The cost incurred by banks for providing such payment services is recovered implicitly through the spread they enjoy between deposit and lending rates, the so-called net interest margin. The handling of physical cash by the government, the RBI and the banking system was an expensive proposition.

The cost-of-conducting-business study by the RBI revealed that servicing a customer at the counter was almost double that of pushing him to an ATM. In fact, pushing customers to go for mobile payments was expected to cost them even less.

This broadly explains how keeping UPI payments free makes ample sense, benefiting banks even without MDR. If people shift to cash due to MDR, banks may end up losing out.

At present, the government subsidises UPI payments to some extent, which is a cost. However, the government and the RBI may have to incur a much higher cost to print and handle currency if MDR on UPI leads to negative fallout.

MDR – a credit card concept MDR arose out of a credit card mechanism developed by VISA and Mastercard in the USA. 5% of the transaction amount, which merchants are expected to pay as a fee.

The price charged by the merchant includes part or all of this additional cost, which the customer pays indirectly. However, customers enjoy credit benefits for some days along with rewards, which is not the case with UPI payments.

As UPI is a pure fund transfer from one account to the other in real time, it cannot be equated with such an MDR concept. The government assumes that customers will not be affected by MDR on UPI as merchants will absorb the same.

It will be almost impossible to impose the same. As a result, MDR on UPI will have a negative fallout, with the possibility of killing the goose that lays the golden eggs.

A possible way out A basic issue is how FinTechs get their revenue from digital payments when UPI is free. These players providing APIs and QRs earn revenue from merchants for these services.

The data captured is also used for business intelligence serving commercial interests. If this is not enough, then the government and the RBI should have a scheme to compensate them.

However, it should be in a graded manner to keep the monopolistic tendency of one or two players cornering most of the transactions through their services under check. UPI is the most important component of digital payments as a public good.

The government maintains its stronghold on the economy as the ultimate controller of currency and the financial system through regulatory bodies. Banks operate under regulatory provisions, including obligations on currency circulation.

As such, banks derive maximum benefit through the money multiplier economics. Any possibility of more cash supply due to MDR will be suboptimal.

Hence, keeping UPI free makes ample sense. As suggested above, there should be other ways of compensating non-banks as part of digital payments while keeping monopolistic tendencies under check.

India’s story on UPI should not be harmed through an ill-advised policy stance.

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