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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.
Relevance:
- 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.
