Welcome to the 54th edition of The Pattern, a weekly newsletter where we dissect and analyse the latest from finance, economy, and technology. Let’s get started!

The week started off on a slightly tumultuous note for UPI loyalists when news broke that transactions over INR 2,000 would attract a 1.1% fee. Considering that UPI is a ‘digital public good’ it wouldn’t be a stretch to say that news of a fee 

(even just for merchants) felt a bit like a betrayal.

However, we needn’t have worried. The NPCI soon released a clarification stating that the fee - as mentioned above - is only applicable for merchant transactions made through prepaid payment instruments, and end consumers needn't bear any charges. 

As those of us who rely on UPI to pay for everything from chewing gum to TV sets heaved a sigh of relief, the episode got me thinking about two things. 

For starters, just how quickly misinformation spreads - verified Twitter handles and well-known public personalities were quick to speculate what this fee would mean for P2P UPI payments and WhatsApp forwards made rounds quickly.

Does this point to a larger problem of inaccessible financial jargon? Do financial institutions need to simplify their language in order to reach out to larger numbers (and prevent rumour-mongering such as in this case)? Or is it simply a case of miscreants spreading fake news to cause alarm?

Either way, it’s worth looking into. Because the impact of fake news goes beyond just temporary panic. It has real economic consequences. According to a  study  conducted by  cybersecurity company CHEQ and the University of Baltimore, the fake news epidemic costs the global economy a stunning USD 78 billion annually.

Secondly, I began considering the question of whether a fee - if it were to be charged across  all  UPI transactions - would be justified.

To answer that, let’s first take a quick look at how UPI companies like GooglePay and PhonePe make money. For starters, they charge a nominal fee to stores that offer UPI scanners on their PoS machines. They also offer quick loans on their platforms and charge up to 3.5% up front of the loan value. In addition, UPI apps tie-up with daily utility companies and charge a commission on services such as bill payments and mobile recharges.

Despite these money-making avenues (which are largely incidental and not from the core business), UPI apps have struggled to become profitable. One could chalk this up in part to the scrapping of MDR in 2020, and also to their high cash burn on activities such as marketing and customer acquisition. 

Costs of infrastructure upgrades aren’t being covered, and this could be blamed for high transaction failure and payment rejection rates.

Clearly then, the idea of a nominal charge on every transaction may not be that unreasonable.

However, charging a fee on UPI payments could threaten the very idea of a digital public good. As part of a  series of tweets last year,  the Finance Ministry stated: "UPI is a digital public good with immense convenience for the public & productivity gains for the economy. There is no consideration in Govt to levy any charges for UPI services. The concerns of the service providers for cost recovery have to be met through other means." 

Now the question of whether these concerns of cost recovery are being met depends on who you ask. 

But here's what I think - the 1.1% merchant fee may go some way in easing UPI's profitability woes - but the amount that goes to each player in the ecosystem might end up being too little considering interchange splitting and number of players in each UPI transaction. And, it could also result in small merchants opting out of UPI altogether.

For now then it looks like UPI remains stuck between a rock and a hard place - and we'll just have to wait and see how the dice rolls.

Between the digits:

• INR 3400 cr: The amount Paytm spent on customer acquisition in FY 2019

• 2348: The number of transactions UPI enabled  per second  in 2022

• INR 3400 cr: The amount Paytm spent on customer acquisition in FY 2019

• USD 613 bn: India’s external debt as of December 2022

Reading recommendations:

• Explained: NPCI’s Interchange Fee For PPI-Based UPI Transactions

• UPI123Pay: The leg-up for India’s FinTechs

  
  

• Golden rules for regulating Digital Public Goods

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues.

Cheers, 

Mayank

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.