India’s biggest success in the digital financial space has undoubtedly been the unified payments interface (UPI), which enables peer-to-peer, customer-to-business and business-to-business transactions using nothing more than smartphones and the mobile Internet.
In both October (the big festival sales month this year) and November, when festival expenses started tapering off, UPI transactions topped $100 billion, making it clear that we have a huge winner here. It is, therefore, right that the Reserve Bank of India (RBI) has, along with its bimonthly monetary policy statement announced on Wednesday (a big yawn, anyway), focused on an additional statement on developmental and regulatory policies, the biggest chunk of which was about making UPI even better.
The four digital payments-related initiatives announced include the following: (1) a discussion paper on the feasibility of levying charges for providing digital payments services (currently it is mostly free for the user); (2) making UPI compatible with feature phones; (3) the creation of an “on-device” mini wallet to facilitate UPI transactions without having to put every transaction through the main payments infrastructure; and (4) increasing the upper limit for investments in government bonds and initial public offerings by retail investors from Rs 2 lakh now to Rs 5 lakh.
Barring one move — the effort to make UPI easier on feature phones — the other three initiatives are all in the right direction.
Let’s start with what may not make much sense. The RBI says that of the total mobile phone consumer base of 118 crore, 74 crore are smartphones. This leaves 44 crore feature phone connections with the public. It seems like a large chunk of the potential UPI user base. But with the launch of affordable smartphones by Jio, and more such launches likely from other mobile phone companies once the chip shortage ends, the chances are smartphone penetration will rapidly move towards 90-100 per cent in the next two to three years. Also, politicians may well choose to make smartphones an entitlement in the next general elections, making the smartphone ubiquitous. So, trying to create a bridge between UPI and feature phones may be of limited use. It would be far better for government to encourage switchovers to smartphones, leaving the few without one to deal in cash. The case for yet another jugaad technology to boost UPI in feature phones is not strong. India is in a good place to leapfrog to universal smartphone usage, and the case for an intermediate technology — which may anyway be clunky to use — is weak.
On the other hand, the other three initiatives are important. Post-demonetisation, the government made digital payments free for all, except for some merchant fees recoverable on high-value card usage. This has made the maintenance of the digital infrastructure a cost centre with no immediate prospect of recovering the investments.
Clearly, we have to move towards some form of fee structure in digital payments. The RBI’s data for small value transactions shows that half of them are for values below Rs 200. If we assume that these are the transactions that will move back to cash if forced to pay a small fee, the case for allowing payments operators to charge nominal fees for larger transactions (say, Re 1 for transactions above Rs 500, and 0.01 per cent for values above that) is strong. A barely noticeable fee will not prompt users to switch back to non-digital modes, given the sheer ease of transacting through UPI.
The case for creating an on-device wallet for concluding small value transactions also makes eminent sense, since the pressure on the digital infrastructure is the same whether you pay someone Rs 100 or Rs 100,000 through UPI or credit and debit cards. Best to push small UPI transactions to the device rather than the system.
As for raising the limit for UPI transactions for investment purposes, this needs no special arguments. As comfort with the UPI grows, the user will be fine with transacting larger amounts. What happened with IMPS, NEFT and RTGS transactions, limits can be raised for UPI too.
All in all, India is well on its way to becoming the digital financial superpower.
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