Clearing ambiguities

The Reserve Bank of India's proposal to issue a discussion paper on various aspects of digital payment charges is a welcome move that can sort out the debate around charging of costs from merchants and consumers by the banks. Ever since the government announced the zero Merchant Discount Rate (MDR) in January last year, different stakeholders involved in the digital payment system have been split on the matter. Merchant Discount Rate is the charge paid by the merchants while accepting digital payments. Banks argue that since they have to incur costs to facilitate digital payments, they need to recover these costs from customers or merchants. This is contested by the government, experts and some digital payment interfaces. Their argument is that charges may act as a deterrent against the push towards digital transactions. MDR regime stands contrary to the notions of affordability of the digital payment systems for the consumers. Following the zero MDR regime, Central Board of Direct Taxes had also issued a notification against the bankers demanding that apart from the banning of charges imposed on UPI transactions, there also has to be a refund of charges collected since January 2020. In doing so, CBDT had particularly cited section 10A of Payment and Settlement Systems Act 2007. The Act disallows imposition of charges on digital payments through electronic modes. Debate around MDR is not new; it has prevailed since its inception. The moot challenge has been to strike the right balance between ensuring affordability for digital payment users and revenue needs of the bankers who facilitate these transactions. RBI's proposal of issuing a discussion paper this month may prove to be an answer to these tangled questions. The discussion paper seeks to invite feedback from various stakeholders on the aspects of charging, and regarding the creation of an affordable payment system through a stable and remunerative process. The major underlying thrust, however, is to increase the user base of digital payments, which is undoubtedly important. Arguments against the imposition of charges emphasize on exploring different alternative options by the banks to earn revenues. The discussion paper should likely focus on this aspect as it lies in the root of the contention. It would be prudent to devise a stable alternative model of revenue generation before pushing for reformative measures. The extent and nature of cost borne by the banks will also have to be assessed to chalk out a balanced plan. The Reserve Bank has taken several other measures as well in this direction. As announced after the recent Monetary Policy Committee (MPC) meeting, the Central bank is also set to roll out its digital payment system for feature phone users. This idea may appear quaint but holds immense potential. As per Telecom Regulatory Authority of India, there are 118 crore mobile phone users in India. A significant proportion of this population uses feature phones. This unexplored area presents a huge opportunity of ensuring deeper digital penetration in Indian society. Use of feature phones for digital transactions offers another advantage. It allows users to transact with negligible data security concerns. The seemingly simple solution certainly comes out with far-reaching positive consequences. It remains to be seen how things pan out once the payment system is introduced. Then again, we have the government's ambitious Central Bank Digital Currencies (CBDCs). These currencies offer a digital version of cash. Whether or not they are substitutes for private digital currencies, they will certainly offer a traceable payment system. To sum up, India's advancement towards digital mode of payments has been encouraging. Ensuring that this path remains unhindered will earn dividends in the future. But clearing the hindrance is distinct from neglecting the hindrance. It is hoped that the RBI's discussion paper will shed appropriate light on the matter and help in addressing the concerns of both sides of the arguments. Meanwhile, the Central bank's move towards using feature phones as a mode of UPI payments is loaded with potential. All the efforts could yield desired results in a cumulative fashion.