments in India,” Mahadevan said, noting that “since most of the enhancements are UPI related and happen on UPI rails, it does indeed increase the concentration risk in the system further”.
The Indian government is currently proposing to offer new payments licences to for-profit companies to offer alternative payments processing platforms in the country.
According to Mahadevan, by going ahead with these plans to license what the RBI is calling "New Umbrella Entities", it will allow the payments infrastructure to spread the load and “take care of the concentration risk of increasing volumes”.
