RBI paper on payments poses questions, offers no answers

  • Analysts, industry disappointed at continued uncertainty as paper takes no stance on key issues

Shayan Ghosh, Gopika Gopakumar
Updated19 Aug 2022, 05:43 AM IST
RBI said payment system operators are independent entities and have expenditure associated with the setup, signalling the likelihood of a return of the charges. istockphoto
RBI said payment system operators are independent entities and have expenditure associated with the setup, signalling the likelihood of a return of the charges. istockphoto

A Reserve Bank of India discussion paper on payment charges released on Wednesday has disappointed the industry and analysts alike, as it raises multiple questions but does not offer solutions or take any stance on them, leading to continued uncertainty.

The paper refers to how some payment mechanisms charge consumers while others do not, and some oblique references to the lack of justification of a free service.

The much-awaited paper, announced in December, has posed 40 questions on charges related to digital payment modes and sought feedback by 3 October. The topics include real time gross settlement (RTGS), immediate payment service (IMPS), unified payments interface (UPI), debit cards and credit cards.

“The discussion paper released by RBI does not take any stance and keeps it completely open-ended in terms of regulation of various charges for various payment mechanisms like debit cards, credit cards, prepaid payment instruments and UPI,” analysts at Macquarie Research said in a note to clients on Wednesday.

In fact, the paper said its intent is to present various issues in an unbiased manner to seek feedback on a set of questions, the idea being to get inputs and thereafter use them for policymaking. “At this stage, it is reiterated that RBI has neither taken any view nor has any specific opinion on the issues raised in this discussion paper,” RBI said.

In January 2020, the Centre had withdrawn the merchant discount rate (MDR) on UPI and homegrown Rupay debit card transactions, leading to exponential growth in payments through UPI. MDR is the charge paid by a merchant to the bank, card network and the point-of-sale provider for offline transactions, and to the payment gateways for online purchases.

This has been a contentious issue and the industry has repeatedly urged the government to review the decision, citing hurdles to innovation and inadequate funds to support and upgrade the requisite infrastructure. Deliberating on whether the use of payment mechanisms should incur a cost for the user, RBI said payment system operators are independent entities and have expenditure associated with the setup, signalling the likelihood of the charges being brought back.

Macquarie analysts said transaction charges must be eventually brought down for customers, individuals as well as merchants, and the cost will have to be borne by banks, fintechs, non-bank lenders, payment aggregators, and service providers. While banks can still absorb the impact as they have always used payments as an acquisition engine and were not making much money, the report said the key challenge will be for other intermediaries that do not have the balance sheets to leverage on the customers acquired.

“Given that the discussion paper is seeking feedback, views and perspectives on 40 questions raised, there is no concrete outcome or decision from the discussion paper that can settle the overhang with certainty around charges on the different payment instruments,” analysts at ICICI Securities said in a note on Thursday.

Nonetheless, it is pertinent to gauge the direction in which, and on what aspects, the regulator is evaluating payment charges, the note said. The ICICI Securities report drew relief from the fact that the discussion paper deliberated on whether intervention is at all desirable. The paper asks whether such cost-related frameworks are to be market-determined or be subject to limits prescribed by the regulators or the government. To be sure, the paper does not answer the questions.

Other experts saw the central bank paper rekindling the possibility of regulating or reducing MDR or interchange fees for cards and wallets. Carved out of MDR, interchange is a quantum of the charges shared with the issuer of certain payment instruments. “(This) could hurt the profitability of card/wallet companies, mainly HDFC Bank, SBI Card, ICICI Bank, Axis Bank, RBL Bank and Paytm,” said Emkay Global Financial Services Ltd analysts.

That said, the formula suggested by RBI is expected to keep MDR between 1.2-2% as against 2% or more as of now, it said, adding that a 10 basis point (bps) reduction in MDR or interchange fee could reduce card business returns on assets by at least 50 bps.

Vishwas Patel, chairman, Payments Council of India (PCI) and director of Infibeam Avenues, said the industry body will submit a detailed feedback to RBI within the requested timeframe.

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First Published:19 Aug 2022, 05:43 AM IST
HomeIndustryBankingRBI paper on payments poses questions, offers no answers

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