The Case For Not Charging UPI Transactions

Earlier this week, the Reserve Bank of India (RBI) published a discussion paper on charges in the payment systems.

The RBI did not propose or hint at disposing of any policy, but merely put out some questions about different payment systems for public feedback.

On UPI, the RBI had three questions. One, if the payment system costs must be subsidised, given the zero charges.

Two, how should the fee on UPI charges be determined, that is, a percentage of the transaction or a flat value? Three, who administers the charges, the free market or the RBI?

Transactions through RTGS, NEFT, IMPS, debit cards and credit cards are charged already. However, the question is about altering the zero-charge framework of the UPI ecosystem, which facilitates the real-time movement of funds.

Two aspects pertaining to financial inclusion are important when it comes to UPI.

One, unlike credit and debit cards, UPI, as a payment system, has witnessed adoption at a scale that would have been unthinkable.

Unlike RTGS, mainly used by businesses, or NEFT and IMPS used for occasional transactions, UPI has been adopted by the masses for everyday transactions, furthering the case for digitisation of the economy.

Two, the continued scaling of UPI will eventually make cards obsolete, given the ease of payments and security.

In July 2022, 338 banks were active within the UPI ecosystem. Close to 6.2 billion transactions happened, compared to 3.2 billion in July 2021, 1.4 billion in July 2020, 0.8 billion in July 2019, and 0.27 billion in July 2018.

The value of the transactions carried out in July 2022 was Rs 10.62 lakh crore, compared to Rs 6.06 lakh crore in July 2021, Rs 2.90 lakh crore in July 2020, Rs 1.46 lakh crore in July 2019, and 0.4 lakh crore in July 2018.

In July 2016, 21 banks were active on UPI, and the monthly transaction volume and value were 0.09 million and Rs. 0.38 crore.

The numbers serve as a testament to the success of UPI and how the country is beginning to get rid of cash payments. Yet, the success story is only in its infancy, with 50 billion monthly transactions not being a distant dream.

The numbers also serve one important lesson for the policymakers: to not compare UPI with other payment systems, especially debit and credit cards, when it comes to deliberating charges or levies to support the payment system operators or providers.

UPI’s success, beyond the numbers, has been its ability to capture the rural Indian market of 800 million users.

For a transaction worth Rs 800, the payer’s bank incurs around 0.10 per cent of the transaction value, or Rs 0.80. In this case, the beneficiary’s bank, UPI app, and the payment system provider incur 0.07 per cent of the transaction value or Rs 0.56.

The payer’s UPI app provider and its payment system provider bank incur 0.06 per cent of the transaction value, or Rs 0.48. NPCI, running UPI, incur 0.02 per cent of the value, or Rs 0.16.

Thus, for monthly transactions that have now crossed the value threshold of $120 billion, fees worth a few hundred crore rupees are easily lost. Therefore, RBI’s question of charging UPI transactions is not unwarranted, but a few aspects must be considered.

One, from the banks' point of view, the adoption of UPI also brings down the cost of issuing debit and credit cards. In the future, credit access would also be a part of the UPI ecosystem, thus eliminating the cost of issuing cards.

Two, it enables banks to cut down on ATM numbers across cities as more people move away from cash.

Three, UPI opens up increased opportunities for microfinance in the future, especially for first-time borrowers from rural areas, enabling expansion of their services and customer base.

From the government’s point of view, the adoption of UPI serves the larger goal of digitising the economy, enabling them to track transactions with pinpoint accuracy. To some extent, the formalisation of the economy is also helped.

Through UPI and ONDC in the future, the government will be able to earn much more in tax revenues through the value-added services and businesses than they will by charging UPI transactions.

Thus, for the government, it is to let the golden goose live while counting the golden eggs.

The transaction cost for the UPI app provider (around Rs 0.48 for Rs 800) must not be viewed in isolation, given the app providers have other product and business incentives for collecting the data.

The government can take care of the cost for the payment operator, or NPCI in this case (incurring Rs 0.16 on Rs 800).

Loss-making public infrastructure pursuits (buses, metros, expressways, etc.) are enablers of the local and national economy. The UPI payment framework must be viewed from the same perspective.

Perhaps, someday, when UPI transactions exceed 50 billion a month in volume, there would be a case to charge the transactions, or the government could be earning much more in tax revenues from the services built on that ecosystem to care for the charges.

For now, however, there is no case for charging UPI transactions, not even remotely, for India is only getting started.

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