User charges on UPI transactions created a flutter this week. While the government quickly dismissed concerns, the uncomfortable question is whether a free-forever model is possible or even desirable. It’s no secret that the RBI wants to streamline charges for different payment services. It released a discussion paper last August and followed it up in December, but the finance ministry shot it off, insisting that a fee on UPI services wasn’t on the cards and extended financial support for the digital payments ecosystem.
But what’s free for one involves a cost for someone else. Even though UPI person-merchant transactions are free, as per RBI’s calculations, different stakeholders collectively incur Rs 2 on Rs 800 worth of transactions. In other words, UPI as a funds transfer system is much like IMPS; so, it’s argued that similar charges apply to UPI. RBI had even proposed a tiered charge on different transactions.
But then, the zero-cost model helped swell the UPI user base so phenomenally since its launch seven years ago. As per the Economic Survey 2022–23, India has the highest fintech adoption rate of 87% against the global average of 64%, thanks to UPI transactions that shot up an average of 121% in value and 115% in volume between FY19 and FY22. As Finance Minister Nirmala Sitharaman noted recently, UPI transactions accounted for 52% of the total digital payments transactions in FY22. Considering the popularity, RBI even rolled it for feature phone users of about 400 million, which means NPCI’s 750 million user base target for individual digital payments got one step closer.
It isn’t a stretch to say that India’s UPI ecosystem has no parallel in the world, so it’s being merrily handed out to all visiting G-20 delegates. All RBI wants is parity, while the government insists on UPI as a free service. Both have a point. A system like UPI cannot flourish in any country unless the government democratises the payment system to the smallest value at no cost or the most reasonable cost. Given the rise in digital payments, India must evolve an efficient payment system where UPI remains a digital public good for user transactions. At the same time, the cost of recovery is met through other means for the rest of the stakeholders.