Digital payments ecosystem in India has evolved to become one of the best in the world, racing past other large economies on the volume of transactions processed. As per the RBI reports, around 44 billion transactions were processed across different payment systems in FY21, up from 16 billion transactions in FY2018. This surge in volumes were primarily due to the meteoric rise in UPI transactions. The adoption of UPI was primarily enabled by technology infrastructure from NPCI, accelerated by mobile first customers, catalysed by government incentives and finally, necessitated by the COVID-19 pandemic. The increasing volume, velocity and variety of payments has brought in discussions on the economics of payment systems, including the cost incurred by payment processors and system providers along with the affordability of payments for end customers. It is in this context, RBI is coming up with a discussion paper on charges relating to various channels of digital payments, with the objective of studying the economics of payments and setting it at the right band to drive the next phase of growth digital payments.
It is safe to expect that the discussion paper on various charges in the payment system will take a holistic view of the issues involved and possible approaches to mitigate the concerns regarding affordability of digital transactions. While other payment systems are also under the purview of discussion, retail digital payments would be a major focus of this paper. Review of zero charge-out regime for UPI and Rupay will be prime focus, given the surge in volumes in these systems. Amongst other factors, zero charges for UPI and Rupay has clearly supported the rapid adoption of digital payments in India. While it took more than four decades for physical card acceptance network to reach 57 lakh terminals in India after the launch of credit cards in 1980, it took merely five years to deploy 7.5 crore QR terminals. Zero cost of transactions and not having to spend on physical infrastructure has led to the rapid adoption, apart from the incentives provided by the payment system operators to merchants and customers.
For the common man, digital payments have brought in a lot of convenience. Simply put, with UPI, one does not need to scourge for change, carry lot of cash or even visit ATMs for cash withdrawal. Cashbacks and rewards have benefitted the customers. With all payments getting logged and statements available, one does not need to keep a meticulous record of how much is paid to who and when. With clearly recorded of payment history, credit will also become more accessible.
For government and regulators, formalisation of payments adds more muscle for transaction monitoring and tax collection. India has 36% of its population between the age of 10-25 years. While the rest of world, including China, is slipping into aged population with lower birth rates, India remains young and will have large working-class population in the world. It is no surprise that we have adopted smartphones and digital payments faster than anywhere in the world. The sheer size and scale at which India’s digital payments operate equals to 1.5 times that of China and 20 times that of US. As we speak, we have 4.2 billion transactions on monthly basis getting processed through UPI systems and one billion transactions through other payment systems. With such a strong share of young population that would largely comprise of digital natives, it is imperative for Govt. to urgently develop comprehensive frameworks for a digital economy
While payments system such as UPI looks simple to a consumer, it is highly complex with many moving parts and several ecosystem players. Banks, PSPs and solution providers have absorbed a lot of complexity and cost to make things happen at the backend. Banks and PSPs are spending hundreds of crores in a year on processing these transactions in the areas such as reconciliation, settlement, disputes, and risk management. There is tremendous pressure on infrastructure required to support the expected growth in digital transactions. Now the question is, how can RBI make sure these transactions continue to be secured, protected, and follow regulatory norms if the revenue model is not sustainable enough to cover the expenses and create surplus for investments? A classic case would be the slowdown in ATM deployments after 2017, where among many other factors, lower interchange combined with higher compliance costs stifled new deployments and replacements. With increasing requirements for data privacy, data localisation, cyber security etc., digital payment service providers will have to invest more on governance and risk mitigation mechanisms. Though some parts of these costs are already taken care by government sponsored digital infrastructure, the ultimate responsibility compliance and risk management lies with the Banks and Payment service providers. Add to this the necessity to spend on consumer awareness, the economics in the sector is a threat to further innovation and risk management. It is therefore critical for India to have a well-balanced, transparent charge-out framework that can be adopted by these players. The discussion should consider the following key aspects while deciding on charges:
- Need for further penetration of digital payments
- Keeping payments affordable for consumers and merchants
- Healthy revenue and surplus for ecosystem players for investments
A well-framed charge-out framework should facilitate healthy market competition, thus pushing the PSP’s to further optimise their costs and continuous improvement on efficiencies. There are other issues also to be addressed such as compensation to customers in case of failed transactions. Given with the pragmatic approach from regulator and government on inclusive digital growth, we can certainly look forward to RBI having a series of meaningful engagements with experts in the payments space to come out with an enabling charge-out framework. A well-orchestrated framework with focus on affordability, growth and sustainability of ecosystem is undoubtedly the need of the hour.
Existing transaction charges in the ecosystem are as follows:
RBI Managed systems
Reserve Bank has waived the processing charges levied by it for RTGS transactions. Banks may pass on the benefit to its customers. With a view to rationalise the service charges levied by banks for offering funds transfer through RTGS system, a broad framework of charges has been mandated as under:
a) Inward transactions (Free): No charge to be levied
b) Outward transactions (INR 2,00,000 to INR 5,00,000): Not exceeding INR 24.50 (exclusive of tax, if any)
c) Above INR 5,00,000: Not exceeding INR 49.50 (exclusive of tax, if any)
Banks may decide to charge a lower rate but cannot charge more than the rates prescribed by RBI.
The RBI does not levy any charges from member banks for NEFT transactions. Also, there are no charges to be levied for inward transactions at destination bank branches for giving credit to beneficiary accounts. For outward transactions, the maximum charges that bank can levy from their customer for NEFT transaction are as follows:
a) With effect from 01 January 2020, banks have been advised to not levy any charges from their savings bank account holders for NEFT funds transfers initiated online.
b) Maximum charges which can be levied for outward transactions at originating bank for other transactions are as follows:
- For transactions up to INR 10,000: Not exceeding INR 2.50 (+applicable GST)
- For transactions above INR 10,000 up to INR 1 lakh: Not exceeding INR 5 (+applicable GST)
- For transactions above INR 1 lakh and up to INR 2 lakh: Not exceeding INR 15 (+applicable GST)
- For transactions above INR 2 lakh: Not exceeding INR 25 (+applicable GST)
NPCI managed systems
Credit transaction other than DBT: NPCI charges INR 0.20 for off-us and INR 0.05 for on-us transaction
Direct benefit transfer transaction: NPCI charges INR 0.15 for off-us and on-us transaction
Debit transaction: NPCI charges INR 0.20 for off-us and INR 0.05 for on-us transaction
Physical mandate: Processing fee INR 0.50 for destination bank and INR 1.00 for sponsor bank
E-mandate: Processing fee INR 0.50 for both destination and sponsor bank
Depending on the bank, the transaction charges may vary. It ranges from NIL up to INR 15 (+GST)
Presently, no charges are levied on transaction done through UPI for both P2P (peer-to-peer) and P2M (person to merchant)
For member bank: FASTag is issued by issuing banks and banks charge a fixed deposit as well as a recharge value threshold limit according to their internal policy. Please check the ‘Fees and Charges’ section of the respective issuer bank website for details.
For customer: FASTag will cost a maximum of INR 100 as per the guideline from the transport and highway ministry, Government of India. However, few banks are offering it free of cost. Bank will collect additional money from customers to fund the FASTag link wallet and details of the same are available on the issuer bank website.
BBPOU who has on-boarded the biller (biller BBPOU) has to pay an interchange to the BBPOU servicing the customer (customer BBPOU) which is INR 2.25 (both digital and physical mode) for electricity and gas, and INR 2.5 (digital)/ INR 5 (physical) for water and telecom.
Charge to consumer is zero for digital while for physical, it ranges slab-wise from INR 5 up to INR 25.
Annual subscription fees for a RuPay card will depend on the banks.
Every bank issue its respective charge sheet which shall include issuance charges, maintenance charges, replacement charges, international transaction charges with applicable GST rates.
Prepaid payment instruments (PPIs) and wallet companies like Paytm, Mobikwik, PhonePe, Freecharge, Amazon Pay, etc., charge customers anywhere between 2% and 2.5%.