UPI payments may no longer be free as RBI floats proposal for charges

UPI, short for Unified Payments Interface, has been an instant hit in India. Launched as an alternative to card payments and another option for digital payments, UPI is now available outside of India. It became successful because of how quickly payments are settled, and you do not have to pay any charges for making these payments. That may change soon. The Reserve Bank of India has floated a proposal to explore monetisation for UPI payments.

Titled “Discussion Paper on Charges in Payment Systems”, RBI’s new proposal outlines that the central bank is mulling a fee for every transaction of funds using the UPI method. The objective is to examine the possibility of recovering the cost of investment and operation of the UPI infrastructure. RBI noted that fund transfer using UPI is like IMPS (Immediate Payment Service), so arguably, UPI should attract the same charges as IMPS for fund transfers.

What RBI has suggested

RBI suggested UPI payments could attract a tiered charge based on different amount brackets. According to the central bank, UPI is a fund transfer system enabling real-time movement of funds. As a merchant payment system, it facilitates settlement of funds in real-time, as opposed to the T+n cycle for cards. This settlement between participating banks is done on a deferred net basis that requires the PSO.

In other words, banks need to set up adequate systems to facilitate PSO to address settlement risk. Therefore, it ends up using up a lot of investment and resources of the banks, leading up to additional costs. RBI wants to recover that from customers. “In any economic activity, including payment systems, there does not seem to be any justification for a free service, unless there is an element of public good and dedication of the infrastructure for the welfare of the nation,” RBI noted.

But who will bear those costs is what RBI seeks to know through the paper, indirectly hinting that everyone should bear the cost. “But who should bear the cost of setting up and operating such an infrastructure, is a moot point…,” RBI said in its paper. Since the paper talks about recovering the cost used up on setting up entire payment systems, RBI also wants to charge a certain fee on debit card transactions, which are currently free.

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