Buying and selling of goods or rendering of services is impossible without money. Almost every transaction on this planet is dependent on money. There was a time when a barter system existed. People used to exchange goods for other goods or services. If we look at the history, exchange of money for things has been quite interesting. And the evolution has reached a level where we can pay instantly without stepping out of our comfort zone. There are many payment options available now on our fingertips. Technology has revolutionised every facet of life.
Emergence of credit cards eradicated the need to carry physical cash. Another way to avoid physical cash is making direct transfers of money from one bank to another by way of net banking. Unified Payments Interface or UPI is a unique step towards easing receipts and payments of money. You can buy anything or pay your bills very comfortably with the help of UPI. The payment system gradually shifted from the traditional payment methods into Electronic Payment through Debit and Credit cards, Electronic Payment options through internet Banking and then to Mobile Payment method through M-Payment technologies.
UPI was launched in 2016 and within a span of five years it has accounted for over 50 percent of retail payments in India. It is a real-time payments system facilitating the instant transfer of funds between bank accounts. The platform was developed by the National Payments Corporation of India.
Talking about apps ,not all apps listed on the play store are really good for making UPI payments. The interface of some of them are hard to understand. The best among them are PhonePe,Google Pay,Paytm-BHIM UPI,Amazon Pay and BHIM App. Cred, ICICI Bank Apps, Paytm Payments Bank App, Airtel Payments Bank Apps, Yes Bank Apps and SBI Apps are popular among others.
Digital payments is a newer way to make payments and the pandemic situation has brought more users on digital platforms. Covid-19 made it more evident as the UPI transaction value crossed Rs. 3 lakh crore mark in August 2020. Another record breaking situation took place when October-2021 saw UPI transaction value going beyond Rs. 7 lakh crore. Similarly transaction value in 2021 has grown by 103 percent.
The norm continues as the auto drivers and road side vendors also accept payments via UPI, making them the friendliest tool ever to pay or receive money. India is a highly populated country. More and more people are adopting digital modes of payment as part of their routine payments. Smartphones are adding this feature to people’s lives like something indispensable to live without.
Making online payments to buy household items, bus & flight booking, IRCTC train ticket booking, buying groceries, LIC premium payment, buying gold, paying e-challan, metro card recharge and many other transactions are just a few steps away on your mobile app because of UPI.
It is expected that India will witness a total of $2.16 trillion worth of digital payments in the financial year 2022. UPI will be almost 50 percent of that followed by Immediate Payment Service at 25 percent. Despite the widespread acceptance, UPI is blamed for eating a part of banks’, NBFCs’ and Fintech’s revenue. Payment processing entities are losing out on revenue due to waiver of the merchant discount rate.
The aim of this article is to explain how UPIs are affecting the fee income of banks, non banking financial institutions and fintech companies and other related matters.
What is meant by the Merchant Discount Rate(MDR), how it works and why does it matter?
It is the sum total of all the charges and taxes that a digital payment entails. It is also known as the Transaction Discount Rate or TDR. This includes bank charges for allowing customers and merchants use of digital payments and the processing charges that a payments aggregator pays to online or mobile wallets or to banks for their service. It is a fee that a merchant is charged by their issuing bank for accepting payments from their customers via credit and debit cards. It compensates the bank issuing the card, the bank which instals the Point of Sale terminal and network providers such as MasterCard and Visa. The mechanism is applicable to UPI too.
The government has come up with low cost digital modes of payment for the customers. Further no Charges or Merchant Discount Rate are imposed on customers as well as merchants while using them. This is in line with its commitment towards a ‘facelsess, paperless and cashless’ economy. Neither the customers nor the merchants will have to pay the MDR while transacting digital payments. But that eventually results in bearing these charges by some entity if customers or merchants don’t pay for it.
The basic ideology behind removing MDR was based on the expectations that the RBI and Banks will be able to generate savings on account of handling less cash as people move to the digital modes of payment. And out of these savings they will absorb the costs of MDR. Apparently, due to the rise of certain concerns, elimination of MDR needs a review by the RBI.
How has it impacted the banks and non-bank payment service providers?
The MDR could not be made zero though in 2019 the government cut the MDR to zero. The incidence of MDR has shifted on to the RBI and banks. It is less likely for banks to adopt digital payments if they end up paying for the MDR. Payment providers also fear that the banks will ultimately pass on the costs to them. The UPI sector is in bloom but the cost of making it available to the customers and merchants itself might hinder its growth.
In February, UPI accounted for more than half the share in person-to-merchant transfers. As more merchants are joining digital payment mode, this share is going to increase. UPI consisted of about 80 percent of the total digital payments by value excluding IMPS and NEFT. At least a quarter of the total fee income of banks is through cards and other payment modes. Banks have a higher share in the MDR due to card issuance and usage through them. Yet we can say that Banks are not affected to a greater extent as they have other ways to generate fee income.
Looking at the actual figures, the share of retail card fee income in overall fee income has come down to 1.9% in the third quarter of FY22 from 2.5% four years ago in case of Axis Bank. SBI has its UPI users increased to 175 million in Q3 from 87 million two years back. This has rendered a rise in remittance charges which are about 25% of fee income for the country’s largest lender.
The industry has incurred a loss of approximately Rs.5500 crores from UPI and RuPay MDR being made zero. The payment service providers are unable to invest in and maintain financial infrastructure due to zero MDR. The RBI will review the charges involved in various digital payment modes, keeping the payment costs reasonable for customers. The RBI is given a suggestion by the market participants to allow a nominal MDR on person-to-merchant payments via UPI and bring down charges levied on card swipes at present.
MDR rules make a lot of difference and they shall affect different payment methods. The Payments Council of India has requested the government to consider a reversal of the zero MDR to broaden and grow the merchant acceptance base specifically in the MSME space. For the past few years even the non bank players have been significantly contributing in deployment of payments infrastructure and they want to be facilitated. PCI has also requested to incentivise the industry with an amount of Rs.4000 crore to fill the shortfall.
How does it affect Indian fintech startups?
US tech giants such as Google and Phone-Pe have a dominant presence in the UPI sector. The big tech companies can afford the zero MDR bill but smaller Indian fintech startups may find their survival challenging.
Indian startup entrepreneurs are unhappy that despite having brilliant financial products in the field of UPI, the Indian fintech market is dominantly controlled by foreign players. The US card system could have faced a major competition from Indian UPI but unfortunately Walmart owned PhonePe and Google are marching ahead of our monthly 2 Bn transaction UPI industry. These two leading foreign companies control over 80% of the UPI transactions. Zero MDR in UPI has allowed US giants to dominate the Indian Payments market, the same market could have been in the hands of Indian startup companies.
In December 2019, the Indian government introduced zero MDR for UPI and RuPay with a condition that all business units with an annual turnover of more than Rs. 50 crore shall have to mandatorily offer low cost digital modes of payment to their customers. However, the suggestion by the Watal Committee wanted it to be different. The MDR was suggested to be kept low enough ensuring that it encourages customers to use it and high enough to cover costs so that acquirers can keep acquiring more merchants.
Banks are also giving a tough competition to the fintech sector as they have expanded their digital networks. UPI’s architecture is open and a large user base does not make a particular service provider more sustainable than the others. Large private sector banks are coming with their digital products. Except SBI, other public sector banks have failed to keep up the pace. Banks play a critical role in executing UPI transactions and fintechs fail to have such exclusive access to transaction data on the UPIn though banks and fintechs have a similar access to transaction data when a transaction moves from a customer app to the recipient through intermediary banks.
Customer funds also remain in bank accounts and fintechs do not have such exposure to important data which banks have over them. But banks’ margins will also get affected as many fintech units are venturing into other financial services as well such as personal loans and loans to small merchants. But still the fintech players will be hurt the most as they have lesser options to generate revenue unlike banks.
The nature of the UPI payments system offers limited scope for cross-selling of products resulting in a negative impact for fintechs. Paytm Payments Bank after operating for three years, had a deposit market share of less than 0.1% as of March 2021. Similarly the company’s result is not promising in other wealth management products like insurance and mutual funds.
One97 Communications or Paytm gets two-thirds of its consolidated operating revenue from payment business gross merchandise value and that shows how fintechs struggle. The most notable amongst India’s domestic payments ecosystem is Paytm,where Ant Financial has a 30 percent stake. It has along with other digital wallets in the country helped popularise the idea of QR code payments in India. Unfortunately Paytm’s fortunes have been adversely affected with the introduction of the UPI. This killed a key feature of Paytm’s mobile wallet use where people could transfer money from wallet-to-wallet without any cost. PhonePe and Google Pay took over Paytm’s position both in terms of users and volume of transactions.
Yet we can say that fintech firms are ruling the digital payments system in India. Fintech firms are trying to expand their branches into other financial services. It should be noted that most nations still do not have a similar system for free and real-time interbank payments. And the functionality of such UPI systems might be limited in their own jurisdictions as the same are being evaluated. Role of NPCI in the UPI system.
Role of NPCI in UPI system
The National Payments Corporation of India owns the UPI architecture. It is a unique body in the Indian technology field. It exercises monopoly over the retail payments services in the country. It also runs a bill payments architecture, toll payment systems, operates an ATM network, a cheque clearing house and other real time payments system known as IMPS. NPCI is a non-profit government entity but is promoted by members of the Indian Banks Association and is supervised by the banking regulator, the Reserve Bank of India and finance ministry. It is a specialised division of the RBI. It was founded in 2008 and has its headquarters located in Mumbai.
UPI integrates 120 banks in India. NPCI was awarded the Golden Peacock Innovative Product/Service Award for the year 2018 for BHIM UPI. Among its notably popular products are RuPay, BHIM, UPI, National Common Mobility Card and Bharat Bill Payment System.
We can say that the NPCI is a quasi-regulator for retail payments in India where member banks must comply with its rules and regulations or else they will face punitive action. The success of the UPI in our country has encouraged the NPCI to set up a company called NPCI International Payments Limited, with a goal of exporting the UPI architecture. It is building an acceptance network for RuPay and UPI which will help Indian travellers pay with these channels in their destination country of travel.
India could through NIPL, lead the tech diplomacy for setting up an interoperable payments network for various regions. It is focused on transforming payments across the globe and enabling payment facilities not only for Indians but also for other countries. The countries which have potential but lack in resources will be given technological assistance, consulting and infrastructure by the NIPL. It has partnerships with Discover Financial Services-USA, Japan Credit Bureau-Japan, Union Pay International-China, Royal Monetary Authority of Bhutan dn Network for Electronic Transfers-Singapore
Future of UPI in India
Good news is that fintech innovations offered by the RBI will extend the UPI for those users who do not have stable internet access at all times. According to a 2020 WEF report, almost 700 million people in our country are not connected meaning that almost 50% of India’s population is not having internet access. In January the RBI declared that offline digital payments of upto Rs. 200 per transaction with an overall limit of Rs.2000 shall be allowed. Now this will be done without any internet connectivity thereby reaching the remote, rural or semi urban areas where there is almost no or poor mobile internet connectivity. This will help to build greater trust in digital payments.
The transaction will be conducted only in face-to-face mode using any of the popular payment modes like debit cards, mobile devices or wallets. Users will receive an SMS or an email when they get connected to a network. There shall be nor requirement of an OTP or any Additional Factor of Authorisation. The RBI had already hinted about enabling wallents in UPI apps for low-value transactions in particular, with an objective to conserve banks’ system resources.
Those who have a smartphone can enable offline digital payments through an ‘on-device wallet inside the user’s chosen UPI app. By regularising offline digital payments, India again stands ahead of others in world-class digital financial innovations. This is like a never before achievement in this field by any country on the map of the world. e-Rupi, an electronic voucher based digital payment system is built on the UPI platform.
The payment industry is looking forward to some charges levied by the government on UPI transactions if the volume reaches a particular level. In March 2022, the number of UPI transactions was 5.4 billion. It is expected that a market-determined pricing will come into force. The industry has shown its gratitude for the incentive of Rs. 1300 crore to be reimbursed to banks as it shows how the government’s idea of digital India is encouraged.
Comprehension of written English in India is not very good and the small mechant community has a lower understanding of it. Both the banks and fintechs resort to dispute management through phone calls or WhatsApp and Emails.The problem resolution takes some time and it is a complex procedure. The small merchants do not have time to read and understand the outcome of any dispute arising between the issuing and acquiring bank and the ultimate loss has to be borne by them. This discourages them from taking the digital route.
If we talk about structural challenges, there are many. A number of e-commerce platforms are adopting digital payment methods, consumers still prefer cash. This can be related to the concerns regarding cybersecurity in digital transactions. During 2016-18, India was the second most cyberattacks affected country. India comes second after the US in hacking attempts. Inadequate investments into security technology is another reason. The enforcement structure needs to be tightened and a quick disposition of cases with strict penalties will be of help.
More technological awareness is needed on the part of consumers to make them adopt digital payment methods more profusely. Aadhar Enabled Payment system is quite consumer friendly. The apps are also quite handy. Growth of digital payments depends on the rising rural population getting connected to high-speed internet and smartphones. The digital startups should focus on secure consumer-friendly methods to make it more widespread.
Phot from https://unsplash.com/@dafidvor
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Bhoi Smrutirekha Dharanidhar
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