Should there be charges on UPI fund transfers?

The Reserve Bank of India on Wednesday sought views from the public on fees and charges in digital payment systems. It stressed that such charges should be reasonable and competitively determined for the users, to ensure wider acceptance of digital payment modes.

The payment systems include IMPS, NEFT, UPI and debit cards, among others.

In just six years of launch, payments made using UPI have become commonplace, with the platform boasting over 26 crore unique users and 5 crore merchants.

According to a report by payments company Worldline, UPI person-to-merchant transactions have become the most popular payment method among consumers, holding a market share of 64% in terms of volume and 50% in terms of value in the first quarter of 2022.

One of the key reasons for UPI’s popularity is the zero Merchant Discount Rate. It is a fee levied on merchants for processing payments.

The government has mandated a zero-charge framework for UPI transactions

The government has mandated a zero-charge framework for UPI transactions with effect from January 1, 2020. As such, charges in UPI are nil for users and merchants alike.

But the RBI explained that different stakeholders collectively incur a cost of 2 rupees to process a UPI person-to-merchant transaction with an average value of Rs 800. 

Also Read: RBI moots 'tiered' charge on payments through UPI, seeks public feedback
 

The RBI acknowledged that in any payment system, the Payment System Providers or PSPs should earn income for continued operations of the system to facilitate investments in new technologies, systems and processes. 
 

The various participants in the UPI include the remitter and beneficiary banks, payer and the receiver’s UPI app providers, their PSP banks, and the National Payments Corporation of India. The system facilitates the settlement of transactions using a combination of these participants.

While reiterating that the RBI has neither taken any view nor has any specific opinion on the issues raised in the discussion paper, it posed several questions for feedback.

Can a tiered charge structure be imposed for UPI based on different amount bands?

In the context of zero charges, is subsidising costs a more effective alternative?

If UPI transactions are charged, then should the merchant discount rate be imposed based on the transaction value or should a fixed amount be charged irrespective of the transaction value?

Further, it has sought feedback on whether the RBI should decide on the charges or the market be allowed to determine if any such charges are introduced.

Siddharth Dani, Chief Financial Officer, Easebuzz says, charges can be introduced in a gradual manner on the merchant. Fee should be a percentage of transaction value. There can be a cap for large value payments. 

Bhaskar Chatterjee, VP, Product Management, Ezetap, small merchant deserves to have a zero MDR, merchant size can be categorised using value and volume of payments, flat fee becomes prohibitive for low value payments.

The industry says the days of free UPI transactions cannot continue forever, but at the same time it is not in favour of the government subsidising it through budget every year. Experts say P2P payments should be kept free while the charges can be recovered from the merchants for P2M transactions. 

Though there is a difference of opinion on what could be the ideal pricing structure, protecting smaller merchants and encouraging small-ticket transactions remains the priority. 

Industry executives believe pricing should be market-determined through competition, with the RBI only stepping in if monopolistic tendencies are seen.

Despite its meteoric rise, UPI still has a long way to go in terms of adoption. Therefore, settling on any pricing mechanism will be a balancing act between growth of digital payments and incentivising the system.