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The Reserve Bank of India (RBI) on Wednesday released a discussion paper on “Charges in Payment Systems”. The central bank has sought inputs from the general public on the paper till October 3, 2022.

With the paper, the RBI aims to ensure that India has ‘state-of-the-art’ payment and settlement systems that are not just safe and secure but also efficient, fast, and affordable.

In its Payments Vision 2025, which aims to strengthen India’s e-payments ecosystem, the RBI had said that providing digital payment services entails costs, like switching fees, interchange fees, among others, that one or more of the payment system participants have to bear. Either the cost gets passed on to the merchant as merchant discount rate (MDR) or to the customer as customer charges.

The paper seems to be a step in taking the discussion forward.

“Frictions in payment systems may arise, inter-alia, from infrastructure, procedures or charges related to payment transactions. Easing such frictions, while also ensuring compliance with statutory and regulatory requirements, has been the focus of RBI’s intervention in the realm of payment systems,” the discussion paper said.

It has categorised the payment system in India in two categories:

• Funds Transfer Payment Systems: System facilitating transfer from one account to another account identified by originator customer (Person-to-Person (P2P) transaction). This includes Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT) and Immediate Payment Service (IMPS)
• Merchant Payment Systems: System facilitating payments for availing goods or services (Person-to-Merchant (P2M) transaction). This includes card networks and prepaid payment issuers (PPI).

It also covers Unified Payments Interface (UPI) and talks about areas such as ownership of payment systems, participants and service providers in payment flow, e PSPs and intermediaries, and the typical role they play in payment transactions, MDR, among others.

The document explained the structure of levying charges in the existing payments system, and the central bank has asked for feedback across different areas. For instance, feedback has been sought on whether the RBI should prescribe the charges to be levied on customers or members for RTGS/NEFT transactions or they be market driven; should charges for IMPS transactions be regulated by RBI; among others.

“While there are many intermediaries in the payments transaction chain, consumer complaints are generally about high and non-transparent charges. Charges for payment services should be reasonable and competitively determined for users while also providing optimal revenue stream for the intermediaries,” said Sharat Chandra, Vice President – Research & Strategy, EarthID in a LinkedIn post.

Merchant Discount Rate (MDR) In Focus

Debit cards, credit cards and PPIs constitute a significant share of the payment instruments available in India for merchant payments. India is heavily a debit card market as seen from the number of such cards issued – about 92 crore vis-a-vis about 7.5 crore credit cards, as of May 31, 2022.

In terms of usage, the turnover of debit and credit card is almost the same. This trend is specific to India and is in line with the mindset of the citizens in terms of lower dependency on credit for regular requirements. Further, the fact that Indians prefer to pay their credit card dues ahead of time often, rather than waiting for the due date, does not get reflected in lower MDR or in their CIBIL score, the paper said.

The present MDR regime for debit cards has been in force for more than four years. The turnover of INR 20 Lakh for small merchants for MDR charges was kept as per the Goods and Services Tax (GST) turnover requirements at that time. The cost to small merchants for accepting debit card transactions has come down substantially. However, the RBI continues to receive complaints from merchants on their cost of accepting digital transactions. Many of these complaints arise due to the role played by intermediaries in the acquiring process.

The RBI is now looking to seek feedback on whether regulatory intervention is needed in this scenario in terms of mandating pre-transaction fees or to regulate interchange.

Also, the central bank has so far not issued any regulatory mandate or intervened on MDR for credit card transactions and charges for PPI-based merchant payments or funds transfer transactions. The discussion paper has sought feedback from the industry on this as well.

Will UPI Transactions Will Also Come Under Scanner?

It seems so. While the RBI has so far not issued instructions regarding charges for UPI transactions, the government has mandated a zero-charge framework for such transactions with effect from January 1, 2020.

The discussion paper looks at “general feedback” such as in the context of zero charges, is subsidising costs a more effective alternative; if UPI transactions are charged, should MDR for them be a percentage of transaction value or should a fixed amount irrespective of the transaction value be levied; or if charges are introduced, should they be administered (say, by the RBI) or be market determined; among others.

The discussion paper also looks at payment intermediaries including payment aggregators, payment gateways as well as areas such as surcharge, convenience fees, charges on a digital transaction vs the value of the transaction, manner of recovery of charges, among others.

Last week, the RBI also released the much-awaited guidelines for digital lending based on the recommendations of a working group to mitigate the concerns surrounding the evolving lending ecosystem.

Prior to that, the RBI came out with a notification for non-bank PPIs that restricted them from loading credits to users’ ewallets, affecting fintech startups such as Jupiter, EarlySalary and KreditBee who had to halt transactions on their prepaid cards.