As RuPay on UPI faces some roadblocks, NPCI explores corrective options
- November 17, 2023
- Posted by: OptimizeIAS Team
- Category: DPN Topics
As RuPay on UPI faces some roadblocks, NPCI explores corrective options
Section: Monetary policy
The National Payments Corporation of India (NPCI) is working on strategies to promote payments through RuPay credit cards linked to UPI (Unified Payments Interface). This initiative aims to boost the acceptance of RuPay credit cards on the UPI platform.
However, there have been challenges due to the difficulty in distinguishing between card-on-UPI transactions and regular UPI transactions made via QR codes.
Here are some key points related to this development:
- The government introduced UPI payments via RuPay credit cards to enhance acceptance infrastructure for such cards. This move was aimed at increasing the use of RuPay credit cards, but it faced challenges in terms of merchant acceptance.
- Merchants and banks find it challenging to differentiate between card-on-UPI transactions and regular UPI transactions. Merchants are accustomed to a zero Merchant Discount Rate (MDR) for UPI transactions, but when a credit card is used, they receive less money.
- MDR Concerns:
- UPI transactions are generally free, but when made via linked credit cards, they attract the same interchange and MDR as any other credit card transaction. Some believe that the effective MDR on card UPI transactions is higher than card point-of-sale (POS) transactions.
- Classification Mechanism:
- NPCI has implemented a mechanism that, once integrated by payment gateways and intermediaries, enables merchants and banks to identify and classify the two types of transactions (card-on-UPI and regular UPI). This allows for a proper assessment of charges.
- Incentive Model:
- To encourage increased adoption and address the higher charges on RuPay UPI transactions, NPCI is exploring a fee income-based incentive model. Payment gateways may compensate merchants for the higher charges compared to the zero charge on regular UPI transactions.
About Merchant Discount Rate
MDR stands for “Merchant Discount Rate.” It is a fee charged from a merchant by a bank for accepting payments from customers through credit and debit cards.
MDR is a crucial component of the payment processing ecosystem and is typically borne by the merchant. The rate is a percentage of the transaction amount, and it is deducted by the acquiring bank before transferring the funds to the merchant.
- Customer Makes a Card Payment:
- When a customer makes a payment using a credit or debit card at a merchant’s point of sale (POS) terminal or through an online platform, the transaction involves various parties, including the cardholder, the merchant, and the banks.
- Processing the Transaction:
- The payment information is processed through the payment network, and the transaction is authorized by the cardholder’s bank (issuing bank).
- Transfer of Funds:
- After authorization, the funds are transferred from the cardholder’s account to the merchant’s account. However, before reaching the merchant, the acquiring bank deducts the MDR.
- MDR Deduction:
- The MDR is a small percentage of the transaction amount, and it serves as compensation for the services provided by the banks and payment service providers in facilitating electronic transactions. The acquiring bank, which provides the merchant with the necessary infrastructure to accept card payments, collects the MDR.
- Distribution of Funds:
- The remaining amount after deducting the MDR is credited to the merchant’s account. The MDR covers various costs, including interchange fees (paid to the card-issuing bank), network fees, and operational costs associated with maintaining the payment infrastructure.
Unified Payments Interface (UPI):
Unified Payments Interface (UPI) is an instant real-time payment system that enables users to transfer money on a real-time basis across multiple bank accounts without disclosing their bank details to the recipient.
It is one of the major systems operated by the National Payments Corporation of India (NPCI) and is widely used for digital transactions.
- Real-Time Transactions: UPI facilitates immediate fund transfers between individuals and businesses, providing a seamless and quick payment experience.
- NPCI Systems: UPI is a part of the NPCI-operated systems, which include National Automated Clearing House (NACH), Immediate Payment Service (IMPS), Aadhaar-enabled Payment System (AePS), Bharat Bill Payment System (BBPS), RuPay, and others.
- Prominent UPI Apps: Leading UPI apps include PhonePe, Paytm, Google Pay, Amazon Pay, and BHIM. BHIM is the government’s offering in the UPI ecosystem.
BHIM (Bharat Interface for Money):
BHIM (Bharat Interface for Money) is a digital payment application developed by the National Payments Corporation of India (NPCI).
It operates through the UPI system, consolidating multiple bank accounts into a single mobile application for real-time fund transfers.
- Real-Time Fund Transfer: BHIM allows users to conduct real-time fund transfers between bank accounts.
- Launch Date: The app was launched in December 2016, contributing to the government’s push for digital payments.
- Authentication Levels:
- Device Binding: The app is linked to a device’s ID and mobile number.
- Bank Account Sync: Users need to sync their bank accounts (both UPI and non-UPI enabled) to initiate transactions.
- PIN Authentication: Users set up a PIN for app login, and a UPI PIN associated with their bank account is required to complete transactions.
- Formation: The National Payments Corporation of India (NPCI) was incorporated in 2008 as a “Not for Profit” company under the Companies Act 1956 (now Section 8 of the Companies Act 2013).
- Initiative:NPCI is an initiative of the RBI and IBA, established under the provisions of the Payment and Settlement Systems Act, 2007. It aims to create infrastructure for the entire banking system in India, covering both physical and electronic payment and settlement systems.
Key functions and initiatives of NPCI include:
- Unified Payments Interface (UPI): NPCI developed and manages the UPI, which is a real-time payments system that enables users to link multiple bank accounts to a single mobile application. It facilitates the seamless routing of funds across various bank accounts.
- Immediate Payment Service (IMPS): NPCI launched IMPS, a real-time interbank electronic funds transfer system in India. It allows customers to transfer funds instantly between banks through mobile phones or internet banking.
- National Financial Switch (NFS): NFS is a centralized network that connects various banks and financial institutions for routing ATM transactions. NPCI operates and manages the NFS to ensure secure and efficient ATM transactions.
- RuPay Card: NPCI introduced RuPay, a domestic card payment network in India. RuPay cards are an alternative to international card schemes and are widely used for various transactions.
- BHIM (Bharat Interface for Money): NPCI developed the BHIM app, a UPI-based mobile payment application that allows users to send and receive money using their smartphones.
- Aadhaar Enabled Payment System (AePS): NPCI launched AePS, which allows users to make financial transactions at micro-ATMs using their Aadhaar number and fingerprint authentication.
- National Automated Clearing House (NACH): NPCI manages the NACH platform, which facilitates electronic clearing of payments for various financial transactions, including salaries, pensions, and dividends.
About National Common Mobility Card (NCMC)
The National Common Mobility Card (NCMC) is an inter-operable transport card system introduced in India, often referred to as ‘One Nation One Card.’
- Inter-Operability: The NCMC is designed to be an inter-operable transport card, allowing users to pay for various modes of transportation seamlessly. It covers services such as buses, metro, suburban railways, toll taxes, and parking charges.
- Multi-Purpose Usage: Apart from transportation services, the NCMC can also be used for retail shopping and cash withdrawals. It aims to serve as a versatile card for different financial transactions.
- Automatic Fare Collection System: NCMC operates as an automatic fare collection system, eliminating the need for separate cards for different modes of transport. It streamlines the payment process for commuters.
- RuPay Card Integration: The card runs on the RuPay payment network, which is a domestic card scheme in India. RuPay ensures that the card is accepted widely across various payment channels.
- Stored Value: The card holds a stored value that supports offline transactions, providing flexibility to users. It reduces dependency on continuous network connectivity for transaction processing.
Nandan Nilekani Committee: The idea of the NCMC was recommended by the Nandan Nilekani committee, which was set up by the Reserve Bank of India. The committee focused on enhancing digital payment systems and reducing the reliance on cash.
Digital Personal Data Protection Act 2023 (DPDP)
- Legislation Overview:
- DPDP is India’s flagship personal data protection legislation.
- Comparable to the impact of GDPR in 2016, DPDP is expected to significantly influence data protection practices in India.
- Corporate Evaluation:
- Corporates with EU headquarters and subsidiaries in India must assess compliance with DPDP.
- Data Categories:
- DPDP lacks a distinct category for sensitive personal data, treating all data with the same security measures.
- Unlike GDPR and SPDI Rules, DPDP doesn’t distinguish between personal and sensitive personal data.
- Processor’s Role and Penalties:
- DPDP holds only the data fiduciary liable to the regulator.
- Data processors’ liability is governed by contractual agreements, placing a higher burden on data fiduciaries.
- Data Transfer:
- Cross-border data transfer under DPDP is generally permitted, with restrictions on transfers to specific countries or sectors.
- Evaluation of sectoral laws impacting business is necessary for data transfer compliance.
- Child Data:
- DPDP defines a child as an individual below 18 years, imposing stringent compliance.
- Prohibits behavioral monitoring/targeted advertising for child data and mandates verifiable parental consent.
- GDPR prescribes penalty slabs based on breach nature.
- DPDP sets maximum penalty amounts, subject to factors like breach severity and mitigative actions.
- Implications for Businesses:
- DPDP, when implemented, will bring substantial changes to privacy practices in Indian businesses.
- Entities GDPR-compliant need to adapt policies, processes, and systems for DPDP compliance.
- The differences between GDPR and DPDP necessitate a thorough evaluation of policies and practices for entities operating in India.