- The RBI has issued a Discussion Paper on “Charges in Payment Systems” (“Discussion Paper”) on August 17, 2022, for public feedback. Earlier, in the “Statement on Developmental and Regulatory Policies” dated December 08, 2021, the RBI, among other things, had discussed the need to issue a discussion paper on the said subject. The Discussion Paper is open for public feedback till October 3, 2022.
Rationale behind the discussion paper
- In the “Statement on Developmental and Regulatory Policies”, the RBI had noted that a significant increase in acceptance infrastructure for digital payments has been achieved in recent years through concerted efforts of all stakeholders. Entities involved in providing digital payment services incur costs, which are generally recovered from the merchant or the customer or is borne by one or more of the participants. While there are both advantages and disadvantages of customers bearing these charges, the RBI noted that such charges should be reasonable and should not become a deterrent in the adoption of digital payments.
- Hence, in order to take a comprehensive view of the issues involved, the RBI has now issued the Discussion Paper which covers all aspects related to charges involved in various channels of digital payments such as credit cards, debit cards, prepaid payment instruments (cards and wallets), UPI, etc. The Discussion Paper has also sought feedback on issues related to convenience fee, surcharging, etc., and the measures required to make digital transactions affordable to users and economically remunerative to the providers.
Necessity of recovering costs
- The Discussion Paper underlines the necessity of an efficient payment system requiring that the fees/charges to be appropriately determined to ensure optimal cost to users and appropriate return to operators. Therefore, like any other industry, the objective of promoters includes recovery of costs and generation of sufficient returns to ensure continued operations; the cost to customers / merchants is an outcome of these objectives.
- In any economic activity, including payment systems, there does not seem to be any justification for a free service, unless there is an element of public good and dedication of the infrastructure for the welfare of the nation. However, which entity should bear the cost of setting up and operating such an infrastructure is a factor worth exploring further.
- Hence, there is a need for 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.
- Over the years, RBI and the Government of India (“GOI”) have intervened to bring down the charges levied for various payment infrastructures. For eg. The RBI had intervened to bring down the Merchant Discount Rate (“MDR”) on debit cards which were restricting the acceptance of debit cards at Point-of-Sale terminals.
- To encourage the use of debit cards and to facilitate acceptance of small value transactions, especially for smaller merchants, RBI had initially prescribed maximum MDR for debit card transactions. With effect from January 1, 2018, the RBI has prescribed differentiated MDR, based on the turnover of merchant in order to safeguard the interests of smaller merchants who do not have sufficient negotiating power to deal with large acquirers.
- The GOI has also taken progressive steps like mandating reimbursement of charges to banks for all debit card, BHIM UPI and Aadhaar Pay transactions up to Rs 2,000 during the 2018 & 2019. This was done to ensure merchants are not charged for accepting small value payments.
- Additionally, in order to give a fillip to UPI transactions and RuPay debit cards, the GOI provided for a sum of Rs 1500 crore for 2021-22 towards reimbursement of charges for RuPay debit card and UPI transactions.
Recovery of Costs
- The Discussion Paper dwells upon the need to recover costs of various transactions using RTGS, NEFT, IMPS etc. Similarly, the Discussion Paper seeks to make a case for regulating MDR applicable in the case of transactions using credit cards, prepaid payment instruments.
- More importantly, the Discussion Paper notes that the UPI’s functionality is like that of IMPS. Hence, there is a need to think about imposing charges in UPI to be like that of IMPS for fund transfer transactions. A tiered charge could be imposed based on the different amount bands. As noted earlier, the GOI has already mandated a zero-charge framework for UPI transactions with effect from January 1, 2020.
- The Discussion Paper also seeks to evaluate whether all digital payment transactions be charged based on value. Additionally, should digital payment transactions be independent of the value of the transaction. Alternatively, should there be a model of cross subsidization wherein large transactions subsidise small value transactions.
- The other point of discussion relates to the manner of recovery of charges. Should such recovery be the investments already incurred or on the additional costs of the merchants. The Discussion Paper discusses the need to allow merchants to only recover his/her genuine costs for facilitating a digital payment transaction and in no situation try to profiteer from the user of the payment instrument/system.
Views of the GOI
- Post issuance of the Discussion Paper, the GOI has clarified that the UPI is a digital public good with immense convenience for the public & productivity gains for the economy and there is no consideration to levy any charges for UPI services. Additionally, the GOI stated that the concerns of the service providers for cost recovery must be met through other means.
- Subsequently, the finance minister reiterated GOI’s stand where digital payments are seen as a public good. Further, people should be able to access these facilities freely in order to ensure that the digitization of the Indian economy becomes attractive to them and to achieve a higher level of transparency through digitization.
- This Discussion Paper brings forward pertinent issues vis-à-vis the payment system infrastructure and its easy access. Initially, as there was a need to foster growth of the digital payments market, the GOI instituted measures to underwrite the operational costs involved in UPI transactions. Since the digital payments market has now matured, there appears to be a need to focus on partial recovery of operational costs and institute a mechanism for cross subsidization of charges based on the value of transactions. There is an urgent need for increasing investment in back-end infrastructure such as cyber security which is witnessing increasing regulatory interventions by the GOI and sectoral regulators. Additionally, the GOI can institute a mechanism exempting certain non-cash transactions only up to a certain limit. For e.g. Rs, 5000 per transaction.
Press Release - Reserve Bank of India releases Discussion Paper on Charges in Payment Systems - https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=54217
RBI’s Discussion Paper on Charges in Payment Systems - https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=21082
RBI’s Statement on Developmental and Regulatory Policies - https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=52688