Charging the payments ecosystem – Price regulation of UPI | 7th November 2022 | UPSC Daily Editorial Analysis

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What's the article about?

  • It talks about the recently released Discussion Paper by the RBI on introducing price regulation in the payment system.


  • GS3: Indian Economy; Prelims

What's the crux of the article?

  • Present regime follows the zero merchant discount rate (MDR). Thus at present we do not pay for UPI transactions, due to government subsidies.
  • But market players, including NPCI, are demanding some sort of price regulation of UPI.
  • This paper analyses this issue thoroughly and gives some suggestions.

Arguments in favour of charging for digital transactions:

  • Zero charges lacks commercial compensation to the merchants and service providers.
  • This discourages new players from entering the market.
  • Due lack of viable profit, no fresh investment.
  • Technological innovations, which are necessary to keep security high, do not come.

Arguments against of charging for digital transactions:

  • If the cost of digital transactions is high, consumers opt for cash payments.
  • Goal of financial inclusion may get compromised

What is the merchant discount rate (MDR)?

  • It's basically a fee that a merchant is charged by their issuing bank for accepting payments from their customers via credit and debit cards.

What is UPI?

  • Unified Payments Interface (UPI) is a payment system that allows users to link more than one bank account in a single smartphone app and make fund transfers without having to provide IFSC code or account number.
  • This is a real-time payment system where funds are credited instantly on a real-time basis.
  • It is developed by the National Payment Corporation of India (NPCI).

Why does the RBI want to regulate the pricing of payment systems?

  • To fulfil the goal of financial inclusion by means of considering digital payments as public goods.
  • To prevent incidents of market failure wrt payment systems due to external factors.

Way Forward:

Finding the appropriate balance between a digital payment system's cost to customers, profit to businesses, and transaction security is crucial given the system's growing importance. To achieve this, RBI must take prudent action.

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