The Unified Payments Interface (UPI) system in India has been a runaway success with now the average total value of daily transactions running above Rs 30,000 crore. Just in August 2022, 657 crore transactions were done on UPI with a total value of 10.73 lakh crore. It’s a uniquely successful Indian story which all of us should be proud of. Administered by the National Payments Corporation of India (NPCI), the government promoted business model with collaboration from banks and application providers is a runaway success. One of the key features of UPI is that it’s an open platform which is not dominated by any individual player such as a bank or an app provider and it facilitates transactions across different players. 

RBI has recently published Discussion Paper on Charges in Payment Systems. Currently there are no charges on UPI transactions most of which are low value but high in volume. Now there is talk of linking credit cards with UPI and the uncomfortable question of transactions costs or Merchant Discount Rates (MDR). Even if UPI transactions have certain costs (say 0.25 per cent as per the RBI paper) it would be a huge self goal if we include these transaction costs in UPI payments. It will discourage the consumers from using this mode of payment even if the transaction costs are small. Looking at transaction costs alone would be myopic. One needs to look at these costs from an economic view point instead of an accounting view point. Such costs should be shared among NPCI, Banks and Application providers such as PhonePe or Paytm. These costs should be looked at from 3 angles: Savings for Banks, Positive Externalities for the Economy and Benefits for application providers. Let me highlight this as follows:

Savings for banks: All banks have to spend a significant amount of expenses on supporting physical cash transactions. This includes transfer of cash to various branches, maintenance of ATMs, Maintenance of Cash Counters at each Branch and security to be provided at each stage. Although cash transactions may not immediately reduce to zero but such transactions and associated costs may gradually decrease with increasing adoption of UPI. Similar to cash transactions, check transactions also have a cost in terms of printing, distribution, collection and processing. These costs will also decrease with increasing adoption of UPI and other digital payment systems such as NEFT, RTGS, IMPS etc. Also most of the IT infrastructure required for UPI is in any case required by banks to run regular banking operations. If banks still require some financial support then they may be allowed to reduce the interest rates on deposits in savings/current bank accounts as a whole. Heavy UPI users will automatically need to maintain higher account balances and thus indirectly pay for the costs by getting lower interest rates while Low UPI users may transfer their excess funds to Bank Fixed Deposits offering higher interest rates. With regards to UPI, NPCI should continue to provide its services free of charges to banks even if it requires budgetary support. As explained later, positive externalities in the economy will more than justify the budgetary costs.   

Positive externalities for the economy: Increasing usage of UPI has huge positive externalities which one shouldn’t lose sight of. Digital payments reduce transaction costs of firms in terms of maintenance of cash as well as lubricate the economy by allowing instant payment transfers. They also act as a counter to illegal transactions which mostly involve high denomination cash. In a paper titled ‘Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes’ published by Harvard’s John F Kennedy School of Government, the author describes that to carry USD 1 million with $100 bills will require 1 briefcase while the same amount with $20 bills requires 4 briefcases, thus making it much harder to carry such transactions. In due course as UPI gains widespread appeal among the masses, the government may further discourage cash transactions by gradually withdrawing high denomination notes from circulation (for example high denomination notes once deposited in the banking system in due course shouldn’t be circulated further and replaced by lower denomination notes).     

Since digital transaction leave a trail, thus they encourage tax payments as bank accounts are mostly linked to both PAN and Aadhaar. Although Income Tax and GST are at two different ends of the tax spectrum, if looked from an individual or company’s perspective they are 2 sides of the same coin: Income/Revenue vs Expenditure/Costs. One person’s expenditure is another person’s income. Thus UPI may offer a common linkage across the entire spectrum resulting in higher collection of both Income Tax and GST revenues. Even now, the UPI total transaction costs pale in comparison to the increasingly buoyant Income Tax and GST revenues. 

Benefits for application providers: Although Individual data on transactions should be protected, application providers may be allowed to use aggregate data to provide products and services to customers as well as gain advertising revenues. This will help them recover their investments and also bring efficiencies in the economy by providing marketers and companies more accurate market data in order to develop appropriate products and services for different customer segments. 

Thus UPI is a win win for all. Let’s not even think about killing this golden goose by introducing transaction costs. In fact, the government, banks, RBI, application providers and tax authorities should go all out for promoting UPI. As GST collections are centralised, the government may also think about the idea of developing a mechanism of giving GST discounts on UPI transactions or even opening exclusive outlets of some key products or services which only accept UPI.