UPI is moving in an interesting direction, which will take it to places where digital public goods have not yet ventured, and make the Indian payment system adaptable and useful around the world. I had advocated this path in February 2022. But now, according to the latest RBI initiatives, the UPI architecture and design should act as a Global Payment Interphase (GPI).
Cross-currency exchange and settlement requires Central Bank Digital Currency (CBDC) at least for global trade and/or wholesale transactions. On September 20, during the Global Fintech Fest 2022, RBI Governor Shaktikanta Das, together with Nandan Nilekani, Chairman of Infosys and Advisor to NPCI, and Biswamohan Mahapatra, Chairman of National Payments Corporation of India (NPCI), have announced the three basic elements to make India’s payment system more adaptable and useful across the globe. Das launched three key initiatives – RuPay Credit Card on UPI, UPI LITE and Bharat BillPay Cross-Border Bill Payments.
RuPay Credit Card on UPI opens up an exciting opportunity for Indian banks to offer credit cards in all countries that are rolling out UPI. This opens the space for Indian banks to take their credit disbursements globally. A number of countries are currently considering or deploying UPI; this will allow Indian banks to take advantage of the rollout. If Indian banks are struggling to offer Rupay-based credit cards globally, Indian fintech can move into this space. CRED and others might think about it now. In a way, a digital infrastructure is created for them.
This is why the rapid deployment of UPI around the world should lead to a redefinition of its purpose from being simply a digital public good to becoming a digital public infrastructure.
The deployment of RuPay credit cards on UPI will enable the deployment of QR codes and facilitate micro-payments across the world. This would change the merchant-buyer payment interphase not only in Asia but also in Africa. This will reduce the cost of transaction or credit in credit-stressed societies in Asia and Africa – a huge fintech opportunity. This is where UPI lite would play a major role as it could also be used on cheaper phones as it takes up less digital space and consumes low telecommunications bandwidth.
All of these developments bring us to a critical decision point – something the RBI triggered with a paper on August 17 on the introduction of fees on UPI transactions.
The RBI discussion paper offers a transparent approach to an issue that is of very strong private and public interest. This is a better way to handle a contentious policy issue that has implications beyond the IPU or even the Indian banking sector.
The debate revolves around whether UPI should charge fees for transactions on its platform. This is a very important question as it not only defines the best performing Digital Public Goods (DPGs) – UPI – but also affects the contours of many other DPGs and Digital Public Infrastructures. The launch of the three products by the Governor of the RBI on September 20 is also bearing on the charges, not only in India but in the countries that are proposing to adopt UPI.
A public park is a public good because the state does not charge for the direct use of a public park. Local or national taxes can be used for the realization of the park, but its use remains free for all and not only for taxpayers or citizens. Similarly, UPI as a public good means that NPCI, the organization that owns it, should not charge users a fee. It costs the NPCI nothing to make this property public as it was built by volunteers. There is a hosting and maintenance cost, but it’s a pittance compared to the savings it brings to the economy. By reducing transaction costs to zero, it was able to bring many more transactions into its fold. Increase the taxation of these transactions via the GST or other direct taxes.
This brings us to the big question: who wants to charge fees for UPI transactions? Is it NPCI, or merchants, payment wallets, credit cards and banks that want to charge a fee for every transaction. They are all service providers and if they ask NPCI/RBI that they want to charge for these transactions, isn’t that just weird? They did not pay directly for the construction of the UPI infrastructure. They can justify that their taxes also financed it, but this analogy is weak from the point of view of public goods. As they are trying to recover taxes through these fees.
The only justification for a charge is if added value is created in addition to the transaction. Some payment wallets charge, for example, tuition payment, utility payments, and the like. This is done by those companies who are the monopoly providers of payments to those merchants. This is fine to the extent that a facilitation or service exists in addition to the UPI transaction provided.
For example, an ice cream vendor inside a park may charge for the ice cream it sells, but should not charge consumers a premium for selling in a public park. The UPI cannot be turned into a toll highway where a fee is charged for its use; even if a small flat fee is levied, it will discourage small transactions, which will affect small traders and micro-entrepreneurs who are most expected from this DPG. An ad valorem charge will also ultimately affect the trading volume on the system and this is not the goal of the DPG.
UPI is a global success and it should not be derailed by global lobbies who have every interest in DPG becoming a private product comparable to their networks. There may be paid parking for cars near a public park, even if there is value added at any end of transaction which may be charged by the value provider. But the load must be transparent. For example, if a credit is provided to the merchant or consumer, it can be charged, but it should not be opaque, nor merged with pricing, nor be the cost of the transaction itself. This is what UPI can bring to the global payments industry.
They know very well and must understand that UPI is the biggest influencer for building a DPG in the payment industry in almost every country. The American FedNow wants to become an UPI. The United Arab Emirates, Brazil and Spain are all trying to emulate or recreate the UPI. The RBI must respect that the DPG, like UPI, is now changing and influencing the transparency of global payments, which is good for all stakeholders – not only consumers, but also banks and merchants, globally. world.
K Yatish Rajawat works at Center for Public Policy Innovation, a Delhi-based think tank studying the impact of DPGs on public policy and economic growth. For comments, write [email protected]. The opinions expressed are personal.
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