Will the RBI paper put an end to the payment industry's tussle? Here's a view

The RBI is aiming to transparently build a payments and settlement framework that satisfies users of diverse paying capacities and meets viability concerns of service providers.

The Reserve Bank of India’s (RBI) recent discussion paper to reassess charges levied on various digital payment systems in vogue aims to balance out the competing interests of payers, beneficiaries, and intermediaries providing these services.

It solicits public views on what could be the best way forward to evolve a framework that is convenient, safe and affordable for users, reasonably covers the costs of running reliable systems, and incentivises private operators to do business at a time digital transactions in the country are at a record high.

Every time you swipe your card or scan a QR code while making a purchase, or transfer a payment to your vendor or receive one as a business, an intermediary — known as a payment service provider (PSP) — ensures the other side receives the payment and the transaction is completed. For its efforts, the PSP charges either party (whether to cover its overheads, or invest in and run the business and make a profit). PSPs themselves are a heterogeneous lot — they include card networks, the National Payments Corporation of India (NPCI), prepaid payment instrument (PPI) issuers, banks and non-banks issuing cards and wallets or accepting payment instruments, and payment aggregators and gateways.

Broadly speaking, in a funds transfer payment system, the charges are recovered from the originator of the payment instruction. In a merchant payment system, they are deducted from the amount receivable by the merchant and known as the merchant discount rate (MDR).

According to the discussion paper, cost and returns are determined by the ownership structure of the PSP. For instance, the RTGS and NEFT are owned and operated by the RBI itself. The IMPS, RuPay, United Payment Interface (UPI), etc. are run by the not-for-profit NPCI and yet others, by private for-profit firms.

A particularly interesting case among these is the UPI. The UPI has clocked a record 380% CAGR in the past 5 years, representing ~46 billion in transaction volume and ~84 trillion in value as of fiscal 2022, representing 64% of total digital volume in India.

The government mandated a zero-charge framework for UPI transactions with effect from January 1, 2020. Moreover, the Ministry of Finance asserted on August 22, 2022 — well after the discussion paper was released — that it has no plans of levying charges on UPI payments and would continue lending financial support to boost the digital payments ecosystem in the country.

For fiscal 2022, it had set aside Rs 1,500 crore as financial incentives for digital payments. It has extended this support this fiscal, which, it has said, could be used to claim revenue loss stemming from zero MDR on UPI, setting up the requisite infrastructure for merchants to accept digital payments, encouraging digital payments for toll collection, and promoting digital payments.

Even earlier, India’s digitalisation thrust has implied regular intervention by the government and regulators, to reduce the charges levied and ensure higher acceptance of the payment modes across customers and merchants.

For instance, in September 2017, the RBI changed debit card regulations to reduce the MDR. This underwent another change in January 2018, with different rates made applicable on physical and QR-based transactions based on the turnover of the merchant.

However, the burgeoning pace of digital payments has probably prompted the RBI to throw the discussion open to the public, revisit the system with the stakeholders, address any frictions that might arise, and further streamline the processes.

Though the discussion paper keeps options wide open, the detailed questions asked below each system described, makes clear the central bank’s line that for an efficient payments system to work at this scale, it is equally important to ensure viability for all parties in the transaction as well as appropriate returns for PSPs.

Under UPI, it has pointed out that being a system similar to IMPS, it could be argued that similar charges be levied, at least for fund transfer transactions, using a tiered structure.

It has sought suggestions (open till October 3) on the different systems based on a total of 40 questions, which range from the nature and reasonableness of charges under each, which ones are desirable, who should administer them, whether they should be regulated, and which could be monitored for revision with the consent of the stakeholders.

Users and service providers alike will keenly watch the outcome of this discussion that is expected to result in a rationalisation of charges based on the responses received.

CRISIL Research, however, does not see a material impact on the volumes of transactions, considering the rapidly increasing dependence on digital payments in the country.

(Aniket Dani is Director, CRISIL Research)