India accounts for 46% of digital payments in the world, and UPI accounts for 80% of digital transactions that take place in India. In fact, Digital Payment Dashboard has been integrated with Integrated with 118 public sector, private sector, payments, and regional rural and foreign banks. Banks and RBI have done a yeoman’s task in encouraging digital payments by citizens and UPI has been lauded across the globe.
Introduction of RTGS, NEFT, enhancing the limits of IMPS and ensuring that all of these become 24X7 services has transformed the way digital transactions are taking place. Equally important is that footfall in the bank’s branches came down considerably due to the impact of ATMs and digital payments. The result has been that among the 26 Public Sector Banks (PSBs) of the country, 90 branches during FY 2014-15, 126 branches in 2015-16, 253 branches in 2016-17, 2,083 branches in 2017-18 and 875 branches during 2018-19 either closed or merged (without taking into account mega bank mergers announced in August 2019). Till now 3400 bank branches have been closed.
However, the banks have been consistently asking for monetary support from the government, with claims of having to bear higher cost due to maintaining UPI ecosystems along with the absorption of Merchant Discount Rate (MDR) costs and bearing operational and Payment Service Providers (PSP) costs. Maintaining UPI ecosystems includes maintaining sophisticated digital ecosystems, ensuring timely online transactions, and managing digitally secured vaults.
It is really surprising that the banks are accounting for the expenses incurred for maintaining net banking and UPI payments – including payments by credit and debit cards without taking into account the savings that digital payments bring. Savings from digital payments accrue due to the reduced need for printing currency, distribution of currency, security to be provided at the bank branches, drop in footfall in the physical brick and mortar branches, reduction in staff required and in the need for efficient tracking mechanisms for transactions done physically. All these factors are leading to huge savings for the banks from the cost aspect. These savings can help the banks provide support for maintaining UPI and other digital payment mechanisms.
Besides, digital payments are creating footprints for easy evaluation of borrower’s creditworthiness and the inclusion of more and more populace in the formal banking sector. Thus, the credit system is becoming more robust for lending purposes. Non-banking institutions and FinTech have also moved fast in digital mode of operations. E-commerce is creating a business of nearly Rs 100 crore for banks.
All these savings are a huge advantage for the banks and enable them to provide more inclusive services. There is a digital footprint of every digital transaction, convenience, speed, security and most importantly reduction in costs of handling payments for banks.
Some banks have already started levying a service charge on digital payments and others are thinking of doing the same, which is a regressive step. The cash floating in the market has gone up by one percent of GDP. In absolute numbers, it has increased from Rs15 lakh crore during demonetization in November 2016 to nearly Rs36 lakh crore in March 2024, as per a report in economictimes.com.
RBI is making an attempt to bring down the cash floating in the market by bringing in the Central Bank Digital Currency (CBDC) for transactions between the RBI and financial institutions such as banks, NBFCs etc. The CBDC will not work for retail customers. This is because CBDC will become cumbersome in retail transactions because it forces round off of figures till the last digit. To illustrate, if one has to pay Rs176.53, then in CBDC one gets a ?100, then ?50, then ?20, then ?6 but there are no 50 or 3 paisa. Whereas in digital payments, the money can be transferred to the last digit.
Further, Indian customers are price sensitive. A levy of say, 1.1% for every Rs1,000 spent via digital payments would mean that the user has to pay Rs 1 for every Rs 1000 spent digitally. This will be a big disincentive for digital payments and a lure to shift back to cash payments.
RBI is also saving by printing less currency and thereby reducing costs of printing, storage, and transportation of physical cash. It is therefore necessary that the cost of digital transactions in terms of maintaining the payment systems must be borne by RBI and the banks with no additional charges to be levied on the user of the digital payment system. There is already a shift towards cash transactions because of high GST on many goods. If the fees are imposed, users will again shift from digital to cash payment to avoid these extra fees. The maximum number of UPI users deal in small amounts and are sensitive to charges, if imposed. It will be a step backwards. The levying of fees will work as a dis-incentive for the digital payments ecosystem which has shown a path to the world of financial inclusiveness and technology penetration in payment tools.
(The article is written by Aruna Sharma, Practitioner Development Economist and former Secretary, Government of India.)
