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23 August 2024 at 9:59:04 pm

Hidden Economics

The reassuring part of the new Unified Payments Interface (UPI) framework is that customers will apparently not be charged for using UPI. The more interesting part is who, then, pays for keeping one of the world’s most widely used digital-payment systems running. From October 15, a Merchant Discount Rate (MDR) of 0.4 percent will apply to specified person-to-merchant transactions above Rs. 2,000, with a ceiling of Rs. 300 on transactions of Rs. 75,000 or more. Person-to-person payments remain...

Hidden Economics

The reassuring part of the new Unified Payments Interface (UPI) framework is that customers will apparently not be charged for using UPI. The more interesting part is who, then, pays for keeping one of the world’s most widely used digital-payment systems running. From October 15, a Merchant Discount Rate (MDR) of 0.4 percent will apply to specified person-to-merchant transactions above Rs. 2,000, with a ceiling of Rs. 300 on transactions of Rs. 75,000 or more. Person-to-person payments remain free irrespective of the amount, while merchant payments up to Rs. 2,000 remain free. Small merchants receiving up to Rs. 1 lakh a month through UPI QR codes will also continue to enjoy zero MDR. The government says roughly 96 percent of merchant transactions will remain unaffected. So, technically, the customer is exempt. MDR is not a tax collected by the government or NPCI. It is a charge within the payments ecosystem, to be shared among banks, payment-service providers and UPI application providers. But that does not make the economics irrelevant to customers. A merchant who previously accepted a large UPI payment at no direct payment cost will now have to absorb a fee. The government has advised banks to ensure that merchants do not pass the MDR on to customers. The economic reality is less tidy. Businesses ultimately recover costs through their overall pricing. Whether the new charge appears as a visible surcharge, a change in discounts or simply becomes part of the cost of doing business will depend on the merchant and the market. That is why the real beneficiaries of the new framework are not necessarily the customers alone. Payment companies, banks and other participants in the UPI ecosystem acquire a new revenue stream from transactions that were previously free. Paytm, for instance, has said the new MDR will generate additional revenue from merchant transactions that earlier carried no such charge. The money is therefore being redistributed within the payments ecosystem. Small businesses are deliberately insulated, an important distinction in an economy where street vendors and neighbourhood shops have adopted QR payments because they are cheap and frictionless. There is also a larger question. UPI became ubiquitous partly because its basic proposition was brutally simple: instant payments without a visible charge. Introducing MDR for a slice of transactions changes that economic model. The government’s argument is that UPI needs a sustainable financial architecture as its scale grows. But sustainability should not be confused with costlessness. Someone has to finance the infrastructure, security and technology behind a system processing billions of transactions. For now, the customer remains protected. The real test will be whether merchants absorb the cost without quietly transferring it through prices and whether the revenue flowing to banks and fintech companies translates into a stronger, more resilient UPI ecosystem rather than simply a new source of income for its intermediaries.

Lateral upgrade to ailing annihilation

Writer: Mangesh Kulkarni
Mangesh Kulkarni
Sep 9, 2024
3 min read

Updated: Oct 21, 2024

Lateral upgrade to ailing annihilation

Being the first person from the private sector to be appointed as chairperson of Securities and Exchange Board of India (SEBI) as part of the government’s lateral initiative, Madhabi Puri Buch also holds the honour of being the first woman to hold the top post as capital market regulator.

But the laurels that the former private sector banker enjoyed in her earlier stint with ICICI Bank, was marred with allegations that she and her husband were having a stake in offshore entities, which were used to artificially inflate shares of Adani group companies.

Terming the allegation as `character assassination, Buch clarified that all disclosures have already been furnished and the fund in question did not invest in any securities involving the Adani group.

When it rains, it pours. This allegation was subsequently followed by Congress Party allegation that Buch had received salary and post-retirement benefits from ICICI Bank after she quit the private sector bank.

In its clarification to the stock exchanges, ICICI Bank asserted that the payments made to Buch were purely retirement benefits after her exit from the bank and they were neither salary nor employee stock options.

Prior to these allegations, Buch tenure at SEBI was all about bringing in quick reforms on operational issues by changing the format of consultation paper to bring in larger responses digitally. Being data savvy, the rationale of her decisions were democratic based on big data analysis derived from the responses received to the consultation papers.

Further she bifurcated the duties of the SEBI staff between operations and enforcement, which were done by the same persons earlier. Having worked for the private sector in the capital market domain space, Buch had a better understanding of the subject compared to officers from the administrative service in the past that reflected even in her orders as a whole-time director at SEBI before becoming the chairperson. As a whole time director at SEBI, her orders on adjudication issues were more directional to the capital market space, according to experts in the compliance space. She was also quick to revamp the old provisions of the 90s at SEBI.

Being tech and data savvy, Buch enhanced regulatory surveillance and detection of market manipulation, insider trading and fraud while also emphasizing on strengthening corporate governance by introducing stricter rules for independent directors and enhancing disclosures for related-party transactions.

To put in perspective, the annual report of the capital market regulator in the just concluded financial year revealed that the number of investigations related to insider trading jumped to 175 in 2023-24 from 85 in the preceding year while probes related to front running jumped over three times to 83 from 24 in the preceding year.

Transparency in mutual funds by implementing measures to protect retail investors along with tightening norms for initial public offers, particularly in the SME platforms were some of her other positive initiatives including confirmation of denial of any market rumours within 24 hours for the top 100 listed companies which will be extended to top 250 companies from December 1. However increased transparency and compliance with tightening regulations led to increased operational costs for the market participants and hence faced resistance from certain quarters. Born in 1966, Buch completed her primary education in Mumbai and graduated with specialization in Mathematics from Delhi and later obtained a management degree from Indian Institute of Management, Ahmedabad. In between, she got engaged to Dhawal Buch, a director at a consumer goods multinational at the age of eighteen and got married at the age of 21.

Besides ICICI Bank, Buch also worked as a lecturer at a college in England, worked at Greater Pacific Capital in Singapore and ICICI Securities as its CEO. She also worked as executive director on several private sector companies and as a consultant for New Development Bank (Brics Bank).

What now remains to be seen, is whether Buch, who survived the 26/11 terror attack when she along with her husband, was attending a meeting at Taj, be able to overcome the current ordeal. Keeping fingers crossed for the times to come.

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