What the RBI misses about fees in payment systems

Three fundamental points concerning the consultation as proposed must retain our attention. First, it does not take into account the prospect of a central bank digital rupee on the blockchain, which would greatly improve the usability and reduce the cost of payments, and outperform previous payment methods, unless these other payment methods don’t offer competitive costs. Second, it ignores the huge gains that accrue to the banking system, including the central bank, through reduced cash transactions, and to the government, through increased transaction transparency, potentially leading to increased collections. taxes and a reduction in tax evasion. Third, it overlooks the opportunity that credit cards offer their issuing banks to offer buy-now, pay-later products, the earnings of which more than offset the cost of the 30-day credit offered to cardholders.

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The government policy of zero merchant discount rate (fees charged to merchants and split between those who facilitate payment) on UPI payments and Rupay card payments should be extended to all digital/online payments, without discrimination. Banks, RBI and the government should together reimburse payment ecosystem operators for their costs (including a fair rate of profit).

The alternative to online funds transfer via RTGS, NEFT or IMPS is cash or check payment. Cash payments involve the RBI printing banknotes of different denominations, both to increase supply and to replace old and damaged banknotes. The central bank must also carefully remove all damaged banknotes and destroy them. Banks must handle cash, employ trucks to transport cash, store ATMs, employ people to count cash, maintain cash accounts, and keep cash in storage and in transit. Cash transactions lack transparency and prevent the government from collecting taxes due on the transactions and the income revealed by the transactions.

Another alternative is payment by check. Checks must be cashed. This is extremely expensive on its own, even with check truncation systems. And there’s the cost of disputes over bad checks.

Electronic transfers completely avoid these costs. From the avoided cost on currency and check processing, banks and the RBI should be able to more than bear the cost of electronic transfers of all kinds. The government can participate with a fraction of the additional tax it manages to collect on transparent transactions, if it wishes.

No charges should be levied on the payer or payee, service provider and service consumers for any type of electronic funds transfer, whether RTGS, NEFT, IMPS or UPI. Second, how are payment service providers and other ecosystem players compensated for their services?

Since electronic payments use the services of computer and communications networks to about the same extent whether it is a payment for a bunch of bananas or a multi-axle truck, the payment should be separated from the transaction amount and charged per transaction. It is for them to determine how to recover the cost of credit risk borne by credit card issuers, not for the RBI to worry about, except by stipulating that neither the cardholder nor the merchant who is paid by the card would only be charged for the transactions. Ideally, credit card issuers should consider card cost as a marketing cost for “buy now, pay later” financing opportunities.

Payment aggregators and payment gateways should be compensated for the work they do, in onboarding merchants, providing them with QR codes and payment plugins, except for the effort of collection of payments and their transfer to the beneficiary’s bank account. Payment aggregators may enjoy a few days’ float on the money they collect, but payment gateways are pure technical service providers.

Perhaps the RBI could invite bids for the fees that a player in the payment ecosystem is expecting by 1,000 crore trades and set fee based on auction results. It doesn’t have to go through the lowest bid, if that seems unrealistic. Authorized actors in the ecosystem should be free, provided they bear all the risk involved, to involve as many additional intermediaries as they wish and to introduce new innovations.

If no merchant were charged a merchant discount rate on any payment transaction, there would be no call for a surcharge, to be passed on to the consumer. The RBI should not regulate the convenience fees charged by those who make it possible to book flights or cinema tickets on their sites: these should be left to competition in the market for the services in question.

The RBI should encourage technological innovation to enable real-time settlement of retail payments from payer accounts to beneficiary accounts, without the need for deferred interbank net settlements and their additional costs of hedging against settlement risk. This would allow it to replace RTGS and NEFT with IMPS, at a lower cost.

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About Matthew R. Dailey

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