Dear Shaktikanta Das, charging UPI is a suicidal move

In spite of not belonging to an Economics background, IAS Officer Shaktikanta Das has performed much better than a lot of RBI governors. But, the proposal to charge UPI may end up corroding his legacy. Along with that, it will prove to be a suicidal move for the payment infrastructure itself.

RBI wants to charge UPI payments

RBI has put forth a proposal asking stakeholders about their opinions on charging money for UPI transactions. In its proposal titled “Discussion Paper on Charges in Payment System”, RBI has expressed its will to streamline the framework of charges for different payment services/ activities in India. Not only UPI, but even IMPS NEFT, RTGS, and payment instruments including debit cards, credit cards, and prepaid payment instruments (PPIs) are also under the radar of structural changes.

One of RBI’s justification for the proposal to charge includes the fact that UPI is used in both funds transfer as well as merchant payment systems. Pitching for tier-based charges on transactions, RBI stated, “UPI as a funds transfer system is like IMPS. Therefore, it could be argued that the charges in UPI need to be similar to charges in IMPS for fund transfer transactions. A tiered charge could be imposed based on the different amount bands,…”

UPI is God-send for the masses

The proposal to charge UPI transactions has been brought forward mainly to protect the interest of banks and other stakeholders. Players in the payment industry have hailed it as a positive move. According to stakeholders taken on board by the media, they believe that a no-charge model is not sustainable in the long run. Experts have also suggested that charges on UPI transactions should be introduced in a phased manner.

It is true that establishing UPI infrastructure involves a heavy investment from the government, banks, and merchants among others. However, at the same time, this is also a fact that most people in India won’t be able to afford the cost incurred on UPI transactions. A brief glossary on statistics involving UPI transactions is good enough to conclude that.

Low-cost transactions rule the rooster

In its recent report, HDFC Securities revealed that UPI has become a preferred mode of transfer for people in the low-income segment. According to its analysis, 75 per cent of UPI transactions were initiated to transfer money below Rs 500. It won’t be a far-fetched idea to state that most of these transactions must have been done for buying low price products from small businesses.

In its report, Worldline SA, a French multinational payment company found out that in the first quarter of 2022, 64 per cent of UPI transactions involved person-to-merchant transfers. The prevalence of low-income individuals in the payment system can be gauged from the fact that in spite of comprising 64 per cent in volume terms, their total turnover was only 50 per cent of total payments.

Problem is there but viable solutions do exist

The Modi government mandating zero charges on UPI payments in 2020 played a major role in flourishing of UPI transactions. But, the freeing of transactions had an adverse impact on banks. According to a report by Business Standard, banks spend Rs 2 for a person-to-merchant transaction for Rs 800. Given their share in the total transaction, this cost gets huge.

It is not that solutions to the problem do not exist. In 2020, IIT-Bombay had suggested that the government and RBI should start sharing the burden of costs taken by banks to maintain UPI infrastructure. Other proposals like limiting Person-to-Person transactions have also been suggested in the past.

Need to work on inadequate solutions

The Modi government did listen a bit to stakeholders and in December last year, it stated that to promote UPI it would be investing Rs 1,300 crores. If any person transfers money upto Rs 2,000 to a merchant account, then the government incurs all the charges for the transactions. Though the scheme is only a pilot project and depending on its success, it may not be brought again after FY 2022-23.

Even Rs 1,300 crore was touted as inadequate by experts. But, the solution which RBI is trying to find is not viable. Customers won’t pay for transacting money. Most of the Indians will return to cash transactions when they will be charged for online transfers. They can’t help it; every penny is hard earned and they don’t want to lose it.

Government needs to step up and use its revenues from low-cost oil purchase and 5-G auctions to augment the payment infrastructure, particularly the UPI. It’s going global and it won’t be a good optic if Indians themselves start leaving the platform.