Date: 27/08/2022

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment; Inclusive growth and issues arising from it, Government Budgetin

Key Phrases: RBI’s Discussion Paper on Digital Payments, IMPS, NEFT, RTGS, UPI, PPIs.

Context:

• The RBI’s discussion paper on reviewing charges on digital payments has stirred up a hornet’s nest.
• RBI sought views from the public on fees and charges in payment systems, with an aim to make such transactions affordable as well as economically remunerative for the entities involved.
• In this context, let us discuss the issues and suggestions highlighted in it.

Background

• The payment systems include -
  • Immediate Payment Service (IMPS),
  • National Electronic Funds Transfer (NEFT) system,
  • Real Time Gross Settlement (RTGS) system,
  • Unified Payments Interface (UPI),
  • Debit cards and credit cards,
  • Prepaid Payment Instruments (PPIs).
• The focus of RBI's initiatives in the payment systems has been to ease frictions that may arise from systemic, procedural or revenue-related issues.
• RBI stressed that charges for payment services (costs imposed by the Payment Service Providers (PSPs) on the users for facilitating a digital transaction) should be reasonable and competitive for the users, yet generate optimal revenue for the intermediaries.
• The charges are recovered from the users depending on the type of payment system.
  • In a fund transfer payment system, the charges are generally recovered from the originator of the payment instruction. These are usually levied as an add-on to the amount earmarked for remittance.
  • In the case of a merchant payment system, the charges are generally recovered from the final recipient of money (merchant). This is generally done by deducting the same from the amount receivable by the merchant or a discount on the amount receivable by the merchant.
• The Finance Minister termed UPI as a “digital public good” and rejected plans to impose any charges on UPI transactions leaving PSPs disappointed.
• While the question remains unanswered on whether UPI transactions should be charged or not, the RBI decided to review charges on all digital payments including UPI as a lifeline for fintech players offering digital payments.

The backdrop

• Recent months have seen the regulator significantly tightening its ground-rules on what fintech players can and cannot do.
  • The notification on digital lending norms laid out the basics of how fintech can approach the lending business. The list was more prohibitive than accommodative.
  • Later, the RBI opened the floor for discussion on charging digital payments.
• These two events suggest that the RBI may be offering a way out for fintech players. The discussion paper seems to be re-opening avenues for fintech to go back to what they set out to do in the first place — make money from the payments business.

The genesis of payment providers

• Paytm, Freecharge and the NPCI-promoted Bhim were the pioneers of the payment wallet ecosystem.
• Initially, digital payments found more use-cases in booking movie tickets or paying utility bills.
• By 2018, QR-backed UPI payments started gathering steam and in the Union Budget 2019, the government decided to allow MDR charges on UPI transactions and this was implemented from January 1, 2020.
• Fintech providers originally intended to generate revenues from a fee on payment transactions, whether they were routed through UPI or their own wallets.
• They faced their first blow when full-stack KYC was made mandatory for digital wallets. Then, with the UPI gaining acceptance from merchants and offered free of cost, fintech players had to go back to their drawing boards.

The pandemic came as a blessing in disguise

• With banks and insurance companies forced to cut back on field agents because of the lockdown related constraints, fintech players filled the void by cross-selling of products and earning a fee.
• They started selling insurance products, mutual funds, and small- ticket loan products in a big way.
• Those who operated with NBFCs at the back-end ventured into lending as an extension of such fee-based offerings.
• Products such as buy now pay later (BNPL) or credit offered through prepaid instruments and early payday loans were a hit with borrowers.
• According to a BCG report, there is more money to be made for fintech players through lending, than through payments and the fintech topography has reflected this in the last two years.
• But these pivots in the revenue models of fintech players haven’t gone down well with the RBI.
• The customer-facing and data storage practices of fintech players and the bad loan thresholds have come in for criticism.
• From the fintech players’ perspective, the ability to branch out beyond payments helped attract capital at higher valuations and gave wings to the Unicorn story. But they are now faced with the challenge of scalability.
• This could put their investors in jeopardy. So, a new window for monetizing their payments business would be welcome for fintech players.

Need for more debate

• The RBI and the government now seem to have divergent views on pricing UPI.
• While the government’s intent on not impeding digital payments when they’re scaling up so rapidly is understandable, it’s also important to consider the financial system.
• Since 2020, there have been rounds of discussions on this issue and most of them have failed.
• The discussion paper floated by the RBI last week is a good attempt to seek feedback from all stakeholders in the digital payments economy - users, service providers and those responsible for laying out the digital infrastructure - on whether a paid UPI will work.
• The bone of contention with respect to UPI is that in the present cost-recovery process where the government foots the bill, the money doesn’t reach the right hands - mainly the back-end technology infrastructure providers.
• The RBI and the government need to sort out this part of the equation and ensure that a digital public good isn’t operated at the cost of someone else’s revenue model.
• Only this can make it a win-win for everyone, be it the UPI user, the RBI, the government or the banking system at large.

Sources: The Hindu BL     Business-Standard    

Mains Question:

Q. In the context of a recently released discussion paper on reviewing charges on digital payments by RBI, discuss the challenges associated with the emerging payment systems. [150 Words].