Responses to RBI’s Discussion Paper on Charges in Payment Systems dated Aug 17, 2022

The following are the responses to the questionnaire, that is posted by RBI about collection of charges on different fund transfer & merchant payment systems, irrespective of who manages or the list of participants in any given payment system.

RTGS

Should RBI review the policy of not levying charges on members for RTGS transactions?
Why not, RBI is at it’s right to periodically review the monthly membership charges or any other, on direct members/participants, that will enable RBI to cover operational costs overall.
Should the time-variable charges be re-introduced?
RTGS is expected to happen on near real-time basis and payment requests are fulfilled on First in, First Out (FIFO) basis. Implementing time-variable charges may not be a welcoming move as it may potentially create a kind of deterrence for further adoption of / growth of RTGS as a fund transfer system.
For RTGS transactions, should RBI prescribe the charges that can be levied on customers by members, or should they be market driven?
Market driven approach is the way to go. RBI is only expected to define the “upper limit to service charges” and every bank is entitled to define it’s service charges to facilitate RTGS transactions to it’s customers.

NEFT

Should RBI charge member banks for transactions processed through NEFT?
RBI has every right, to collect required fees, to effectively cover operational costs overall.
Should banks be permitted to charge customers for NEFT transactions, whether initiated online or otherwise?
Operating branches and web based systems both costs money. It is up to each bank to decide upon which interaction mode (through mobile app/at a branch) to be allowed without cost and which one to be leveraged for fee collection from the customers.
Should RBI prescribe charges for NEFT transactions to be levied by banks on their customers, or should they be market driven?
Market driven approach is the way to go. RBI is only expected to define the “upper limit to service charges” and every bank is entitled to define it’s service charges to facilitate NEFT transactions to it’s customers.

IMPS

Should charges for IMPS transactions be regulated by RBI?
Service charges are to be defined by the direct participating banks, in sync with the RBI’s mandate as a reference, and the collected transaction fee to be shared in between direct participating banks, payment companies, NPCI etc…
Should RBI fix a ceiling on charges that can be imposed in IMPS?
Market driven approach is the way to go. RBI is only expected to define the “upper limit to service charges” and every bank is entitled to define it’s service charges within RBI prescribed limits, when facilitating IMPS transactions to it’s customers.

Debit Cards

Should debit card transactions be charged as normal funds transfer transactions?
Yes, why not?
Should MDR for debit cards be uniform across merchants (irrespective of turnover)?
Yes, Why not? RBI to define upper limit to service charges, so acquirer banks will have flexibility while a healthy competition exists.
Should RBI regulate interchange for debit card transactions?
Not needed, as issuer bank bears the costs of card issuance and maintenance to its customer, acquirer bank is handling costs of merchant acquisition and Payment Services Operator (PSO) aligns both long with any payment gateways and payment aggregators in the process. They should be able to deal themselves and RBI to step-in for arbitration purposes primarily, unless and otherwise all participants chooses RBI to define fixed percentages of the collected MDR Rate to respective parties.
Should RBI deregulate MDR for debit card transactions and let stakeholders decide on optimum level of MDR and interchange?
RBI to only control the upper limit of service charges and rest to be handled by different stakeholders themselves. One needs to know how to objectively choose a business model, so they stay in business with profit, while they never exploit the customer, as if there is no other option.
Should MDR for debit cards be a percentage of the transaction value or should it be a fixed amount irrespective of the transaction value?
Percentage of transaction value is good for small value transactions and fixed amount approach works for large transactions.
Should RuPay cards be treated differently from other debit cards affiliated to international card networks in terms of MDR?
While international debit cards are managed by international card networks like Visa, Mastercard etc…, Rupay is managed by NPCI. The point to note is, people in other countries might perceive Rupay as managed by an international payment network NPCI, isn’t it?

While Union government of India and RBI showed their interest for Rupay adoption and tried creating awareness for the homegrown card network to prevent monopoly of few card networks in India and to ensure data security guidelines are followed by them, w.r.t. their indian customers, Rupay is surely not a toddler anymore. Banks know when to spend money (for big brands) and where to save (by adoption of growing brands), and few indian banks already issued Rupay based credit cards, this is a good sign for Rupay as more customers will be added and brand value to the Rupay network grows, in India and abroad, especially when NPCI ties up with banks in other countries for cross border card issuance.
Among the two options (waiving / reducing MDR, or giving incentive to cardholders), which is more effective for increasing use of digital payments?
Not many card holders timely collect incentives (reward points etc…) provided on cards, unless expiring reward points are automatically applied to reduce credit card bill. Reducing MDR is a better choice than waiving MDR. No business can survive unless and until, that has a workable business model and all participants be allowed to earn, irrespective of who funds it, as that depends on policies and many other factors overall.

Credit Cards

Are credit card MDR charges reasonable?
When selling goods & services at MRP rates, while some merchants consider MDR as a cut in their profit, some others try to collect MDR rate on top of the MRP, to recover MDR costs. Healthy competition helps make & keep MDR reasonable to end consumers.
Should RBI regulate MDR for credit cards?
RBI to consider capping MDR in terms of defining the upper limits, while leaving the final charge enumeration to card payment networks and corresponding acquirer banks, issuer banks, payment intermediaries etc….
Instead of MDR, should RBI regulate interchange for credit card transactions?
As shared in point 2 of this section, defining upper limit for MDR is good, leaving the rest to banks and payment intermediaries for them to arrive at numbers, as all parties know that, they need to survive in the market in a profitable way, in long-term. Volume of payments will be a key criteria in these calculations.

Note: If issuer bank prefers to be unaccommodating, RBI can intervene, to avoid denial of specific bank issued cards/payment network managed cards at merchant outlets.
Should RBI regulate both MDR and interchange for credit cards?
As shared in point 2 of this section, defining upper limit for MDR is good enough.

PPIs

Should RBI regulate MDR for PPI transactions?
Yes, Why not? RBI to define upper limit to service charges, so acquirer payment intermediaries/banks will have flexibility, while a healthy competition exists.
Given that no credit is extended in case of PPIs, is it reasonable to charge high MDR (in sync with MDR levied on credit card transactions) for PPI transactions?
PPIs are not providing loans. They donot have much earning avenues like regular financial institutions/banks. At the same time, they need good investment, to build, operate and do merchant acquisition similar to acquirer banks who reach out to merchants to provide POS machines and to facilitate card acceptance. Unlike credit cards & debit cards that offer reward points, PPIs offer cashbacks, coupons of different merchants etc… which all require some investments in the name of market expenditure, when strengthening partner ecosystem in long-term.

While closed PPI requires minimal investment to operate, as it is in-between outlets of the same brand, semi-closed PPIs & open PPIs require a lot more investment and has to follow RBI guidelines to operate the service. RBI has to ensure MDR rate, to be similar to debit cards, for semi-closed PPIs and Open PPIs.

Note: Open PPIs, that will be allowed to be operated only by banks, potentially comply, since they will do cash handling and are well regulated by RBI already.
Should the charges structure for merchant payments done using PPIs be akin to that of debit cards?
Both debit cards and Semi-closed PPIs operate at common places with similar business models and partner ecosystems, even though operation technologies and scope of returns to their consumers differs. Moreover, cards have PCI compliance and wallets (especially semi-closed PPIs and Open PPIs) are regulated differently by RBI. But, GDPR inspired indian law that was tabled in the parliament earlier and was recently scrapped, will be brought in again, by accommodating everybody’s concerns, so, PPIs will incur increased costs for compliance soon.

To summarize, RBI to define the upper limits for both PPIs and debit cards in similar way and respective companies make their service charges, all based upon target segments, their market expenditure etc…
Should charges for cash withdrawal using PPIs be regulated?
While this will be a helpful feature in terms of consumers getting cash at merchant space, while doing a fund transfer for the amount and a service fee be considered too, it is not advisable as a business model for larger amounts (>Rs.1000) since regulation is difficult in terms of proving the source of that amount, and this option to be primarily availed to “open PPIs” partnered merchants, as they are operated by banks anyway.

Note: While semi-closed PPIs may be allowed, extra scrutiny is must and it has to be RBI’s call about scope of restriction, in this arena for both semi-closed PPIs & open PPIs.

UPI

In the context of zero charges, is subsidizing costs a more effective alternative?
Subsidy is a temporary measure. It cannot be chosen as a business model into long-term. UPI is one of those most successful payment methods, that has extreme demand. While government policies complimented it’s growth, UPI brought in security, convenience and gained consumer trust. Banks to not forget that, without UPI, Wallets would have dominated and had taken over the market in fund transfer and merchant payment system scopes by this time.

For more details on possible business models, the need to pay banks/payment companies and the importance of continuing UPI success, one may go through the following article on UPI, that has all required details
https://www.idealnation.net/2022/09/21/can-banks-payment-companies-serve-upi-free-and-as-a-public-good-service/
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?
While percentage of transaction value is good for small value transactions and fixed amount approach works for large transactions, UPI being expected to be a public good service by the Union government of India, a different approach to be adopted, as described in
https://www.idealnation.net/2022/09/21/can-banks-payment-companies-serve-upi-free-and-as-a-public-good-service/
If charges are introduced, should they be administered (say, by RBI) or be market determined?
Market driven is the way to go while RBI define upper limits. Again, since UPI is expected to be a public good service, Union government of India has to take the responsibility of paying a wholesale rate to banks & payment companies, while the latter invests to expand and create an extreme scalable National Payments Grid that can cater a minimum of 2,00,000 transactions per second (TPS) in quicker time possible, like by next festive season of 2023 atleast (i.e., October 2023).

More details can be obtained from
https://www.idealnation.net/2022/09/21/can-banks-payment-companies-serve-upi-free-and-as-a-public-good-service/

Intermediaries

Should intermediaries be transparent in the way charges are levied by them?
Whether it is per transaction fee or a monthly fee, the business model has to be transparent and while they need not share details of expenses & profits to public other than in the form of balance sheet, that they will submit to tax departments and likewise through different documents that they will submit to RBI for compliance.
Should the various charges levied by intermediaries be unbundled and charged separately?
Making charges of intermediaries as part of MDR rate is fine. Thing is, RBI to ensure and collect reports from acquirer banks (that hold and manage nodal accounts of payment intermediaries) to post settlements as per pre-agreed settlement cycles, after deducting their fees in the process.
Should these charges be subjected to regulation?
Nobody is an exception, RBI to define upper limits, so that payment intermediaries do not kill “demand” by prioritizing larger profits in short-term.

Surcharging

Are surcharges justified? Are they desirable?
When MDR is ensured to be reasonable and are deducted from the received payment as expected, surcharges are 100% not justifiable. While surcharges might ease life of merchants when former mentioned conditions are not effectively enforced, surcharges are undesirable for growth of digital payment ecosystem.
Should merchants be allowed to levy surcharge on customers?
No, surcharges are not to be allowed in principle.
Should surcharging be regulated? By whom?
RBI and acquirer banks are to ensure surcharges are not collected. At the same time, they both need to create the required awareness in terms of volume game and remove friction points like surcharge in the merchant payment scenarios.

Convenience Fee

Should convenience fee be regulated? By whom?
Be it at a movie theater or a show or for travel requirements like on a bus/train/flight etc…, booking tickets multiple days in advance or just in time can be done online and convenience fee is recommended to be laid in such scenarios, but that has to be ensured as reasonable and either RBI or another competent authority to clearly define the upper limit of convenience fee, that is charged to the customer.
Should such charges be the same irrespective of the number of seats / tickets booked?
Convenience fee, when charged, to be done on per booking basis and need not be on number of seats/tickets booked etc…
Should such charges be based on value of a transaction?
No. Convenience fee may be charged on per booking attempt (that can include any no. of tickets/seats etc…). This should not burden service consumers.

Other Aspects

Should the levy of charges for a digital payment transaction be independent of the value of the transaction?
Ideally Yes but, charging a percentage of transaction value is good for small value transactions and fixed amount approach works for large transactions.
Should the levy of charges for a digital payment transaction be the same irrespective of the number of seats / tickets booked?
YES, it has to be on per booking basis, irrespective of number of seats etc…
Should the levy of charges by merchants be marginal cost-based, meaning that only the additional costs incurred by them for facilitating a digital payment transaction should be recovered from the users?
Cash based payment approach costs merchants anyway as they need to deposit the money in bank account on daily basis or rotate the money through other channels. Digital transactions made that simpler through technology. While recovering some of the digitization costs is acceptable, merchants to prioritize adopting digitization of payment collection over recovery of payment digitization costs in short-term.
Should the charges for digital payment transactions be market determined – based on demand and supply – without any regulatory or sovereign intervention?
Being market driven is the way to go, with upper limits to be defined by RBI.
What more transparency could be brought in for such charges?
Presenting the charges in the receipt in a clear way is good so consumers know the criteria for which they are being charged. If the purpose of the payment is tracked with a code, that will later be helpful during tax enumeration times, to consultants etc for example, who will show some of their expenses for tax deduction. Likewise, it will be clear to the government, about assessing the industries and their growth based on where people’s spending habits, without delving deeper at individual basis.

Summary:

From barter system to early currency that is based on gold, silver, copper etc…, to current paper and then digital, payment methods are changing and while convenience drives a payment method, security keeps that in use, in long-term.

Be it banks or payment companies, it is their time now. They need to invest in extremely mission critical payment infrastructure, like National Payments Grid, that can process a minimum of 2,00,000 transactions per second (TPS) like a breeze and that has to be ready to quadruple successful transactions, at times of spikes. On other hand, this immense growth in India/Bharatavarsha’s digital payments industry requires huge investment, that banks & payment companies will not be ready to do without any incentive.

A special mention to be made about UPI and while it has the potential to become the de-facto payment method, if not the most used one worldwide, in next 5 to 10 years, India/Bharatavarsha to take the lead and Union government of India to play a pivotal role by finding strong use cases, that will enable itself to be a big institutional customer, that will embolden RBI to make supportive policies and banks & payment companies to invest in creating the interoperable payment processing capacity to the world.

Collecting a reasonable MDR from merchants is a tidbit for banks & payment companies and this is the right time for the union government of India to give banks & payment companies a mountain sized perpetually consumable opportunity, in the form of real-time tax collection wherein, banks (with support of payment companies in the value chain) start collecting transaction tax in non-cascading way and pay to the government while the new tax regime disburses the share of different participants (Union government, state governments, local governments, banks & payment companies) on periodic basis. Non-cascading Transaction Tax proposal (https://www.idealnation.net/2019/04/08/non-cascading-transaction-tax/) from IdealNation outlines one such proposal and if this great movement of digital payment revolution is not carved out to right shape at this time, by supporting sustaining business models, many of the same participants might one day compete with others in cutting the golden goose in cold blood, even before India and the world start having a wholesome experience of receiving golden eggs overall.