If UPI is free, banks/vendors have no incentive to push it
Even critics of the government’s demonetization decision will agree that the way it pushed digital payments has been remarkable. To begin with, the government agreed to bear a large part of the costs of digital transactions – at petrol pumps, for instance, the merchant discount rate (MDR, or commission) was absorbed by the PSU oil companies – and, simultaneously, it worked to popularize UPI that was developed by RBI’s National Payments Corporation of India (NPCI) for payments using the mobile phone. While UPI started in August 2016 with 21 banks on-board, it was 61 banks a year after demonetization and is up to 143 banks today. In January this year, barely 29 months after its launch, at Rs 109,932 crore for the month, UPI transactions were higher than the total usage of both debit and credit card transactions at merchant outlets; at Rs. 191,359 crore in October 2019, the value of transactions was a third more than that for cards. It is true that just 30% of these UPI payments are P2M transactions of the type that debit/credit cards are, but the ramp up in volumes/value is a huge achievement.
The ramp-up was both due to the open architecture of UPI – this allowed PayTM, Google Pay, Phone Pe to use it effectively – as well as the fact that NPCI kept innovating to make UPI more attractive and worked to create UPI QRs that made it universally acceptable in the manner debit/credit cards or a PayTM is with its impressive reach among merchants especially across north India; indeed, it is not just PayTM, others like Google Pay also have very attractive merchant on-boarding schemes. A large part of the credit also has to go to the government for trying to lower MDR charges for digital transactions.
Lowering MDR, however, is a double-edged sword and, so, needs to be used with caution. A lower – or a zero – MDR will clearly draw many towards digital payments, but if you lower it too much, it also takes away the bank’s incentive to roll it out or that of the payments firms – like PhonePe or PayTM – to innovate further. That, however, is precisely what the government has done and earlier this week, the government decided that from January 1, there will be no MDR on either RuPay (there are 500 mn RUPay cards today) or UPI. While insisting that all firms with a turnover of more than Rs 50 crore have to offer an RuPay/UPI facility for customers will help push digitization, there is no incentive to push RuPay/UPI ANYMORE. And given that UPI MDR were so low – just 30 bps – it is not as if this was a deterrent to its use. In any case, to the extent it was for very low-value transactions, it would be better if the government paid for this; after all, more digital transactions means there are more people who will come into the formal economy – and pay taxes – and it also means that both RBI and government-owned banks spend less money in managing the printing and circulation of cash. As in the case of price controls in so many areas, like medicines, the government’s plan to cut/finish profits will also deal a big blow to the industry.