The right price

Transaction costs must be reasonable

The Reserve Bank of India (RBI) has just released an important discussion paper, comprehensively reviewing all digital payment systems and outlining the procedures for levying charges in each. It has asked for feedback on possible changes in policy and charges by October 3. Policy based on this feedback will be crucial to the future of the digital payments system. It’s vital to get this right to evolve a safe, secure, efficient and affordable system, which encourages the uptake of digital transactions. Enabling greater digital penetration is possible only through promoting innovative, interoperable, and inclusive payment systems, which improve the payment infrastructure. The fees and charges must be appropriately determined to minimise costs to users while offering returns to operators.

Such policy cannot be determined entirely by market forces, given multiple payments systems operating in parallel, involving several types of entities. For example, real time gross settlement (RTGS) and national electronic funds transfer (NEFT) are operated by the RBI itself, while the immediate payment service (IMPS), RuPay, and unified payments interface (UPI) are operated by the National Payments Corporation of India, a not-for-profit promoted by commercial banks. Card networks are run by for-profit entities, such as card issuers, banks, and fintech firms. Thus, the policy must take a holistic account of demand, supply, volume, and the ease and safety of users and stakeholders into consideration. Although outside the remit of the RBI, the policy must also reckon on practical considerations like infrastructure lacunae, disruptions due to floods, earthquakes and, regrettably, the frequent practice of shutting down the internet on the grounds of law and order.

After offering approximate calculations of current costs and charges, the paper asks key questions. Some of these are as follows. Should the RBI review the policy of not levying charges on members for RTGS transactions, and should it prescribe RTGS charges to be levied on customers by members, or should such charges be market-driven? Similarly, should the central bank charge member banks for NEFT, and should banks be permitted to charge customers for NEFT transactions, and should any such charges be mandated or market-driven? In IMPS, should the RBI impose a ceiling on charges? In debit-card and credit-card charges, the key merchant discount rate is paid by the receiver (the “merchant”), unlike in RTGS and NEFT, where the issuer pays. What changes are necessary to ease frictions in this system? Also, should RuPay cards be treated on a par with debit cards and should per transaction charges be imposed on debit cards?

The current charges in RTGS, NEFT, and IMPS appear moderate. Logically, since the RBI is not driven by commercial considerations, it could continue without imposing charges on members. But at some stage, subsidisation of costs in Rupay and UPI through the Union Budget should be phased out. Some system of charges needs to be devised if private entities are to be encouraged to invest in UPI. The entire concept of “surcharge and convenience fees” may also be worth reviewing since these are often quite substantial. A debit card charge per transaction also needs careful consideration but it could work. Over and above these details, the RBI needs to keep certain goals in mind: The more digitised the payment systems, the less the macroeconomic friction. It must also consider the implications for seigniorage in a highly digital economy where electronic money replaces cash to a significant extent.