What the RBI misses about charges in payment systems

Three fundamental points about the consultation as proposed need attention. One, it does not take into account the prospect of a central bank digital rupee on the blockchain, which would greatly enhance the ease of use and reduce the cost of payments, and outcompete prior payment methods, unless these other payment methods offer competitive costs. Two, it does not take into account the huge gains that accrue to the banking system, including the central bank, from reduced cash transactions, and to the government, from enhanced transparency in transactions, resulting potentially in tax collections increasing and evasion reducing. Three, it overlooks the opportunity credit cards provide their issuing banks, to offer buy-now-pay-later products, the gains from which more than offset the cost of 30-day credit offered to cardholders.

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The government’s policy of zero merchant discount rate (the fee charged to merchants and divided up among those who facilitate the payment) on UPI payments and Rupay card payments should be extended to all digital/online payments, without discrimination. The banks, the RBI and the government should, together, reimburse the operators in the payment ecosystem their costs (including a fair rate of profit).

The alternatives to online transfer of funds via RTGS, NEFT or IMPS is payment by cash or cheque. Cash payments entail the RBI printing currency notes of different denominations, both to increase the supply and replace old and damaged notes. The central bank also has to carefully withdraw all the damaged currency notes and destroy them. The banks have to handle the cash, employ trucks to ferry the cash around, stock Automated Teller Machines, employ people to count money, keep accounts of cash and to guard money in storage and in transit. Cash transactions lack transparency and prevent the government from collecting its due taxes from the transactions and the incomes the transactions reveal.

Another alternative is payment by cheque. Cheques have to be cleared. That is hugely expensive in itself, even with cheque truncation systems. And there is the cost of litigation over bounced cheques.

Electronic transfers avoid these costs altogether. From the avoided cost on handling currency and cheques, the banks and the RBI should be able to more than bear the cost of electronic transfers of all kinds. The government can chip in with a sliver of the additional tax it will manage to collect from transparent transactions, if it wants to.

No charges should be levied on either the payer or the payee, the service provider and the service consumers for any kind of electronic fund transfer, whether RTGS, NEFT, IMPS or UPI. Then, how are payment service providers and other ecosystem players to be compensated for their services?

Since electronic payments call upon the services of computer and communication networks more or less to the same extent whether the payment in question is for a bunch of bananas or for a multi-axle truck, the payment should be delinked from the amount of the transaction and charged per transaction. How to recover the cost of the credit risk credit card issuers bear is for them to work out, not for the RBI to bother about, except by stipulating that neither the card holder nor the merchant who is paid by the card would be charged for the transactions. Ideally, credit card issuers should consider the cost on cards as marketing cost for buy-now-pay-later financing opportunities.

Payment aggregators and payment gateways have to be paid for the work they put in, in onboarding merchants, supplying them with QR codes and payment plug-ins, apart from for the effort of collecting payments and forwarding these to the payee’s bank account. Payment aggregators might get a few days’ float on the money they collect but the payment gateways are pure technical service providers.

Perhaps, the RBI could invite bids for the charge a payment ecosystem player expects per ₹1,000 crore of transactions, and fix the charge, based on the bid results. It need not necessarily go by the lowest bid, if that looks unrealistic. The authorized ecosystem players should be free, subject to their taking on the entirety of the risk involved, to involve as many additional intermediaries as they like, and to introduce further innovation.

If no merchant would be charged a merchant discount rate on any payment transaction, there would be no call for any surcharge, to be passed on to the consumer. The RBI should not regulate convenience fees charged by those who permit flights or movie tickets to be booked on their sites: these should be left to competition in the marketplace for the services in question.

The RBI should encourage technological innovation to enable real-time settlement of retail payments from payer accounts to payee accounts, without the need for deferred, inter-bank net settlements and their additional costs on hedging against settlement risk. That would allow it to replace RTGS and NEFT with IMPS, at a lower cost.

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