[Answered] Do you think government regulations can be helpful in achieving the full potential of UPI in India?

UPI is an instant real-time payment system developed by National Payments Corporation of India (NPCI) facilitating inter-bank transactions. The interface is regulated by the Reserve Bank of India. The recent discussion paper by the RBI on charges in payment systems has triggered widespread public debate, especially on the zero-charge framework for UPI transactions.

Helpful in achieving the full potential of UPI:

• UPI apps have not been receiving any Government incentives and that the entire incentive amount is being appropriated by banks.
• UPI’s core model of payments makes it an unsustainable business for small players who do not have other means of revenue like the big players, resulting in skewed competition and innovation in the sector.
• But for UPI enablers like PSPs and banks, a revenue model that meets their operational costs and offers them the width to invest in new technologies and upgrade their systems is the bare minimum for sustainability.
• Rising UPI transactions also need to be matched by a robust scaling of the current systems, and banks and PSPs might not have the incentive to invest further in their UPI infrastructures in absence of revenue clarity from the stream.

The following points explain that government regulations can be counterproductive in achieving the full potential of UPI in India:

• Only 3-7% of rural consumers are actively using UPI, with many even unaware of its existence. So from the digital public good perspective, it is probably not the right time to levy charges on UPI for merchants or consumers.
• If MDR is levied on all merchants, then the major target of the digital inclusion drive of UPI – small merchants who deal with petty cash daily – will not accept digital payments.
• Over the past few years, government and RBI have spent, on average, Rs 5,400 crore annually on printing and even more on currency management. The expenditure towards UPI may be much lower and could even curtail the expenditure on cash.

What the UPI ecosystem needs is a balancing act between digital payments growth and incentivizing of the system. One way to strike this balance is by re-introducing MDR as a revenue stream for the banks and PSPs and also subsidising it for merchants to ensure that they incur no charges.