RBI moots ‘tiered’ charge on payments through UPI, seeks public feedback

The Reserve Bank of India (RBI) has sought feedback from stakeholders on the possibility of imposing a “tiered” charge on payments made through the Unified Payments Interface (UPI), based on different amount bands.

The RBI’s discussion paper on charges in payment systems, released on Wednesday, seeks to structure its policies and streamline the framework of charges for different payment services or activities, such as UPI, IMPS (Immediate Payment Service), NEFT (National Electronic Funds Transfer), RTGS (Real-Time Gross Settlement), and payment instruments including debit cards, credit cards, and prepaid payment instruments (PPIs).

“At this stage, it is reiterated that the RBI has neither taken any view nor has any specific opinion on the issues raised in this discussion paper,” the central bank said.

The RBI has asked for feedback and suggestions before October 3.

“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 the different amount bands,” the RBI said in the discussion paper.

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Currently, no cost is incurred by users or merchants in the case of payments made through UPI.

The RBI has asked that if UPI transactions are charged, then should the merchant discount rate (MDR) be imposed based on the transaction value or should a fixed amount be charged as MDR irrespective of the transaction value? Further, it has sought feedback on whether the RBI should decide on the charges or the market be allowed to determine if charges are introduced at all.

MDR is the rate charged to a merchant for payment processing services on various payment instruments.

For a person-to-merchant (P2M) transaction of Rs 800 on UPI, collectively, the stakeholders incur Rs 2 for processing the transaction, the RBI has explained.

UPI is the most preferred digital payment platform in the country, with over 6 billion transactions amounting to Rs 10 trillion processed every month. It is both a funds transfer as well as a merchant payment system. Back in 2020, the Union government had mandated a zero-charge framework for UPI transactions with effect from January 1, 2020.

In the case of debit cards, the RBI has asked if the interchange fee, a component of the MDR paid to the issuer of the card by the acquirer, can be regulated because that will ensure more flexibility for the acquirer when it comes to MDR charges. “…if the interchange is regulated, the merchant and acquirer can negotiate acquiring charges between themselves,” the RBI said.

Secondly, the RBI has argued that the transaction done using a debit card is akin to a normal funds transfer payment transaction, with deferred net settlement where the merchant receives the funds on a T+n basis, the charges on such a transaction should be levied similar to a normal funds transfer. As cost to issuer/acquirer does not generally depend on the transaction value of a debit card transaction, the charges could be uniform for all debit card transactions, irrespective of transaction amount, the RBI has argued.

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In a merchant payment system, payment instrument issuer, payment acquirer, and payment system operators (PSOs) are three important payment service providers. PSO are card networks, NPCI, and PPI issuers. Payment instrument issuers are bank/non-bank entities that issue the payment instruments like cards and wallets. Payment acquirers are bank/non-bank entities that enable the acceptance of payment instruments.

For debit cards, RBI has sought feedback on whether MDR for debit cards be uniform across merchants, irrespective of turnover. Also, whether they can deregulate MDR for debit card transactions and let stakeholders decide on optimum level of MDR and interchange.

More importantly, the RBI has asked whether RuPay cards can be treated differently from other debit cards affiliated to international card networks in terms of MDR. The government had made the MDR for RuPay debit cards (and UPI) zero, effective January 1, 2020.

On credit cards, where the RBI has not issued any regulatory mandate or intervened on MDR, the central bank has sought feedback on delinking the cost of performing transactions from the cost of funds (credit) and credit risk. There are two types of costs in credit card transactions – the cost of enabling a digital payment at a merchant, and the cost of interest foregone (including credit risk) by the issuer.

The RBI has argued that merchants could be charged only for the cost of enabling payment which is similar to that for a debit card; the other element of cost could be recovered by the issuer from the credit cardholder separately.

Further, they have argued that there may be a case for MDR for credit card payments to be regulated by the RBI since charges for some credit cards are exorbitant and they do not come down with falling interest rates. One way of doing it is by making MDR of credit card transactions equal to MDR for debit card transactions (first cost), plus average rate for 30 days’ credit of few large banks (second cost), considering that a customer gets an average 30-day free credit period on a credit card transaction.