The Reserve Bank of India (RBI) has sought feedback from the public and industry stakeholders in a discussion paper to modify its policies governing charges for different payment mechanisms like Unified Payment Interface (UPI), IMPS (Immediate Payment Service), NEFT (National Electronic Funds Transfer), RTGS (Real-Time Gross Settlement), debit cards, credit cards, and prepaid instruments.
The RBI is mulling a tiered-fee structure “based on different amount bands” via UPI.
“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 different amount bands,” the central bank said in the discussion paper.
According to Shilpa Mankar Ahluwalia, partner and head of FinTech division, Shardul Amarchand and Mangaldas and Co, a law firm, "The RBI Discussion Paper on charges in payment systems asks some very critical questions on the need to balance the policy of pushing digital payments and the economic viability of operating a payment system –an issue that the digital payments industry has been struggling with for a while. Digital payment transactions are typically the first point of contact for a customer and therefore play a key role in the digital distribution of all financial products."
The RBI said efficient and widely accepted payment systems are important for the economy. It stressed that besides safety and security, “reasonableness of charges is an important criterion for wider acceptance of digital payment modes.”
However, one of the main friction points in the country’s payment systems has been the high charges. Hence, RBI has been trying to bring down the charges over the years, it said.
An efficient payment system, the bank said, requires appropriate fees “to ensure optimal cost to users and appropriate return to operators.”
Therefore, it was necessary “to undertake a comprehensive review of the rules and procedures for levying charges in different payment systems in the country, with the objective of assessing their impact on the efficiency, growth and acceptance of payment systems.”
"This discussion paper also comes at an important time – when the RBI is trying to separate payment and credit products (such as the recent rule around prohibiting credit lines on a PPI product). While a change to the zero MDR rule for UPI payments will need government intervention, this discussion paper is critical to creating an open dialogue on some of the issues faced by the digital payments industry and will hopefully lead to a set of rules that recognizes the need to balance the interest of consumers and business," Ahluwalia further added.
UPI acts both as a fund transfer and a merchant payment system. The UPI participants, as outlined by the RBI, are payer and payee PSP (payment service providers), remitter bank, beneficiary bank, NPCI, bank account holders (payer and payee/merchants) and third-party application providers (TPAPs).
The RBI said the “payment instrument issuer, payment acquirer and PSO are the three important payment service providers (PSPs) in a merchant payment system.”
Hence, “PSPs in any payment system should earn income for continued operations of the system to facilitate investments in new technologies, systems and processes,” the RBI noted, adding that it is applicable irrespective of the system being operated by a public sector or a private sector entity.
Explaining how UPI involves an additional cost to the payment system, the RBI said that UPI as a fund transfer system enables real-time movement of funds for both consumers and merchants.
“However, the settlement among participant banks in UPI is on a deferred net basis. Facilitating this settlement requires the PSO and banks to put in place adequate systems and processes to address the settlement risk. This involves additional costs to the system,” added the RBI.
The RBI, hence, has sought feedback on three aspects:
- In the context of zero charges, is subsidising costs a more effective alternative?
- If UPI transactions are charged, should the MDR for them be a percentage of transaction value, or should a fixed amount, irrespective of the transaction value, be levied?
- If charges are introduced, should they be administered (say by RBI) or be market determined?
According to Ketan Patel, CEO, Mswipe technologies, a fintech company, “The discussion paper issued by the Reserve Bank of India (RBI) primarily will help streamline the payment system, which will reduce the friction and bring a commonality in the various payment modes. The entire focus of the paper is to bring transparency in the payment system, wherein customers and other stakeholders have a clear understanding of the payment mechanism."
IMPS is a fund-transfer system (push transactions) operated by the National Payments Corporation of India (NPCI) that works 24X7, 365 days. One can transfer up to Rs 5 lakh on a real-time basis using IMPS.
The RBI said the cost of operating and facilitating transactions in IMPS involves “inter alia, operational costs and settlement risk management costs. The charges in IMPS are a function of these costs.”
However, “unlike RTGS, which facilitates real-time settlement of each transaction in central bank money, the settlement in IMPS is on a deferred net basis,” said the RBI.
Explaining the role of NPCI in addressing the risk from real-time payments and deferred net settlements, the RBI said “NPCI has put in place arrangements like maintaining settlement guarantee funds (funded by the participating banks and NPCI), availing lines of credit,” etc.
“Direct participants incur cost for participating in the IMPS system in the form of cost of such funds placed with NPCI,” the RBI said. The central bank also noted that IMPS transactions have “continued to increase in spite of availability of other systems facilitating funds transfer without any charges.”
RBI said the IMPS system also has an advantage over UPI in terms of access.
“While UPI transactions are mobile-based for customers, IMPS transactions can also be initiated using other devices. Besides banks, IMPS allows non-bank entities, such as PPI issuers, to participate and facilitate remittances from wallets to the beneficiary bank accounts,” added the RBI.
The RBI also has sought feedbacks regarding IMPS charges: Should charges for IMPS transactions be regulated by RBI? Or Should RBI set a ceiling on charges that IMPS can impose?
Rahul Gochhwal, co-founder of BankSe, a digital lending aggregator platform, said, “The problem with market driven transaction charges is that they are unpredictable. The charges may be high in certain times and low sometimes. If banks should be allowed to charge for the services then the charges need to be on a pre-decided and standardized basis.”
"From the consumer perspective, this initiative or framework policy will surely help the common people by providing them with transparency of the changes made to the various participants and also control mechanism on unfair and unhealthy distribution of income. Overall, the RBI has taken corrective measures in understanding the digital ecosystem and receiving feedback on improving the mechanics,” added Patel.
The RBI said that feedbacks relevant to the questions must be submitted to the central bank by emailing to dpssfeedback@rbi.org.in on or before October 3, 2022.
