UPDATE: An edited version of this post was published in Medianama. UPI is a toll road
This is a response to LiveMint opinion piece How the Indian state is building a new generation of digital public goods. For the purpose of keeping it specific, I will restrict the response to UPI, and shall refrain from covering other products(Aadhar, Digital Certificates etc) built by India Stack. I would be the happiest person if UPI is truly built as a public good.
UPI is NPCI club good.
The core perception that UPI is a public good comes from the fact that it is built by NPCI, a not for profit company formed by Indian banks under the aegis of RBI. We will come to problems with this later, but for now focus how UPI is a NPCI club good. For anyone to build a payments app, they need to get a Payment Service Provider (PSP) license which can be bought only through partnership with banks. If one needs to start a bank, key to that lies with RBI. So, if I were to ride on the highway called UPI as a developer, I need to pay toll to these players(banks, who are members of NPCI), either one time / have a partnership agreement of some sort.
So in effect, one can operate inside UPI ecosystem, only if they are friends with NPCI club members. If UPI were to be truly open public highway which anyone can ride, the barriers to ride can’t be this high. I am okay with UPI being a NPCI club good, but just do not call it public good / use phrases like “highway without toll”. We are used to paying tolls in this country.
Comparison to Net Neutrality
I am thankful to the author for bringing in reference to net neutrality in to the digital payments debate. UPI, in its current form being offered by banks differentiates payments based on the use and charges them separately. The core argument of net neutrality is not to discriminate function(serving data packets) by entities (who / which sites) / discriminate producers / consumers of digital content. Translate this to payments, discriminate function (making payments) should be same irrespective of entities(Person / Merchant) in the transaction. The cost a bank can charge anyone for ₹50,000 Person to Person (P2P) transaction is always fixed.(₹10 / ₹20 at the maximum + applicable taxes).
Banks have conveniently washed off their hands in servicing the basic moral obligation (payments) at cost and have made a product for it. Cheque leaves were priced at cost of processing a cheque, where as in a digital world, cost of fully / semi automated transaction cannot be as high as ₹10, even counting the digital infrastructure costs.
MDR is Expenditure Tax.
For Person to Merchant transactions, the cost is even higher, implicit (meaning, the merchant will be settled after detecting a % fee (called Merchant discount rate) from the customer). Now, the merchants will obviously pass this to customer, just like they have been doing for credit / debit cards. So here is a revolutionary system, which even though costs a fraction to make the payment, charges the same as legacy technology. The MDR might have been valid in era of POS terminals. In UPI world, both merchants and the customers have smart phones and the bank just runs the software platform. Why should payments still have “merchant acquisition”? Just so banks earn easy money? MDR for banking transactions through UPI is actually an Expenditure Tax. A platform touted as public good cannot impose a tax silently under the hoods.
- Govt to bear MDR cost for online payments – That could be probably biggest tax sop given by Govt — to the payments / banking industry.
- RBI Concept Paper on Card Acceptance Infrastructure
- Is merchant discount rate a game changer?
Cost of digitization of currency must be split fairly. Banks and RBI are robbing us for a while, aim to do more. The India Stack project UPI isn’t helping either.
How should UPI be priced?
I am not asking payments for free. I understand digital payments come at a cost. But when calls are being made for cashless society, it is only fair that the cost and benefits of digitization are shared equitably between the state, the banks and citizens instead of state and banks enjoying the benefits and citizens bearing the costs. The existing system of MDR for card payments does that exactly and any system inheriting it cannot be just.
Banks are behaving the exact same way, Telcos have embraced technology / internet. They want the benefits of technology, free software, lower computing costs; But they want the customers to pay the same / higher cost which is totally unreasonable. In collusion with the chief bank of the country, the banks will remain in the era, only waiting to be taken for ride by newer technology / players like block chain based crypto-currencies just like how Internet took over telephony.
UPI must be priced in terms of API calls (the actual cost of payments) and if UPI is touted as public good, every bank account holder, regardless of merchant / citizen, must be given sufficient API credits to perform day-to-day payments which will make it public good. Of course, the power user, who has more volumes(in terms of transactions, not the transaction amount), will need to buy extra credits (again at cost, nominal prices) and then buy extra services like analytics, data separately. Keep the basic transaction layer free of expenditure tax before calling it a public good.
If you want to make the platform attract innovation, lower the barriers for developers, make them earn / trade UPI API calls through their apps.
I wish UPI a grand success, one which should empower of every citizen, making payments cheap (just the actual cost), instead of becoming a cash cow for banks which fail to perform their core business (collecting back their dues from giant debtors)