Can banks & payment companies serve UPI free and as a public good service?

As per report by Boston Consulting Group (BCG) & Phonepe titled “Digital payments in India: A $10 trillion opportunity”, India’s digital payments market is expected to increase more than threefold from the current $3 trillion to $10 trillion by 2026. This would translate to digital payments (non-cash) constituting 2 out of 3 payment transactions by 2026.

Digital Payments is a great vision and UPI is the most popular fund transfer system and payment method in indian digital payments history
UPI is growing at a rapid rate faring 657 crore transactions in count and 10.73 lakh crores in transaction value, in August 2022.

Post demonetization, while wallets showed the possibility of being a fund transfer & payment method in India, UPI turned out to be the swiss army knife in common man’s pocket, that is brought in by RBI, NPCI and banks and it’s adoption skyrocketed after many payment companies like PayTM, Trupay, Phonepe, GooglePay and innumerable payment aggregator companies served as extension cord in taking UPI closer to users & merchants in the last mile while, the zero-charge framework that is mandated by the Union government of India on UPI transactions with effect from January 1, 2020, catalyzed UPI’s growth by almost 4.25 times in 2.5+ years.

While UPI as a payment method grew by 4.25x, in transaction volume, in just 2.5+ years, banks like State bank of India (SBI) grew by 4 times and Bank of Baroda (BOB) grew 8 times their transaction count as per August 2022 NPCI published data.

https://www.npci.org.in/what-we-do/upi/upi-ecosystem-statistics

Payment aggregator companies & payment service providers incurred a lot of expenditure to offer cashbacks for the initial traction, while India’s union government took the initiative to provide cashbacks for BHIM UPI App/co-branded bank’s UPI app based UPI transactions.

Does someone realize how much banks & payment companies are investing in IT infrastructure, while aligning technical, creative & business teams to support the quadrupled UPI growth in 2.5+ years?

What does Banks & Payment Companies expect?

Banks & payment companies expect to monetize UPI transactions as per their chosen “business model”. This will empower them to make long-term investments in massive payment infrastructure creation (in the lines of National Payments Grid, that can cater a minimum of 2,00,000 Transactions per Second (TPS) on UPI itself by 2025), that requires adoption of latest IT infrastructure, technology innovations and well collaborated operations by respective technology/creative/business/finance & payment domain teams etc…
A level playing field to both banks & payment companies, to flexibly expand their UPI services.
Prevent monopoly.
Policy support to expand to every corner of India/Bharatavarsha and to take UPI to the last mile of the world.

What kind of business models potentially work? Is it time to charge for UPI transactions? Why not? Who needs to pay?

Some of the options include,

A Percentage of transaction value to be collected as MDR rate, with a cap for large value payments.
No transaction fee (i.e., zero MDR) on P2M payments with small merchants, while charging MDR rate on P2M payments to larger merchants.
Charging MDR rate on P2M payments with all kinds of merchants.
Tiered pricing/flat fee on P2P transactions & P2M payments.
Monthly fee for unlimited P2P transactions & P2M payments per month.
Government subsidizing P2M payments, but how long will this be possible unless and otherwise government is ready to pay for UPI & other payment methods for their required initiatives.
Government paying a wholesale MDR rate per P2P transaction / P2M payment, to cover UPI transaction facilitation costs of all entities (issuer bank, acquirer bank, NPCI, payment intermediaries).

How does government think banks & payment companies can sustain in facilitating UPI based transactions into long-term?

With people increasingly adopting digital transactions when compared to cash transactions,

banks potentially save w.r.t. cash handling costs, and government expects banks to spend those savings to serve UPI as public good service.
banks can cross-sell and up-sell their different products to existing digital savvy customers.
banks & payment companies earn revenue by providing bill payment services through their existing mobile banking / UPI apps.
government is providing minimal budget allocations as subsidies for UPI transactions, but will that be enough?

What government & RBI can do to support sustainable business models for UPI while keeping it as public good service?

A wholesale MDR rate per UPI transaction to be agreed upon in between union government and RBI, banks and payment companies and then government make fee payments to banks & payment companies on weekly/monthly basis, as per the agreed fee settlement schedule.
Do the ever awaited tax reforms, by bringing in next generation real-time taxation systems like Non-Cascading Transaction Tax, that enables governments to collect majority of their tax revenues on real-time basis.

A data backed thought process, with calculations are presented in
https://www.idealnation.net/2022/09/14/what-can-be-the-next-breakthrough-in-indian-economic-reforms-history/
Provide policy support & government support as needed, to simplify cross border payments with many countries in the scope of inward remittances & outward remittances through UPI. Also expediting UPI setup as a payments platform in different countries creates the path for interoperability in future.

Summary:

UPI is the most successful payment method that has seen momentum in India and that can be used as a debit card alternative across the world, facilitating merchant payments & fund transfers involving INR as currency and with forex conversion too.

In addition to the above, providing UPI platform as a whitelabel solution is a different dimension that will enable many countries across the world, to deploy UPI as a payment method and that lays the foundation for a flexible and interoperable cross border payment system in future. Bhutan, Bangladesh, UK, Singapore etc… were some of them that are working with NPCI International Payments Limited (NIPL) to realize different possibilities with UPI.

This is a watershed moment for UPI’s adoption outside India and appropriate business models will allow every participating entity (be it a bank or a payment company) to stay profitable while, union government in India/Bharatavarsha and governments in other countries can pursue their payment digitization targets by running UPI as a public good service.

P.S. An article was published on December 31, 2019, a day before enforcement of “Zero MDR” on January 01, 2020 on Linkedin. The link follows: https://www.linkedin.com/pulse/does-offering-zero-mdr-merchants-viable-move-banks-what-dendukuri/