Context: Recently there has been a debate among various industry stakeholders and the government on making digital payments through UPI infrastructure chargeable.
Although recently the finance minister has reiterated that the UPI was a digital public good and hence will likely remain a free-of-charge product.
About Unified Payments Interface (UPI):
It is a system that facilitates instant fund transfer between two bank accounts on a mobile platform, without requiring details of the beneficiary’s bank account.
It is an advanced version of Immediate Payment Service (IMPS) – round–the-clock funds transfer service to make cashless payments faster, easier and smoother.
It is developed by National Payment Corporation of India (NPCI) and regulated by RBI.
NPCI launched UPI with 21 member banks in 2016.
India is expanding UPI based infrastructure in many foreign countries such as Singapore’s PayNow has been linked with UPI.
Evolution of UPI:
UPI has gone a long way in enabling the digitalization of India’s payments economy.
It has added layers of convenience in the way people transact with money.
UPI being an indigenous ‘Made in India’ product has helped India find its unique place in the globe in the digital payments arena.
Touted to be a $180 billion market by 2026, India is among top nations in this space.
With UPI expanding beyond the borders, it has certainly brought a lot of pride to the nation.
Issues with the UPI infrastructure:
UPI has neither reduced the cost of money or currency, nor has it propelled a mass-scale substitution of physical cash with UPI.
The payments industry is unhappy with the current free-UPI model because the cost of its investments in infrastructure don’t recover.
Incremental investments are not coming in thus the upgradation of infrastructure has suffered.
This is partly a reason for the high transaction failure rates of the UPI.
Payment rejection rates are increasing from less than 1% about 4 years back to about 2% currently.
Although the UPI allows transfer of up to ₹1 lakh but about 70% of the total payments are lower value transactions (up to ₹200).
In reality it has replaced low-denomination rupee notes and not really cash as a payment mode
Government’s stand o UPI:
The government believes that the current reimbursement fund is adequate to find the stakeholders.
Although the reimbursement fund neither considers the constant cost of upgrading the back-end systems of the payment providers nor does the money reach everybody in the ecosystem.
While banks end up getting their costs refunded, payment apps and infrastructure providers are often left to fend for themselves.
Advantages of making UPI transactions chargeable
Data trade and data mining accounts for a third of total revenues for payment apps.
RBI and the government are trying to clamp down on companies making gains out of the consumer’s personal data, introducing charges on UPI transfers could help address this.
The NPCI has been facing the challenge of capping the market dominance of certain players in the payment interface.
A mechanism to charge payments can help address this issue too.
For instance, the NPCI could levy an additional user fee on payment companies which have breached the permissible transaction threshold.
Such levies are usually passed on to customers, and this itself would help cap individual player market shares at 30 per cent.
The payment infrastructure providers will get incentivized to upgrade their infrastructure thus making innovation in the field.
Save government finances on subsidies as the government allocates substantial amounts for reimbursement of charges towards RuPay debit card and UPI transactions.
Way forward:
UPI is a means to accelerate formalization and digitization of the economy and thus its infrastructure needs to be upgraded at the right times.
To make the UPI acceptable and relevant across larger ticket sizes and economic strata, all the players in the UPI ecosystem need to be incentivized.
Therefore, if the government’s intention is to increase the use case and acceptability of UPI.
It should do away with its policies of populism and should make the UPI infrastructure chargeable so that the UPI lives up to its expectation of “a new generation payment system” and which is accepted across the globe.
About Public Good:
Public goods are non-excludable and non-rivalrous, meaning they are free for everyone and unlimited in supply.
In theory , there is no shortage to others as they are non-rivals in consumption
The public sector typically manages public goods and the private/free market does not produce them i.e., the state has absolute say over these goods.
Public goods suffer from what economists call the free-rider problem.
Examples of public goods include:
Street lighting,
National defense,
Public beaches
National parks and monuments.
Education, healthcare infrastructure etc.
Are public goods necessarily available at zero cost?
Public goods are actually not available at a zero cost because they come at a cost which is indirectly paid in the form of taxes.
In specific cases such as healthcare or education the dynamics are different.
While basic or entry level public goods are usually available free of cost, specialized healthcare treatment or higher education usually does come at a cost.
When a public institution provides healthcare/education services, the costs are lesser than a private player which actually creates certain artificial usage barriers.
For instance, free education or education at a low fee is an option only to households of a certain socio-economic strata.
But in case of road and toll taxes everyone having a vehicle will be paying road tax i.e public goods are not completely free.
