While a segment of bankers is in favour of charges, experts say players need to find alternatives and not charge customers for digital transactions to encourage a shift away from cash. Payments startups, too, want the transactions to be free of cost.
Charges consumers pay for digital payments continue to be a contentious issue and the latest Central Board of Direct Taxes’ notification on Unified Payments Interface (UPI) has only intensified the debate.
On August 30, CBDT issued a notification that not only barred banks from charging customers for UPI payments but also ordered a refund of charges collected since January 1, 2020.
While one segment of bankers say digital payments cannot be provided for free as banks have to bear a charge for these settlements, the other says the payments should be counted among many other free services that banks provide.
“Banks are only charging beyond 20 transactions. The logic is beyond that the customer might be engaging in frivolous payments,” said a senior banker with a private sector bank.
If the government wants digital to replace cash, then consumers cannot be asked to pay for every transaction they do, is the counter.
Also read: All about bank charges on UPI transactions
Why the debate?
The CBDT order came after several customer complaints and a recent research paper by Professor Ashish Das, who is with IIT-Bombay’s mathematics department, showed how banks were charging customers for fund transfers through UPI.
The CBDT order has split the bankers, with a section saying free services are possible to an extent beyond that they get expensive for banks and stress the system.
Another top banker Moneycontrol spoke to said it would affect merchant onboarding by banks, “Who will bear the cost of adding merchants into the payments ecosystem, if everything is offered free?” he asked.
The no-charge, or zero MDR (merchant discount rate) regime as it is officially known, kicked in from January 1 despite the payments industry pushing back against the government’s decision.
MDR is the fee a merchant has to pay for accepting digital payments.
Also read: Payments industry reiterates demand for a stable MDR regime
At a recent global fintech event, top executive of NPCI Dilip Asbe, Visa India head TR Ramachandran and PhonePe chief executive Sameer Nigam highlighted how the zero MDR regime was affecting revenue.
Asbe pointed out that the Rs 500-crore Payments Infrastructure Development Fund was not sufficient if India wanted to grow payments volumes by five to ten times. “The need is to have a stable MDR regime,” he said.
The fund, announced by the Reserve Bank of India, is aimed at pushing digital payments by deploying points of sale (PoS) infrastructure, both physical and digital modes, in small cities and towns.
However, industry insiders say if the government is serious about its digital-payment push then it will have to make these payments free. There is no visible cost of paying each other in cash, if digital wants to replicate that experience how can there be charges imposed, they ask.
“In case of cash, banks would incur cost only when the cash is withdrawn but for digital payments, the case is different. Banks have a cost to bear for every small transaction,” Das told Moneycontrol.
For every transaction, be it person to person (P2P) or person to merchant (P2M), there is a cost for banks—from paying settlement fees to National Payments Corporation of India (NPCI), which developed UPI, to processing successful notifications to interested parties to running the entire backend of the settlement system.
In case of cash, the major cost was borne by the regulator for printing currency notes and for changing soiled notes.
In his research paper, Das says about 160 crore UPI transactions are processed every month. Even if the number jumps to 300 crore a month, then annually banks will incur Rs 3,600 crore as cost.
He has taken a fair assumption that every UPI settlement costs banks Re 1. Das argues this is a very small sum paid by banks for increasing digitisation in the economy, which will have many cascading benefits.
“Most of the merchant onboarding is being done by third-party applications and they were anyway offering these payments free of cost,” said a top executive at a fintech startup.
Many startups in the payments space have spoken out about the need for digital payments to be made free.
For instance, Bengaluru-based PhonePe, a major player in the UPI space, has no plans to slow down its merchant onboarding business. It said on August 31 that it aims to onboard 25 million merchants across small towns over the next few years.
“The business model on charging digital payments is obsolete. Now, payments are a means, this enables businesses to grow and payment players need to generate revenue through cross-sell,” the fintech executive quoted above said.
Unlike card payments where there is a need for a PoS terminal, for UPI there is no such setting up cost. UPI payments can be processed through QR codes. Hence, banks should not be charging customers anything for such payments.
The government, as of now, has weighed in and clarified that banks cannot charge but the debate rages on.
The market perception is that there should be some charges on payments and MDR should be brought back. If not, then market-regulated but a stable and reasonable MDR regime is a must, say payment industry executives.