UPI Payments is good business. But how?
A couple of weeks backI wrote about my attemptat uncovering the economics of a UPI transaction. I received quite a few responses from people on the internet. Many wrote in to tell me that I was wrong about the rates. Some pointed out what I could be wrong about, others left it for me to go figure. The whole exercise unfortunately didn’t really provide many answers and instead left me with more questions.
About my motives
I’d like to point out that this exercise of finding out the charges isn’t an attempt to malign the people associated with UPI, the NPCI or any other stakeholders. Honestly, there’s already enough antagonism out there and I certainly don’t wish to add to the noise. I’m using this medium to mostly ramble about things I’ve been thinking about and work things out for myself. With that disclaimer out of the way, let’s move on.
Confusion with interchange rates for P2M transactions
To recap, interchange is a small fee paid by a merchant’s bank (acquirer) to the UPI user’s bank (issuer) to compensate the issuer for the value and benefits that merchants receive when they accept electronic payments. In the case of card payments, interchange rates are usually set by Govt bodies or by card networks like MasterCard or Visa.
The interchange rates for UPI transactions are set by the NPCI, and as I wrote in the previous article, referring to the last publicly available circular, the interchange rates were set to 0.1% (of the transaction value) for transactions less than Rs. 2000 and 0.4% for those above Rs. 2000, to be paid to the issuer by the acquirer in 2017.
However, the NPCI recently mandated that the MDRs (the fee charged by acquirer banks to the merchants) be changed to 0.30%with a maximum cap of Rs. 100 per transaction. This obviously throws the economics of the transactions in a disarray because the acquirer, for a transaction over Rs. 2000 would be paying the issuer 0.4% and making only 0.3% from the MDRs (discounting the fees paid to NPCI and PSP).
Some of the readers wrote in to me privately to tell me that the interchange rates have been revised to 0.2%, others said it has been brought down to 0.15%. I’m guessing that the number should be somewhere in that range. I’m having to guess because the circular that notes the MDR changes doesn’t make any mention of the interchange rates.
Going through this exercise has opened me up to more questions. To start with, why doesn’t the NPCI have a systematic schedule to re-look at rates? I can only imagine the angst faced by payment companies, having to deal with the constant disruption due to revision of the rates. These often unplanned changes adds a layer of unexpectedness to the business models of different players stakeholders. Instead of making ad-hoc changes, it’d serve the NPCI well to stick to a schedule to revise the rates.
Some of the readers pointed out that NPCI is not obligated to put out the changes in the rates in public domain. While this might be technically true, by putting out partial information paves the way for unnecessary speculation and confusion among the general public.
Why should we care?
All this reflection throws up an important question about why should we even care about these rates. The UPI could very well be a black box that somehow just works, and why should we as users bother about the internal economics?
The actions of most businesses ultimately tie down to the business models they employ, and changes in the rates incentives actions that add to the top-line revenues (sometimes bottom-line revenues) and dis-incentivizes actions that don’t.
Take the interchange rates, for example. A very low interchange rate would dis-incentivize an issuer bank to offer UPI facility to its customers. This is especially true for banks that already have a large number of card carrying customers. A lower interchange fee also implies lesser money to cover fraud, and consequently issuer banks come up with deterrents like placing limits of sizes of transactions. A lower interchange fee would also make it harder for the issuer banks to offer recurring payment mandates on the UPI network.
A very high interchange rate, on the other hand, would make it very expensive for the acquirer banks to handle transactions, and would consequently pass this charge to the merchants either as MDR or in some other fashion. The merchants would in-turn pass this charge on to the customers either by increasing the rates of all the products or by charging the users using electronic payments specifically. If the MDRs are also capped, as in the case of UPI, the acquiring bank may purposefully reward merchants to use a payment method, like cards, that may offer it better MDR — interchange differential.
There’s no free lunch after all
By arbitrarily changing the fees we can — at least in theory — decrease the transaction costs, but we won’t be able to takeaway the realities of costs incurred by different stakeholders. It certainly costs money to run data centers, pay salaries to developers and set up large scale merchant distribution networks.
Banks and other stakeholders will eventually start working out ways to extract monies. Some banks have already begun charging fees from users for p2p transactions, and over time the other stakeholders, like PSPs will resort to new ways to charge the users eventually — and not all of these will be straightforward and in the best interests of the users.