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Reports are circulating that the Reserve Bank of India (RBI) may have gone cold on plans to allow firms to charge fees for use of the country's instant payments system, the Unified Payments Interface (UPI).
According to a “highly placed source” quoted by The Hindu Business Line, India’s central bank has lost its previous enthusiasm for the idea of introducing charges on all UPI payments.
The source, who asked to remain anonymous, said that in 2022 there were “several rounds” of conversation between the RBI and the payments industry on the issue, but to no avail.
“Even until December last year, the regulator seemed in favour of introducing charges on UPI payments and agreed with the industry’s stance on why it was necessary to have some levy on these payments,” the source said.
“However, now with all the focus on improving the acceptance and usage of retail central bank digital currency, or CBDC, UPI doesn’t seem to be the focus point.”
According to the source, if the RBI does decide to introduce charges for all UPI transactions, no action will be taken for at least another year.
A national issue
The issue of UPI charges was last tackled head on by regulators in an RBI discussion paper published in August last year.
In the paper, the RBI noted that since January 2020, UPI charges have been “nil for users and merchants alike” as a result of the government’s zero-charge framework.
But hoping to elicit “general feedback” on the idea of reintroducing UPI charges, the RBI made the following pitch.
“Payment service providers (PSPs) in any payment system should earn income for continued operations of the system to facilitate investments in new technologies, systems and processes,” said the bank.
“This is applicable irrespective of the system being operated by a public sector or a private sector entity.”
To illustrate the point, the RBI included a diagram depicting the charges incurred by all parties involved in an ₹800 ($10) person-to-merchant (P2M) UPI transaction.
Collectively, the payer’s bank, beneficiary’s bank, UPI app and the National Payments Corporation of India (NPCI) (as the UPI operator) would incur costs of ₹2 ($0.024).
Comparing UPI to India’s Immediate Payment System (IMPS), a parallel instant payments service that operates 24/7, the RBI said that similar charges to use UPI may be justified.
“It could be argued that the charges in UPI need to be similar to charges in IMPS for fund transfer transactions,” it said. “A tiered charge could be imposed based on the different amount bands.”
Following the publication of the discussion paper, India’s Ministry of Finance immediately moved to distance itself from the RBI’s proposal.
“UPI is a digital public good with immense convenience for the public and productivity gains for the economy,” the ministry said in a statement.
“There is no consideration in the government to levy any charges for UPI services. The concerns of the service providers for cost recovery have to be met through other means.”
But other state actors, such as the Parliamentary Standing Committee on Finance, have voiced their support for reconsidering UPI charges.
“The committee feels that a relook into the merchant discount rate (MDR) in UPI transactions and the structure of payment service provider (PSP) fee is essential as financial transactions via UPI are expected to increase,” the committee said in a 2022 report.
“The committee, therefore, recommends the NPCI and Ministry of Finance to undertake comprehensive stakeholders' consultation in this regard and furnish action taken on the same.”
The case for fees
Among payments industry professionals, there are mixed views as to the pros and cons of reintroducing UPI charges.
Balakrishnan Mahadevan, former chief operating officer at the NPCI, told VIXIO that he is generally in favour of UPI charges.
“I personally feel a reasonable charging regime is good for UPI,” he said. “The RBI has previously proposed a differentiated interchange regime based on the type of acceptance infrastructure and merchant turnover. Perhaps that should be implemented.”
Mahadevan added that there is already recognition that UPI participants incur costs, hence the government’s subsidies regime for banks that process UPI charges — a regime that will continue this year, as covered by VIXIO.
“More so when there is a recognition that participants incur costs and that is reimbursed as subsidies to banks by the government of India.”
Mahadevan also pointed to Brazil’s Pix as an example of an instant payment system that has grown rapidly despite some charges for merchants.
“One way this discussion can be put to rest is by the government of India publishing a paper that quantifies the benefit of digital payments — such as increase in tax compliance resulting in increased revenue and reduction of cash management costs,” he said.
“A zero-charge regime is not mandatory within an instant payments system for merchant payments to grow.”
Meanwhile, Yatish Rajawat, founder and CEO of the Center for Innovation in Public Policy, an Indian lobby group, has argued that UPI should remain a zero-charge payment system.
“UPI is a global success story and it should not be derailed by global lobbies that have a vested interest in digital public goods becoming a private product and comparable with their networks,” he said.
“UPI as a public good means that the NPCI, the organisation that owns it, should not charge a fee from users.
“There is a cost of hosting and maintenance, but it is a small pittance compared to the savings it gives to the economy. By reducing the cost of transactions to zero, UPI has been able to bring in many more transactions into its fold.”
