The RBI’s discussion paper last week on reviewing charges on digital payments has stirred up a hornet’s nest. Payment service providers (PSPs) quietly heaved a sigh of relief on its publication. But the relief was short-lived with the Finance Ministry rushing in with a clarification last Sunday that termed UPI as a ‘digital public good’ and categorically rejecting plans to impose any charges on UPI transactions, leaving the PSPs disappointed once again.

The jury is still out on whether UPI transactions should be charged or not, but it’s important to understand why the RBI decided to review charges on all digital payments including UPI. Events suggest that the RBI mooted this idea as a lifeline for fintech players offering digital payments.

The backdrop

The RBI paper on digital payments should be seen in the light of some recent developments. Recent months have seen the regulator significantly tightening its ground-rules on what fintech players can and cannot do.

The notification on digital lending norms on August 10 laid out the basics of how fintechs can approach the lending business. The list was more prohibitive than accommodative. A week later, the RBI opened the floor for discussion on charging digital payments.

While the two may seem unrelated events, a deeper reading of these notifications, keeping in mind all that has transpired in the fintech space in the last 4-5 years, suggests that the RBI may be offering a way out for fintech players. The discussion paper seems to be re-opening avenues for fintechs to go back to what they set out to do in the first place — make money from the payments business.

Genesis of payment providers

Paytm, Freecharge and the NPCI-promoted Bhim were the pioneers of the payment wallet ecosystem Initially, digital payments found more use-cases in booking movie tickets or paying utility bills. By 2018, QR-backed UPI payments started gathering steam and in the Union Budget 2019, the government decided to allow MDR charges on UPI transactions and this was implemented from January 1, 2020.

Fintech providers originally intended to generate revenues from a fee on payment transactions, whether they were routed through UPI or their own wallets. They faced their first blow when full-stack KYC was made mandatory for digital wallets. Then, with the UPI gaining acceptance from merchants and offered free of cost, fintech players had to go back to their drawing boards.

The pandemic came as a blessing in disguise. With banks and insurance companies forced to cut back on field agents because of the lockdown related constraints, fintech players filled the void by cross-selling of products and earned a fee. They started selling insurance products, mutual funds, and small- ticket loan products in a big way.

Those who operated with NBFCs at the back-end ventured into lending as an extension of such fee-based offerings. Products such as buy now pay later (BNPL) or credit offered through prepaid instruments and early payday loans were a hit with borrowers. According to a July 2022 BCG report, there is more money to be made for fintech players through lending, than through payments and the fintech topography has reflected this in the last two years.

But these pivots in the revenue models of fintech players haven’t gone down well with the RBI. The customer-facing and data storage practices of fintech players and the bad loans thresholds have come in for criticism.

While the delinquency levels of fintech players had eased to 2.3 per cent (almost at par with NBFCs’, down from nearly five per cent in September 2021) in March 2022, per RBI’s July 2022 Financial Stability Report, with lending norms not adhered to, the RBI seems to see a systemic risk to the banking sector from these players growing their loan books.

From the fintech players’ perspective, the ability to branch out beyond payments helped attract capital at higher valuations and gave wings to the Unicorn story. But they are now faced with the challenge of scalability. After the new regulations on lending, what next is a question they aren’t able to answer easily.

This could put their investors at jeopardy. So, a new window for monetising their payments business would be welcome for fintech players.

Need for more debate

The RBI and the government now seem to have divergent views on pricing UPI. While the government’s intent on not impeding digital payments when they’re scaling up so rapidly is understandable, it’s also important to consider the financial system. Since 2020, there have been rounds of discussions on this issue and most of them have failed.

The discussion paper floated by the RBI last week is a good attempt to seek feedback from all stakeholders in the digital payments economy — users, service providers and those responsible for laying out the digital infrastructure — on whether a paid UPI will work.

The bone of contention with respect to UPI is that in the present cost-recovery process where the government foots the bill, the money doesn’t reach the right hands — mainly the back-end technology infrastructure providers.

The RBI and the government need to sort out this part of the equation and ensure that a digital public good isn’t operated at the cost of someone else’s revenue model. Only this can make it a win-win for everyone be it, the UPI user, the RBI, the government or the banking system at large.

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