As Unified Payments Interface (UPI)-based transaction continues to be grow in leaps and bounds, payment firms are pinning strong hope for a continued, rather higher subsidy to continue facilitating the free transactions.
In order to push adoption of digital payments, the government had mandated to keep the UPI transactions free for users, and in return compensate the payment firms for the cost they bear to facilitate the same.
These subsidies come via the Payments Infrastructure Development Fund (PIDF) that finds mention in the Budget every year along with certain separate allocation for promoting RuPay and UPI transaction.
In Interim Union Budget 2024, the government had approved the proposal for the continuation of the incentive scheme with a financial outlay of Rs 3,500 crores for both small-value UPI transactions and for Rupay-BHIM transactions.
However, as the popularity of UPI picks up pace with each passing day with jump in both volume and value, the stakeholders, including payment aggregators, UPI apps and banks, are hoping for an enhanced reimbursement.
In May, UPI set another record as it processed more than 14 billion transactions worth Rs 20.45 lakh crore or Rs 20.45 trillion, according to data issued by the National Payments Corporation of India (NPCI).
The payment method saw a 5 percent jump in volume and a 4 percent surge in value of transactions in May compared to April. This is a new high in terms of volume and value for UPI which began its operations in April 2016.
“The government should provide a subsidy on merchant discount rate (MDR) for UPI and RuPay Debit card transactions to make the business model more viable for industry players. This will support the expansion and deep penetration of digital payments across India especially in rural areas,” said Rahul Jain – CFO, NTT DATA Payment Services India.
A PwC report notes that stakeholders (including payer’s bank, beneficiary’s bank and UPI app provider, and NPCI) typically incur a cost of nearly 0.25 percent of transaction value for processing a UPI P2M (person-to-merchant) transaction.
"This means that they incurred a cost of about Rs 12,000 crores for such transactions for FY23–24 (assuming a flat average MDR rate of 0.25%). However, due to zero MDR, they are not able to recover the costs, and the same needs to be reimbursed to them through such incentives," the report notes.
In comparison to the cost, Rs 3,500 crore of subsidy seems inadequate, industry players echo.
Some have also been pitching to start charging a minimal fee, also known as MDR, on these transactions, in phases--opening a monetisation opportunity for them.
The ‘no MDR on UPI’ policy has sparked debate among stakeholders on several occasions in the past.
MDR is typically a fee that banks and payment service providers charge merchants for facilitating digital transactions. This fee further gets passed on to the customers.
In August 2022, the RBI had floated a discussion paper on regulating various payment system-related charges, including MDR on UPI transactions. The regulator was of the opinion that the cost had to either be passed on to the merchant as MDR or to the customer as a transaction fee.
The heated debate, however, pushed the Union Ministry of Finance to clarify its stance, stating that there was no plan to levy any charges for UPI services.
“The government should look at charging for digital payments like UPI which will allow banks to build robust payment infrastructure and security standards enabling fast, simple and secure payments while protecting consumers from frauds and cybersecurity threats,” said V Balasubramanian, CEO, Financial Software and Systems.
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