Charging For UPI Transactions

As per newspaper reports, the Standing Committee on Finance has informed the Parliament that the current UPI (Unified Payments Interface) setup is financially unsustainable and threatens critical investments in cyber security, fraud prevention, and network infrastructure. To address these issues the government is planning to make changes in the way users pay for this service and two modalities are being explored. The first is to charge certain high value transactions and high turnover merchants. The second is to have a tiered incentive structure so that the government can phase out its current scheme under which it compensates payment ecosystem players for a portion of the cost of processing low value UPI Transactions conducted at small merchant establishments.

It is true that banks & NPCI have invested large amounts of capital, both on hardware and software, to operationalize UPI and there are large continuing operational expenses which is partly funded through subsidies from the government. For continued stable operations of UPI clear sources of regular income needs to be identified to fund not only the operational expenses but also investments to make it better.

But we need to look at the other aspects of the picture too.  

First, one of the biggest contributions to growth is the financial system providing a cost effective, easy to use medium of exchange, which in turn enables trade on which ultimately all economic investment and growth depend. In this regard, UPI has turned out to be a real game changer and any tinkering in its functioning should be clearly and deeply thought through.

Second, handling physical money, especially small denomination notes and coins, apart from being a major expense due to its labour-intensive nature, is also prone to fraud. Using electronic means of payment, such as UPI, helps in virtually eliminating this in the operations of banks and businesses. In all discussions on the operations of UPI, there is no mention of the large tangible savings it has engendered. 

Third, the hard fact is that over 90% of UPI transactions are carried out by non-bank apps, of which only two – Google Pay and Phone Pe have roughly 40% each. Look at the irony of the situation – money moves from one bank account to another, either in the same bank or another but using third-party apps. Now since the transaction moves through a third-party app, all the information embedded in it is lost to the banks!

Are these third-party service providers doing charity, or are they being unduly subsidised by the government, or do they lack business sense. Actually, none of the three. The information embedded in the transactions is pure gold. It can be and is being used for designing marketing programs, profiling customers and targeting them. There is no way that the operational mismatch between what the government pays (Rs.2,000 crores) for keeping the UPI structure functional and the operational costs of running UPI (Rs. 20,700 crores) is sustainable without the players thinking out how to make the system pay for itself.

Fourth, the trails of cash flows created by UPI can be utilised for building credit products by banks, especially for the MSME and retail sectors. Something the banking industry has miserably failed to do, but fintecs are attempting. Failure by our banks to evaluate and build such credit products for this large and lucrative segment will very soon find them out of that market totally. Just as they find themselves out of the payment apps market. The security provided by clear, sustainable, and identifiable cash flows is much more tangible and immediate than the ephemeral collateral security banks keep running after.

Finally and most importantly, UPI is a public good which has unwittingly resulted in myriad benefits to the bottom third of society. From demonstrating the benefits of having a bank account to making it operational at little cost and effort – no need to visit a bank branch and waste time and money in doing so. Something all these years and efforts have miserably failed to do.

It would be very short-sighted and counter-productive for the economy if the Government now blindly starts charging for UPI transactions without taking into account the myriad benefits. It would be akin to killing the goose that lays golden eggs.  

The funding for keeping and improving the infrastructure should come from those large players who can immeasurably benefit from it – in sheer financial terms. The banks and the fintecs who can and are profitably using the information generated by UPI. After all, information is the new oil.  

I sincerely hope that better sense prevails.