RBI on digital payments: A win for UPI, a setback for Paytm and other wallet players?

Among other announcements, it was decided that UPI will be introduced for India’s huge pool of feature phone users; the cap for retail subscribers to initial public offerings (IPOs) through UPI has been hiked from Rs 2 lakh to Rs 5 lakh; and it has proposed an ‘on-device wallet’ for low-value UPI transactions to reduce the strain on online systems.

Here is a look at how these announcements are expected to impact payment ecosystem players.

Caps on charges to hurt margins

The RBI said that its proposed discussion paper will look at charges involved in various channels of digital payments such as credit cards, debit cards, prepaid payment instruments (cards and wallets), UPI, etc.

Currently, customers are not levied any charges for using debit cards, credit cards or UPI. It is the merchants who are charged for payments made through credit cards. This leaves prepaid payment instruments (PPIs) and wallet companies like Paytm, Mobikwik, PhonePe, Freecharge, Amazon Pay, etc., who charge customers anywhere between 2 percent and 2.5 percent.

Suresh Ganapathy, associate director at Macquarie Capital, said, “The issue with wallets and PPI instruments is that they are charging 2-2.5 percent and, in some cases. Higher; it is not regulated. This is one area clearly where we believe the RBI will bring down charges. This is a negative for fintechs in the payments space.”

A Macquarie Capital note by Ganapathy and Param Subramanian said that revenues of payments companies will be impacted further by any caps.

Paytm’s stock ended the day down 1.76 percent on Wednesday, with a steep fall seen after the announcement. Macquarie Capital’s report further said that any further caps on payment take-rates will negatively impact Paytm’s already weak payment margins, which fell from 7 basis points in Q1 of FY22 to 4 basis points in Q2.

Worry on credit card charges being passed on

While credit card charges are levied on merchants and not customers, the RBI’s need to look at these charges come from the fact that many merchants ask customers to shell out 2 percent more to make payments at physical stores using credit cards. This unorganised mode of making customers pay for the merchant’s charges may be under the regulator’s scanner.

“Umpteen times I have seen the merchant refusing a credit card transaction as he incurs the 2 percent cost. Either they will give an excuse that the PoS (point of sale) machine is not working or will try to pass on these costs indirectly. So clearly incentivising these merchants will aid digital adoption,” Ganapathy said.

A hint at charges on UPI?

The RBI’s statement saying that the discussion paper will look at measures required to make digital payments ‘economically remunerative to (payment service) providers’ caused quite a stir with many wondering if the wording suggests a balanced approach towards reviewing transaction charges or a hint that UPI transactions will finally be charged.

UPI falls under the government’s zero merchant discount rate (MDR) policy, meaning merchants are not levied any charge for accepting payments under this method. This has been a long-time concern for UPI players as the mode does not earn any revenue for these players or for banks that process these transactions at their end.

However, UPI definitely has led the adoption of digital payments in India and also acts as a customer-pull product for players like PhonePe, Google Pay, etc., who can then cross-sell other services to these customers.

Sameer Nigam, founder and CEO of PhonePe, which has a 47 percent share of monthly UPI transactions, has made his views clear that a certain charge should be allowed to encourage more companies to provide UPI as a service.

Speaking to Moneycontrol on April 3, 2021, Nigam had said, “Any industry where you're assuming that you'll be powering a billion transactions a day requires tons and tons of capital, in fact it requires some pretty incredible and very expensive engineering talent. Honestly, a 30 basis points MDR structure would have actually generated more income for the industry at large.”

However, experts believe that charges on UPI does not seem to be on the agenda for the government or the RBI at the moment.

A push for UPI usage?

India still has a vast number of feature phone users. According to the Telecom Regulatory Authority of India (TRAI), as of October 2021, India had a mobile phone consumer base of about 118 crore. Around 74 crore (Statista, July 2021) have smartphones, indicating that the rest are still using feature phones.

Innovation allowing users to use UPI through their feature phones will lead to a further jump in UPI usage.

Following these announcements, Dilip Asbe, CEO of the National Payments Corporation of India (NPCI), the entity which handles UPI, tweeted, “1 billion a day, not very far.” Asbe was referring to the fact that with the projected growth in adoption, UPI will be able to clock transactions worth $1 billion per day soon.

1 Billion a day, not very far.@RBI #monetaryPolicy

— Dilip Asbe

One of the measures that has made Asbe bullish on UPI is the increase in the cap for IPO subscription payments through UPI. However, the industry has a few questions on that.

A fintech founder said on condition of anonymity, “The Securities and Exchange Board of India (SEBI) cap on retail investment in IPOs is at Rs 2 lakh. So we are not very sure yet how this announcement by the RBI will help. SEBI has to increase the cap first for retail investors to invest over Rs 2 lakh.”

Asbe too pointed out a few issues in further tweets. “Unfortunately, all leading securities apps have not integrated UPI inside thereby not having in-line user experience,” his tweet read.

Currently, 50 percent of retail IPO subscriptions happen through UPI. With UPI becoming an important mode of IPO subscription amid the boom in internet companies going public, further clarity is awaited on this from both the RBI and SEBI.