September 29, 2022

Good morning. In today’s either/view, we discuss whether UPI should start charging a fee. We also look at the security measures in Delhi ahead of the festive season, among other news.

📰 FEATURE STORY

Should UPI Charge a Fee?

The Unified Payment Interface (UPI) system in India was met with much scepticism when it was first launched in 2016. However, it has been a huge success in the digital payment ecosystem. The Reserve Bank of India (RBI) published a discussion paper early last month seeking views on charges in payment systems. In response to this, the Finance Ministry clarified that the government will not levy any charges for UPI transactions.

Against this backdrop, many views have emerged regarding levying charges on digital payments. Who should bear the cost of UPI transactions?

Context

Over the last 5 years, digital payments in India have witnessed an exponential increase jumping from 2,071 crore transactions in FY 2017-18 to 8,193 crore transactions in FY 2021-22. As per the estimate released by Boston Consulting Group, digital payments constituted about 40% of all transactions in India as of June 2022. Out of all online payment modes, UPI has seen the highest adoption rate among consumers.

The Finance Ministry responded to the paper published by the RBI terming UPI as a “digital public good,” stating that the government had provided and will continue to provide financial support to service providers for cost recovery. Finance Minister Nirmala Sithraman reiterated that ₹200 crores have been allocated for reimbursement of charges towards UPI transactions. Additionally, the Finance (No.2) Act of 2019 prohibits UPI network enablers from imposing any charges.

Merchant Discount Rate or MDR is a fee charged by the bank to the merchant for carrying out an online transaction. For methods other than credit cards, this fee is capped at 0.9% of the transaction value. The finance minister in 2020 stated that the RBI and banks will absorb the cost of the zero-MDR that was implemented and the savings that will be accrued on account of cashless transactions will also be awarded to them.

The government has implemented a zero-charge framework in order to encourage further adoption of UPI, accelerating the “Digital India” initiative. However, banks and other payment intermediaries have questioned the sustainability of this regime. Even the Parliamentary Standing Committee on Finance submitted a report that highlighted the need to revisit the zero-charge practice.

VIEW: UPI payments should levy a charge

The UPI application market is currently dominated by Google Pay, PhonePe and PayTM which hold about 90% of the market share. However, despite this massive number, their revenue model for UPI transactions alone is not sustainable. The Payment Council of India, the largest body in the country for digital payment aggregators, announced in January 2022 that the payments industry will bear a loss of ₹5,500 crores due to the zero-MDR regime.

Additionally, RBI’s discussion paper estimated that the cost borne by all stakeholders for a Peer to Merchant (P2M) transaction is roughly 0.25% of the transaction value. The unknown cost of UPI P2M also needs to be accounted for. Since the value of all these transactions in FY 2021-22 was about ₹84 lakh crores, assuming a 0.1% cost percentage would still amount to roughly ₹8400 crores in UPI transaction costs.

If the costs incurred by the system are not levied on merchants or subsidized, UPI payments fail to make a profitable business model. The Chairman of Payments Council of India, Vishwas Patel has also highlighted that the government incentives allotted for UPI apps are being appropriated by banks entirely. This is contrary to the incentive scheme released by the government in FY 2021-22 which iterated that the incentives are to be received by acquiring banks and shared amongst UPI providers and issuer banks.

COUNTERVIEW: UPI payments should not levy a charge

It is not unknown that there has been an unprecedented digital financial revolution in India owing to the hassle-free, inclusive and convenient UPI mode of payment. Adding a service fee will automatically discourage consumers from adopting this form of payment thereby significantly reducing the magnitude of momentum it has gained over the past few years. This is the same reason the finance ministry waived off any fees for online transactions.

Cashless transactions benefit banks to a great extent. Maintaining physical cash transactions is attached to many expenses including transfer of cash, maintenance of ATMs and cash counters at every branch and the security of cash at each stage. Such costs will decrease gradually once users transition to UPI payments. Additionally, the infrastructure required by banks to support UPI payments is the same as that of regular banking operations.

Apart from convenience for customers, UPI usage reduces costs for firms as it lubricates the economy by allowing instant payment transfers. Additionally, the ongoing problem of illegal transactions involving high denomination cash is countered effectively through UPI payments. By implementing zero-cost transactions, more transactions have been brought into the fold. Digital transactions are recorded which facilitates transparency and thus promotes tax payments.

Another thing to consider, as stated by the Finance Minister, is the aspect of digital public good (DPG). Even if a minimal charge is levied, smaller transactions will be discouraged which will in turn affect small businesses and micro-entrepreneurs who are expected to benefit the most from DPG. An extra charge will also seriously impact the volume of transactions on the system.

Reference Links:

UPI payment charges explained: Why FinMin had to clarify there’s no move to levy fee (The Indian Express)
Who should bear the cost of UPI? (Financial Express)
India must re-think the zero-charge regime for digital transactions. Try this tiered approach (The Print)
Unified Payments Interface: Don’t Kill Golden Goose (BW Education)
Should UPI Charge a Fee? Global Payment Lobby Wants It, RBI Must Ensure Otherwise (News 18)
Should there be charges on UPI fund transfers? (Business Standard)
To charge or not to charge for Digital Payments (News on AIR)

What’s your opinion on this?
(Only subscribers can participate in polls)

a) UPI should levy a fee.

b) UPI should not levy a fee.

🕵️ BEYOND ECHO CHAMBERS

For the Right:

‘Chronology Samajhiye’, To Know The Modi Government’s Stand On TV Slanging Matches

For the Left:

Modi And Jaishankar Have Become To Foreign Policy What Rao And Manmohan Were Once To Economy

🇮🇳 STATE OF THE STATES

Security measures ahead of festive season (Delhi) – As the festive season gets underway, crowded public spaces are easy targets for terrorist attacks. The Delhi Police will place dummy IEDs across the city to check alertness levels and the preparedness of security officials. Spaces that are likely to be crowded will be covered via this drill. The police hope this plan will help avoid any possible incidents and ensure their readiness.

Why it matters: Ahead of the busy festive season, security officials said they received intelligence about possible terror threats in different parts of the city. Previously, the special cell of the Delhi Police placed 15 dummy IEDs to check the alertness of the force. 10 were detected. Last month, officials conducted a mock drill ahead of Independence Day celebrations.

GI tag for chilli (Telangana) – Telangana is looking to secure a geographical indication (GI) tag for the Chapata Warangal Chilli, regarded as one of the sweetest in India. The application has been filed with the GI registry in Chennai. The chilli is unique to Warangal and looks like a Mexican capsicum. It’s low in heat, measuring negligible on the Scoville Scale used to determine a chilli’s spiciness. It measures between 4,000 and 8,000 SHU (Scoville Heat Unit).

Why it matters: If the chilli does get the GI tag, the number of such goods from the state will increase to 18. It’s used as a colourant in food and beverage processors due to its natural plant colour. It’s grown in Warangal in water-sufficient fields. It has a unique sweet fragrance. It’s used in restaurants and in making pickles. Demand for it comes primarily from East Asia.

IRCTC partnership for tourism (Chhattisgarh) – The state government has signed an MoU with the IRCTC to promote tourism in the state through its website and social media platforms like Twitter and Facebook. The agreement was signed on World Tourism Day in the presence of Chief Minister Bhupesh Baghel. He mentioned the state’s tourism potential with its rich history and culture and needing to bring them to the world’s attention.

Why it matters: Baghel mentioned that tourism in the state has been neglected since its formation in 2000 due to insurgency and Maoist violence. A few years back, the state tourism board began developing wayside amenities at Nathiya Nawagaon, an offbeat destination in Kunkuri district. It also identified other lesser-known areas to build motels, including an Ethnic Tourist Village at Sarodha Dadar in the Kabirdham district.

Defeating the cattle Bill (Gujarat) – The Maldhari community persisted for six months when it finally won as the Bhupendra Patel government withdrew the controversial stray cattle bill. They resorted to milk boycotts and protests on the streets and even used WhatsApp and Telegram. The Bill aimed to tackle the stray cattle menace in urban areas by mandating a license, tags, and a fine of up to ₹5,000. The government seemingly miscalculated as there are more than 70 lakh Maldharis in the state.

Why it matters: The Maldharis are a cattle-rearing community and a major vote bank in the state. It’s said they decide the fate of about 46 assembly seats and three Lok Sabha constituencies. They previously flexed their political muscle by threatening to withdraw their votes from BJP candidates. For many in the community, the Bill would’ve threatened their livelihoods. Due to urbanisation of places like Ahmedabad, stray cattle have become an issue.

Website to document tribal heritage (Arunachal Pradesh) – The US Mission launched a website to celebrate the cultural heritage of the indigenous tribes of the state to celebrate 75 years of bilateral relations between India and the US. The event included films, performances, and exhibitions showcasing the state’s tribal heritage. One of the films that premiered was The Living Heritage of Arunachal: Beauty in Diversity.

Why it matters: Last December, the US launched an initiative through the Ambassador’s Fund for Cultural Preservation to work with tribals across 39 villages to preserve and document their heritage and culture. The field research for the initiative was possible through the state tourism department. The program was a way to discuss responsible tourism and technology and how to engage with those who are torch bearers and teachers of sustainability.

🔢 KEY NUMBER

14,976 – The number of voters in Rajasthan over 100 years old. Data from the Election Commission shows the maximum number of these voters are in the Jhunjhunu district.