Mastercard CFO expresses concerns over UPI impact on payment ecosystem

The Universal Payments Interface (UPI), which has rapidly gained popularity and facilitates over 10 billion monthly transactions in India, is facing scrutiny from major international players in the payment ecosystem. On Wednesday, Mastercard's chief financial officer Sachin Mehra voiced concerns about the challenges faced by ecosystem participants while praising UPI for its role in digitisation.

Mehra referred to UPI as "fantastic at many levels" but underscored its limitations, stating that it remains an "incredibly painful experience" for those involved in the ecosystem. This observation highlights the ongoing tensions surrounding UPI, which operates as a mobile payments rail in a nation with relatively low credit card penetration.

One of the primary concerns Mehra raised during a UBS conference presentation was UPI's commercial sustainability. Unlike card giants such as Mastercard and Visa, which charge merchants fees for consumer transactions, UPI, established seven years ago by a consortium of banks and supervised by National Payments Corporation of India (NPCI), a special unit of the Reserve Bank of India, largely operates without charging merchants, reducing transaction costs for businesses.

The reduced cost of UPI transactions, combined with strong support from the Indian government and regulatory bodies, has driven a significant surge in the adoption of mobile digital payments in India, the world's most populous country. This has also led to tangible benefits for various stakeholders.

"Banks have benefited from a sharp decline in expensive ATM transactions, with transactions per capita falling from approximately 7 to 5 in the last four years," noted a recent report by AllianceBernstein. The report adds that these cost savings account for approximately 20 basis points (bps) of the current UPI person-to-merchant (P2M) transactions.

Banks are also expected to benefit from a potential decline in the cash-to-deposits ratio and new lending opportunities associated with the increasing use of cashless payments.

Additionally, the government has enjoyed several advantages, including lower currency printing costs, reduced from approximately five bps of private consumption to around 2.8 bps. The cost savings from this decline contribute around 12 bps of the current UPI P2M transactions. The government has also improved tax collection efficiency owing to the rise in digital payments. Consumers and merchants potentially earn greater interest income as physical currency holdings decrease.

That said, the path forward appears to be challenging for Mastercard and Visa, which view India as a crucial overseas market with the Centre actively promoting the domestic Rupay card network, which is gaining traction thanks to features such as credit linkage with UPI.

"The MDR (merchant discount rate) on RuPay debit card transactions is zero, and not surprisingly, 100 per cent of the volume growth in the last five years and approximately 50 per cent of value growth has been led by RuPay cards," said analysts at AllianceBernstein. Transactions through debit cards linked to other networks have declined by approximately 40 per cent over the last five years.

Meanwhile, the government is planning a comprehensive survey to gain insights into the popularity and use of digital payments, including UPI. The survey will gather information about the average transaction size, geographic adoption, and user perceptions of safety when making payments through UPI, as reported by the Economic Times.

Despite the concerns expressed by the Mastercard CFO and the rise of domestic competitors like Rupay, UPI continues to reach new milestones. In September, UPI transactions crossed the 10-billion mark for the second consecutive month, making it the most favoured payment method in India.

In the 2022-23 fiscal, UPI accounted for a staggering 73 per cent of the total volume of 114 billion digital payments, reflecting its dominant position in the country's payment landscape. The future of UPI and its impact on the ecosystem remain topics of keen interest and debate for both stakeholders and observers in the Indian payment space.