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Subject: Digital Payments,Digital Infrastructure

  • We innovated with UPI. Why not with merchant fee?

    Why in the News

    Unified Payments Interface (UPI) payments are moving from no merchant charge to a card-style merchant discount rate (MDR) of 0.40 per cent with a maximum of Rs 300. Welcomed as making UPI self-sustaining, the fee still raises whether a rail built as an alternative to card networks should copy their percentage-of-value pricing.

    What is UPI, and how does it differ from a card payment?

    1. What it is: UPI moves money directly from one bank account to another, across any bank or app, at population scale. India built it as a home-grown rail to cut dependence on international card schemes.
    2. Credit transfer (push): The payer starts the payment from their own account. Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT) and Immediate Payment Service (IMPS) work alike.
    3. Card payment (pull): The merchant starts a card payment, and the customer’s account or credit line is debited once approved.
    4. Merchant discount rate (MDR): The fee a merchant pays on each payment it receives, the way card networks price their service.
    5. The takeaway: As a push system, UPI resembles NEFT more than a card network, so card-style pricing is contested.

    How has India priced its other credit-transfer rails?

    1. Slab pricing, not percentages: NEFT and RTGS have charged fixed slab fees with maximum caps, not a percentage of the amount sent.
    2. NEFT example: NEFT historically charged at most Rs 5 for transfers up to Rs 1 lakh.
    3. IMPS rule: In 2016 the government directed public-sector banks that IMPS charges above Rs 1,000 must not exceed NEFT charges.
    4. Real-time precedent: The National Payments Corporation of India (NPCI), which runs UPI, priced its real-time IMPS system in simple, low slabs. A percentage MDR breaks that tradition.

    What does it actually cost to run UPI?

    1. NPCI’s cost per transaction: An Indian Institute of Management (IIM) Bangalore analysis puts NPCI’s 2024-25 cost at about 9.8 paise per transaction.
    2. Operating cost alone: Without marketing, the cost is around 5 paise per transaction.
    3. Wider ecosystem costs: Banks, merchant acquirers (firms that sign up merchants), fraud management, security and customer support add costs beyond NPCI’s own.
    4. Low cost at scale: NPCI keeps its cost to a few paise by running very high volumes frugally, a lesson for the wider ecosystem.

    Should UPI adopt card-style pricing?

    1. Sustainability within purpose: Banks and technology firms must earn enough to keep running, and profit is not the problem. That need should not override UPI’s public purpose.
    2. Participation, not revenue: UPI and India’s Digital Public Infrastructure (DPI) were built to widen economic participation, not to maximise revenue. Eg. A small merchant accepting Rs 50, or a migrant sending money instantly.
    3. Pricing as the next innovation: UPI’s next innovation should be how the rail is priced, not only how it moves money, because efficiency must serve well-being.

    Challenges

    1. Small merchant burden: A percentage fee weighs most on small merchants with thin margins, who may steer customers back to cash.
    2. Fee rises with value, cost does not: A percentage MDR grows with payment size, but processing cost per transaction stays flat.
    3. Unclear cost base: No published benchmark shows what revenue banks and acquirers need.

    Way Forward

    1. Slab-based charge: The government and NPCI should price UPI in flat rupee slabs with a low cap, matching NEFT and IMPS practice.
    2. Annual cost study: NPCI should publish a yearly cost-of-service study so any fee is tied to measured cost.
    3. Small-payment exemption: The government should exempt small-value payments so participation does not fall.

    Conclusion

    The UPI fee debate is about whether a public payment rail is priced as infrastructure or as a card network. The final design, percentage or slab, will decide whether small merchants stay digital.

    Key numbers

    1. NPCI’s 2024-25 base: Expenses of Rs 2,270 crore against 230.2 billion transactions (IIM Bangalore analysis).
    2. NEFT above Rs 1 lakh: Maximum charge of Rs 25.
    3. RTGS caps: Rs 25 for transfers of Rs 2 to 5 lakh; Rs 50 above Rs 5 lakh.
    4. UPI users: Over 800 million active users (May 2026).

    Payment Systems and DPI in India

    1. Digital Public Infrastructure: DPI is a set of shared digital systems for development and inclusion. Through India Stack, India was first to build all three pillars: digital identity, fast payments and consent-based data sharing.
    2. UPI’s scale: UPI processed about 23.2 billion transactions in May 2026.
    3. RuPay credit on UPI: From June 2026, an MDR applies to large RuPay credit card transactions on UPI, raising merchant costs.

    Matching Previous Year Question

    “[2026] An e-commerce revenue model where the seller has control over pricing but doesn’t keep products in stock and instead transfers customer orders and shipment details to a third-party supplier, who then ships the goods directly to the customer, is called: (a) Dropshipping Model (b) Affiliate Revenue Model (c) Transaction Fee Revenue Model (d) Agency Revenue Model Answer: A”

  • What are the alternatives to the SWIFT payment system?

    Why in the News

    Countries in the Global South are looking for ways around the Belgium based Society for Worldwide Interbank Financial Telecommunication (SWIFT) network for inter country payments, driven by multiple wars and by the use of the dollar as an instrument of financial sanctions. The attempts so far have been patchy, and the felt need for other options is rising. The recent Summit of Brazil, Russia, India, China and South Africa (BRICS) in the national capital took up payments in national currencies, and a proposal to link central bank digital currencies for cross border payments did not survive into its declaration. The contested point is whether a set of national payment rails, each anchored to its builder’s currency, adds up to an alternative to a single global messaging network.

    What did the BRICS summit actually commit to?

    1. The Declaration’s resolve: The New Delhi Declaration resolved to increase trade between member countries and payments in national currencies.
    2. The proposal that was tabled: India was reported to be pushing at the summit to link central bank digital currencies (CBDCs) for cross border payments across BRICS nations.
    3. Why it was expected to be difficult: Political and technical hurdles could limit progress, and the limited global adoption of digital currencies could complicate implementation.
    4. The outcome: The proposal to link CBDCs was not part of the Declaration.

    What are the alternatives to SWIFT, and who runs them?

    1. Project mBridge: Project mBridge is a group comprising the Bank of Thailand, the Central Bank of the United Arab Emirates, the Digital Currency Institute of the People’s Bank of China, the Hong Kong Monetary Authority and the Saudi Central Bank.
    2. The Chinese system: The Cross Border Interbank Payment System (CIPS) is backed by the People’s Bank of China, which launched its clearing and settlement services in 2015 to internationalise use of the yuan.
    3. What CIPS changed: It lets global banks clear cross border yuan transactions directly onshore, instead of routing them through clearing banks in offshore yuan hubs.
    4. The Russian system: The System for Transfer of Financial Messages (SPFS) was developed by Russia in 2014 to bypass Western sanctions. Russian banks were cut off from SWIFT in 2022 and the SPFS was of help.
    5. The Iranian system: SEPAMA is Iran’s local interbank telecommunication system. The Central Bank of Iran said in 2023 that 52 branches of Iranian banks and four unnamed foreign banks connect with 106 banks using the SPFS.

    How is Project mBridge faring after the Bank for International Settlements exit?

    1. The withdrawal: The Bank for International Settlements (BIS), an institution owned by central banks to foster international monetary and financial cooperation, exited Project mBridge on 31 October 2024. It had supported the platform since 2019, when the Hong Kong Monetary Authority and the Bank of Thailand launched it.
    2. What the platform is: mBridge is a cross bloc multi CBDC platform with no Western bank on it. It attained minimum viability status in 2024.
    3. The design: It was envisaged for direct peer to peer CBDC settlement without going through correspondent banks. The project team built a new blockchain, the mBridge Ledger, designed by central banks for multi currency cross border payments in CBDCs.
    4. Why the exit drew attention: Media reports attributed the withdrawal to the platform offering a possible basis for a BRICS initiative to circumvent sanctions on Russia.
    5. What it became in practice: A Forbes report described mBridge by late 2025 as a wholesale settlement rail denominated in renminbi for trade between China and the Gulf, “running outside the dollar correspondent system”.

    How far has CIPS actually scaled?

    1. Reserve asset status helped: The renminbi’s inclusion in the basket of currencies making up the Special Drawing Right, an international reserve asset created by the International Monetary Fund (IMF), has increased acceptance of CIPS.
    2. Participation: CIPS now has participants in more than 120 countries, including every BRICS member except India.
    3. Daily throughput: CIPS processed 679.8 billion yuan of transactions on average per day in 2025.
    4. Scale against incumbents: It remains far smaller than established global systems such as the United States based Clearing House Interbank Payments System.
    5. Where Beijing is taking it: Beijing appears to be moving towards building CIPS into a global platform compliant with multi currency settlements and other foreign payment channels.

    How has the SPFS grown under sanctions?

    1. Growth in 2023: The SPFS grew at a record pace in 2023 as Moscow stepped up efforts to resolve financial shortcomings caused by sanctions over the Ukraine war.
    2. Participation: 50 new entities joined the system in 2023, taking the total to 440, of which more than 100 are non residents.

    How do India Russia trade settlements work now?

    1. The rouble rupee channel: Russia and India have built a functioning payments infrastructure using roubles and rupees, which now accounts for 96 per cent of bilateral trade.
    2. What gives it volume: India is the second largest importer of Russian oil, which is what supplies the channel with its throughput.
    3. Banks servicing it: 22 Russian banks and 17 Indian banks currently service bilateral trade. Sberbank, Russia’s largest lender, was tasked with developing the payments infrastructure.
    4. The stated assessment: Sberbank’s India head called it one of the best established mechanisms for Russia’s payments with other countries.

    Challenges to building an alternative to SWIFT

    1. Bilateral rails strand balances: A channel that settles only between two currencies leaves the surplus partner holding a currency it cannot spend elsewhere. Eg. Russia accumulated rupee balances under the rupee settlement route that it could not readily deploy outside India.
      The Fix: Attach an agreed reinvestment channel for the surplus partner’s balances, such as government securities or project equity, to every bilateral settlement arrangement.
    2. A national rail carries its builder’s politics: A system run by one central bank settles mainly in that country’s currency, so joining it shifts a dependence rather than removing one. Eg. A single BRICS currency has drawn a lukewarm response because members are unwilling to accept an instrument the renminbi would dominate.
      The Fix: Build interoperability at the messaging layer between national systems instead of migrating onto any one of them.
    3. Secondary sanctions reach the user, not the rail: A commercial bank using an alternative channel still risks losing its dollar clearing, which is what keeps large banks away from it. Eg. Indian refiners and banks scaled back Russian oil payments as United States designations widened.
      The Fix: Route sanctioned trade through designated institutions that hold no dollar exposure, so the risk sits inside a ring fenced entity.
    4. Invoicing does not move with settlement: Commodity contracts stay priced in dollars even where payment is made in another currency, so the dollar keeps its price setting role. Eg. Crude oil and most industrial metals are quoted in dollars on the benchmark exchanges.
      The Fix: Develop local currency denominated commodity contracts on domestic exchanges, so invoicing and settlement move together.

    Conclusion

    No single system has replaced the network the Global South is trying to route around. What exists instead is a set of national rails, each carrying the currency and the political exposure of the state that built it, which is why India has built a bilateral channel with Russia rather than joining one of them. The position that remains unreconciled is that cutting dependence on one currency by moving onto another country’s rail substitutes one dependence for another. The marker to watch is whether BRICS moves from a resolve on national currency payments to a working interoperability arrangement between the systems that already exist.

    Back2Basics: SWIFT

    1. What it is: A cooperative owned by its member financial institutions, established in 1973 to replace telex based messaging between banks.
    2. What it actually does: It carries standardised payment instructions between financial institutions. It does not hold accounts, move money or settle payments itself.
    3. Why exclusion bites: A bank cut off from the network loses the standard channel through which counterparties send and confirm instructions, so its correspondent relationships stop functioning.
    4. Why the alternatives look similar: Because the incumbent is a messaging layer, most alternatives are also messaging or clearing systems rather than new currencies.

    Matching Previous Year Question

    “[2023] With reference to the Central Bank digital currencies, consider the following statements: 1. It is possible to make payments in a digital currency without using US dollar or SWIFT system. 2. A digital currency can be distributed with a condition programmed into it such as time-frame for spending it. Which of the statements given above is/are correct? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2 Answer: (c)”

  • Fear of shift to cash due to merchant fee on UPI ‘100% misplaced’: Govt sources

    Why in the News

    A merchant discount rate of 0.4 per cent will apply to Unified Payments Interface (UPI) payments made to merchants above Rs 2,000 from 15 October, under a decision of the National Payments Corporation of India (NPCI). The government has called fears of a public shift back to cash “100% misplaced”, noting that a merchant fee already applies to credit and debit cards other than RuPay debit cards and that those cards continue to be used. A Goods and Services Tax (GST) of 18 per cent applies on the fee itself. The contested point is whether a charge levied on the seller stays with the seller, or reaches the buyer as a higher price.

    What is the merchant discount rate now applying to UPI?

    1. What the charge is: A merchant discount rate (MDR) is a fee paid by the seller on a payment accepted electronically. On UPI it has been set at 0.4 per cent of the transaction value.
    2. Where it applies: It applies to person to merchant UPI transactions of more than Rs 2,000, and takes effect on 15 October.
    3. Who receives it: The fee is split between the payments industry players that run the rail, which includes banks, payment gateways, UPI apps and other service providers.

    How narrow is the fee’s incidence?

    1. Share of transactions: Only 4 per cent of person to merchant UPI transactions are for more than Rs 2,000 and will attract the fee.
    2. Share of value: That small group of payments accounts for two thirds of person to merchant UPI payments measured by value.
    3. Merchants untouched: Around three fourths of India’s merchants accepting digital payments have never recorded a UPI transaction above the threshold, so they stay outside the fee altogether.
    4. Transfers stay free: All person to person UPI payments remain without any MDR.
    5. RuPay debit exempt: Payments made by RuPay debit card attract no MDR even above the threshold.

    Why does the government reject the fear of a shift back to cash?

    1. Card fees already exist: An MDR already applies to credit and debit cards other than RuPay debit cards, and users have not given those cards up.
    2. Merchants already absorb it: Merchants have always absorbed the MDR on credit cards while continuing to accept Visa, Mastercard and American Express.
    3. The comparison on rates: The merchant fee on debit and credit cards runs broadly in the range of 1 per cent to 3 per cent, significantly higher than the rate set for UPI.

    What is the stated purpose of charging for UPI?

    1. Cost of a free service: The stated ground is that a payment service cannot be supplied free indefinitely without exhausting the business that funds it.
    2. Reinvestment rather than full recovery: NPCI’s managing director and chief executive officer said the objective is not to recover the full cost of running UPI, but to generate enough revenue for banks and payment companies to keep investing in the ecosystem.

    What else decides how much of the fee reaches the buyer?

    1. The pass through concern: Shopkeepers may stop accepting UPI, and consumers expect sellers to pass the fee on by raising prices.
    2. A monitoring mechanism: The government is willing to talk to the Indian Banks’ Association (IBA) to set up a mechanism for monitoring whether shopkeepers pass the MDR to buyers.
    3. Talks with traders: The government will also speak to traders, including the Confederation of All India Traders (CAIT), about the issue.
    4. Tax on the fee: GST of 18 per cent applies on the MDR on person to merchant UPI payments, which lifts the seller’s cost above the notified rate.
    5. The stated hope on the tax: The position taken is that the GST Council will take a favourable view and be reasonable on the rate.
    6. The Council’s agenda: The GST Council meets on 7 October and is not expected to discuss the indirect tax rate on the MDR.

    Challenges to the UPI merchant discount rate

    1. Pass through is hard to police: A monitoring arrangement cannot observe a shopkeeper who quotes one price for cash and a higher one for UPI. Eg. Surcharging on card payments continues at small outlets even though the card rules bar it.
      The Fix: Require the acquiring bank to certify surcharge free acceptance as a condition of the merchant’s UPI acceptance agreement.
    2. A value threshold invites splitting: A fee that triggers above a transaction value gives the seller a reason to break one payment into two below the line. Eg. The fee applies only above Rs 2,000, so a bill just over that figure can be collected as two smaller payments.
      The Fix: Levy the fee on a merchant’s aggregate monthly person to merchant value rather than on the size of each transaction.
    3. The revenue split leaves acquirers last: The fee is divided among banks, gateways and app providers, so the share reaching the party that actually onboards a small shop may not cover that cost. Eg. Person to merchant acceptance among small merchants was built on zero MDR and on government incentive payouts to banks.
      The Fix: Fix a minimum acquirer share of the fee in the settlement rules so merchant onboarding stays funded.
    4. A priced rail can be repriced: A charge introduced administratively can be raised the same way, and the rail loses its universality if some sellers refuse the instrument above the threshold. Eg. The European Union caps interchange at 0.2 per cent on debit cards and 0.3 per cent on credit cards precisely to keep acceptance universal.
      The Fix: Notify a statutory ceiling on the person to merchant fee so the rate cannot be revised upward by the operator alone.

    Conclusion

    The charge is small and narrowly aimed, and it still changes what UPI is: a rail built on being free to use now carries a price for sellers above a value threshold. Whether that price stays with the seller is not settled by the fee’s design but by enforcement the government has yet to build. Two things are worth watching. The first is whether a monitoring arrangement with the banks is in place before the fee takes effect, and the second is whether the tax levied on the fee is revisited once the Council turns to it.

    Back2Basics: National Payments Corporation of India

    1. What it is: An umbrella organisation for retail payments and settlement systems in India, incorporated in 2008 as a not for profit company.
    2. Promoters and statutory basis: It was promoted by the Reserve Bank of India and the Indian Banks’ Association under the Payment and Settlement Systems Act, 2007.
    3. Systems it operates: UPI, RuPay, the Immediate Payment Service, the National Automated Clearing House, the Aadhaar Enabled Payment System and FASTag.

    Matching Previous Year Question

    “[2026] Which one of the following statements about Unified Payments Interface (UPI) and Central Bank Digital Currency (Digital Rupee) is NOT correct? (a) UPI is a real-time payment system but Digital Rupee is akin to sovereign paper currency (b) In case of UPI, settlement for end users happens instantly; in case of Digital Rupee, wallet balance gets transferred to another wallet (no traditional settlement) (c) UPI transactions are recorded by banks and reflected in bank statements; in case of Digital Rupee, no data is captured in bank statements (d) In both the cases (UPI and Digital Rupee), the liability lies with the users and their respective banks Answer: (d)”

  • UPI heads towards a code-less era, a decade after debut

    Why in the News

    The Reserve Bank of India (RBI) has launched a tap and pay facility for Unified Payments Interface (UPI) transactions in partnership with the National Payments Corporation of India (NPCI). It settles RuPay credit card payments of up to Rs 5,000 without a one time password or a QR code, and transactions above that threshold still require a PIN. The facility answers the RBI’s own mandate of two factor authentication for UPI transactions from 1 April 2026, which forced payment companies to find a second factor that is not an interceptable code. The tension is that the instrument being removed, the one time password, is also the instrument that recorded a customer’s explicit consent, and the rail carrying about 85 percent of India’s electronic payment transactions is being re engineered around its absence.

    How does the tap and pay facility work?

    1. The connectivity shift: The transaction runs on the point of sale terminal’s own internet connection. The customer’s phone does not need internet access for the payment to complete.
    2. What is removed: Neither a QR code nor a one time password is required for the payment to be authorised within the threshold.
    3. The value ceiling: The facility currently covers transactions of up to Rs 5,000. Above that, the customer enters a PIN.
    4. The instrument carried: It settles payments made on a RuPay credit card linked to the UPI rail, rather than a direct bank account debit.

    Why is authentication being redesigned rather than strengthened?

    1. The fraud vector is the code itself: The growth of digital payments has been accompanied by theft and inadvertent sharing of one time passwords and other authentication credentials, so the credential is the attack surface.
    2. The regulatory trigger: The RBI mandated two factor authentication for UPI transactions from 1 April 2026, which required a second factor that could not simply be a second code.
    3. Friction as an adoption limit: UPI’s adoption rested on the convenience of retail and utility payments without cash, and each added verification step works against the property that produced the adoption.
    4. Possession replaces knowledge: Moving the second factor to the card and the terminal replaces something a fraudster can extract by conversation with something they must physically hold.

    What alternatives to the one time password are payment companies building?

    1. Passkeys: Visa and Mastercard have introduced passkeys, cryptographic credentials stored on the user’s own device, as an additional authentication mechanism in place of a transmitted code.
    2. Device biometrics: Mastercard has showcased its Consumer Device Cardholder Verification Method (CDCVM), which authenticates a transaction through the device’s fingerprint or facial recognition. Mastercard has partnered with Google Pay to offer it.
    3. Terminal side authentication: The RBI and NPCI facility shifts verification to the merchant terminal, which is a different design choice from the card networks’ device side methods.

    What does the shift mean for UPI’s market structure?

    1. Scale of the rail: UPI accounts for about 85 percent of electronic payment transactions in India, so a change in its authentication design is a change in the country’s default payment method.
    2. Credit on an account to account rail: Routing RuPay credit card payments through UPI converts a transfer rail into a credit distribution channel, which changes who earns on each transaction.
    3. A contestable margin: Amazon Pay, which accounts for less than 1 percent of UPI transactions, has introduced a tap and pay facility for its partner merchants as it seeks to expand its share, so the new interface is being treated as a market entry point.
    4. Origins of the volume: UPI was introduced in the aftermath of demonetisation and its adoption was driven by the convenience of cashless retail and utility payments, not by a pricing incentive that could be withdrawn.

    Challenges to a code-less payment system

    1. Loss of an explicit consent step: Removing the one time password removes the moment where a user actively confirms a specific amount to a specific payee. Eg. A contactless card in a lost wallet can be used repeatedly below the no PIN threshold before the loss is noticed.
      The Fix: Require a cumulative daily cap across all no PIN taps on a card, after which a PIN is forced regardless of individual transaction size.
    2. Terminal dependence shifts risk to the merchant: The transaction now relies on the merchant terminal’s connectivity and software integrity rather than on the customer’s device. Eg. Card skimming at compromised point of sale terminals has been a recurring source of card data theft in India.
      The Fix: Mandate certified tamper responsive terminals with remote attestation before a merchant is enabled for no PIN acceptance.
    3. Dispute resolution is weaker without a credential trail: A customer contesting a tap based transaction has no credential event to point to, which shifts the evidentiary burden onto them. Eg. Digital payment complaints have consistently formed a large share of grievances handled under the RBI’s Ombudsman scheme.
      The Fix: Fix a defined chargeback window with reversal by default for contested no PIN transactions below the threshold, with the loss allocated between acquirer and issuer.
    4. Concentration risk on a single rail: A rail carrying about 85 percent of electronic payment transactions turns a single outage into a nationwide payments failure. Eg. UPI has experienced multi hour outages that halted retail payments across merchants simultaneously.
      The Fix: Require large merchants and aggregators to maintain a certified fallback acceptance mode that does not route through the same rail.
    5. Exclusion by device and connectivity: A design built around modern terminals and cards leaves out merchants and users without them. Eg. Feature phone users depend on the offline UPI123Pay channel rather than on app based flows.
      The Fix: Set a floor requirement that every new acceptance standard is released on the feature phone and offline channels before it is promoted to merchants.

    Conclusion

    India’s dominant payment rail is being rebuilt around the removal of the credential fraudsters were harvesting, with possession of a card and a terminal replacing knowledge of a code. The design transfers security responsibility from the customer to merchant infrastructure, and the dispute rules have not been rewritten to match that transfer. The marker to watch is whether the RBI raises the no PIN ceiling, since that threshold is the only thing currently bounding the exposure.

    Back2Basics: National Payments Corporation of India

    1. What it is: NPCI is the umbrella organisation for retail payments and settlement systems in India.
    2. Origins: It was set up in 2008 as an initiative of the Reserve Bank of India and the Indian Banks’ Association.
    3. Legal form: It is a not for profit company registered under Section 8 of the Companies Act, 2013, so it is an industry utility rather than a government department or a regulator.
    4. What it operates: It runs UPI, RuPay, the Immediate Payment Service, the National Automated Clearing House, FASTag and the Aadhaar Enabled Payment System.

    Matching Previous Year Question

    “[2026] Which one of the following statements about Unified Payments Interface (UPI) and Central Bank Digital Currency (Digital Rupee) is NOT correct? (a) UPI is a real-time payment system but Digital Rupee is akin to sovereign paper currency (b) In case of UPI, settlement for end users happens instantly; in case of Digital Rupee, wallet balance gets transferred to another wallet (no traditional settlement) (c) UPI transactions are recorded by banks and reflected in bank statements; in case of Digital Rupee, no data is captured in bank statements (d) In both the cases (UPI and Digital Rupee), the liability lies with the users and their respective banks Answer: (d)”

  • How agentic AI could transform the way we make digital payments

    Why in the News

    The National Payments Corporation of India (NPCI), the umbrella body that operates India’s retail payment systems, has unveiled MyUPI, an artificial intelligence (AI) powered revamp of the Unified Payments Interface (UPI) capable of delegating pre authorised payments and filing payment disputes automatically. It has also launched a back end tool described as the connective tissue for AI interaction across the financial ecosystem, called Agentic Orchestration and Messaging (AtOM). Both were shown at the Global Fintech Fest in Mumbai, where several of the country’s largest payment companies demonstrated AI integration in their products. Conventional AI already sits inside the payments stack, reducing friction and screening fraudulent transactions from the back end. The shift now proposed is different in kind: an agent that carries the consumer’s entire payment journey rather than one that checks it, which moves the question from how safe a payment is to who is accountable for a payment the consumer did not personally execute.

    What is agentic commerce?

    1. Definition: Agentic commerce is a digital trade model in which AI agents discover, negotiate and execute a purchase on behalf of the customer.
    2. Authorisation is not bypassed: The model does not remove the requirement of authorisation. It compresses the number of steps in the buying journey, including the payments stage.
    3. Agentic AI, defined: An agentic AI model executes tasks for a user without constant prompts, operating inside limits the user has set in advance.
    4. Consumer oversight survives: The consumer retains oversight through the process and can change any component of the transaction before it completes.

    What has NPCI actually launched?

    1. MyUPI: The revamp delegates pre authorised payments to an agent and files payment disputes automatically and without a separate consumer initiated complaint.
    2. AtOM: The back end tool standardises how AI systems across the financial ecosystem talk to each other, which is what allows an agent on one platform to act against rails operated by another.
    3. Placement on public rails: Putting the capability inside UPI rather than leaving it to individual wallets extends an interoperable public system into agentic commerce.

    How does agentic AI differ from the AI already used in payments?

    1. Conventional AI is a back end function: It reduces friction in the payments process, makes back end processes more reliable and screens consumers from fraudulent transactions.
    2. Agentic AI is a front end actor: It performs the consumer’s task rather than validating it, which makes the agent a participant in the transaction rather than a control over it.
    3. Adoption is early: Agentic AI adoption in payments remains at a nascent stage, and agentic commerce is currently its largest use case.

    What are private wallets already doing?

    1. Amazon Pay’s Smart Wallet: The wallet combines smart recommendations, biometric authentication and a tap and pay feature, with an agent handling each step of the journey.
    2. Auto execution within a threshold: The wallet executes small ticket regular purchases automatically inside a set limit. A customer with a monthly grocery limit of Rs 10,000 authenticates only once that threshold is crossed.
    3. Single authentication in place of repeated prompts: An agent that selects the payment instrument replaces multiple one time passwords and authorisation requests with a single authentication event.
    4. Industry wide adoption: Samsung Pay, Google Pay and PhonePe already offer pin less small ticket purchases, and MyUPI carries a comparable feature.

    Challenges to agentic payments

    1. Liability on a delegated transaction is unallocated: No settled rule assigns the loss where an agent transacts inside a pre authorised limit and the consumer later disputes the outcome. Eg. The RBI’s limited liability framework for unauthorised electronic banking transactions is written around a customer who did not authorise the payment at all.
      The Fix: Extend that limited liability framework to agent initiated payments, with the reporting window running from the transaction alert rather than from discovery.
    2. Authentication thins as steps are removed: Collapsing several authorisation checkpoints into one removes the repeated confirmations that currently interrupt a compromised session. Eg. Delegated payments under the UPI Circle facility already run on the primary user’s single authentication for a secondary user’s spending.
      The Fix: Require a step up authentication whenever the agent changes the merchant, the instrument or the amount from the pattern it was authorised on.
    3. Ranking can be tuned to the platform: An agent that selects products and payment instruments can be configured to serve the platform’s commercial interest rather than the buyer’s. Eg. The Competition Commission of India has investigated preferential treatment of selected sellers by large online marketplaces.
      The Fix: Mandate disclosure of the ranking and payment instrument selection criteria an agent applies, on the same principle as the Central Consumer Protection Authority’s dark patterns guidelines.
    4. Grievance redress assumes a human decision: The ombudsman route is built around an identifiable act by a named regulated entity, not an autonomous action taken by a model. Eg. The Reserve Bank Integrated Ombudsman Scheme, 2021 requires a complaint to be made against a specified regulated entity.
      The Fix: Register agentic payment providers so that every agent action maps to an accountable regulated entity before the service reaches scale.

    Conclusion

    Agentic payments are at the demonstration stage, with the public rails and the large private wallets converging on the same design within a single week of announcements. The unresolved question is accountability: a system built to compress authorisation steps is being layered onto a consumer protection framework that assumes the customer authorised each step personally. What to watch is whether the RBI issues a liability and authentication standard for agent initiated payments before MyUPI moves from demonstration into general availability.

    Back2Basics: National Payments Corporation of India (NPCI)

    1. What it is: NPCI is the umbrella organisation for retail payments and settlement systems in India.
    2. How it was set up: It was incorporated in December 2008 at the initiative of the RBI and the Indian Banks’ Association, as a not for profit company under the companies law.
    3. Legal basis: It operates under the Payment and Settlement Systems Act, 2007, which gives the RBI authority over payment systems.
    4. What it runs: UPI, the Immediate Payment Service, RuPay, the National Automated Clearing House, FASTag and the Bharat Bill Payment System.

    Matching Previous Year Question

    “Which one of the following statements about Unified Payments Interface (UPI) and Central Bank Digital Currency (Digital Rupee) is NOT correct? (a) UPI is a real-time payment system but Digital Rupee is akin to sovereign paper currency (b) In case of UPI, settlement for end users happens instantly; in case of Digital Rupee, wallet balance gets transferred to another wallet (no traditional settlement) (c) UPI transactions are recorded by banks and reflected in bank statements; in case of Digital Rupee, no data is captured in bank statements (d) In both the cases (UPI and Digital Rupee), the liability lies with the users and their respective banks”

  • Merchants to pay 0.4% fee on UPI payments over Rs 2,000

    Why in the News

    The National Payments Corporation of India (NPCI) has restored a Merchant Discount Rate (MDR) of 0.4 percent on Unified Payments Interface (UPI) payments above Rs 2,000, payable by the merchant and capped at Rs 300 a transaction, with effect from 15 October. MDR on UPI and RuPay debit cards was removed in January 2020 to accelerate adoption of digital payments, and payment providers have since sought its return to meet infrastructure and settlement costs. The framework follows the Centre’s notification a day earlier barring any charge on UPI payments below Rs 2,000 and on RuPay debit card payments. The Union Ministry of Finance has advised banks to ensure merchants do not pass the cost on to customers, and that advice carries no prohibition behind it.

    What is the Merchant Discount Rate?

    1. Merchant Discount Rate: It is the fee a business pays on a digital payment it receives, deducted from the amount finally credited to the business rather than added to the customer’s bill.
    2. Person to merchant payments: The fee applies only to person to merchant (P2M) payments, where a customer pays a business. Person to person transfers between individuals carry no fee.
    3. Who counts as a merchant: An e-commerce website, grocery shop or shopkeeper receiving more than Rs 1 lakh a month from customers through UPI is classified as a merchant.
    4. Who receives the fee: The charge is shared between banks, payment apps and payment service providers.

    What does the new framework charge, and on which payments?

    1. Slab structure: Payments up to Rs 2,000 attract no MDR, and payments from Rs 2,001 to Rs 74,999 attract 0.40 percent. Eg. A merchant receiving Rs 10,000 pays Rs 40.
    2. Absolute cap: Payments of Rs 75,000 and above attract a fixed Rs 300, so the charge does not rise beyond that point.
    3. Flat fee for essential categories: A flat Rs 5 applies to payments for rail tickets, fuel, agricultural inputs, credit card dues, telecom and utility bills, insurance premiums and taxes. The stated purpose is to stop costs rising in critical public services and in sectors with thin profit margins.
    4. Capital market payments: UPI payments to mutual funds, securities and stock brokers carry a lower 0.02 percent fee, intended to encourage retail participation in formal financial markets.
    5. Autopay exemption: Systematic Investment Plan (SIP) payments and recurring standing instructions carry no fee at all. Eg. Monthly utility bills and OTT streaming subscriptions set on autopay.
    6. Review cycle: The charges are to be reviewed every six months to one year.

    Who stays outside the fee?

    1. Person to person transfers: These remain free, with no monthly quota, volume limit or tiered cap on free transactions for individuals.
    2. Small merchants under P2PM: A merchant receiving up to Rs 1 lakh a month through UPI QR codes faces zero MDR under the Person to Person Merchant (P2PM) framework.
    3. Purpose of the category: It bridges informal street vendor setups and formal merchant acquiring accounts, keeping digital acceptance costless for micro businesses in the unorganised sector.
    4. Migration trigger: A merchant crossing Rs 1 lakh a month for three consecutive months is moved into the P2M category and becomes liable for MDR.
    5. Daily limits are not charges: Daily transaction limits of Rs 1 lakh to Rs 5 lakh enforced by banks and NPCI are risk management measures and carry no cost.

    Why was the zero MDR regime abandoned?

    1. Zero MDR since January 2020: The charge was removed on UPI and RuPay debit cards to accelerate adoption, leaving the network running without a transaction revenue stream.
    2. The subsidy substitute: The Centre has since covered part of the cost through the Incentive scheme for promotion of RuPay Debit Cards and low-value BHIM-UPI transactions (P2M), capped at 0.15 percent of transaction value and not extending to large merchants.
    3. Industry cost claim: Payment providers have put their infrastructure and transaction settlement costs at around Rs 20,000 crore a year.
    4. The regulator’s position: The Reserve Bank of India (RBI) backed MDR on large value UPI payments as necessary for the long term sustainability of India’s digital payments ecosystem.
    5. Comparison with cards: Debit and credit card payments already carry an MDR of 1 to 3 percent, well above the rate now set for UPI.

    What is the revenue meant to fund?

    1. Technology and acceptance networks: RBI’s stated position is that a fair distribution of MDR among ecosystem participants supports continued investment in technology, infrastructure and payment acceptance networks.
    2. Competition in fintech: NPCI expects the fee to let new fintech startups and technology companies enter digital payments and compete with well capitalised conglomerates.
    3. Security spending: MDR revenue is also to fund cyber security infrastructure, artificial intelligence driven fraud detection and encryption upgrades.
    4. Small merchant fund: Five percent of all MDR collected goes into a dedicated fund to help small merchants accept UPI payments.

    How much of UPI does the fee actually touch?

    1. Share of volume: Payments above Rs 2,000 are only 4 percent of all UPI payments to merchants, and the remaining 96 percent sit below that ticket size.
    2. Share of value: Those same payments carry two thirds of all person to merchant value, so a small slice of volume is a large slice of money.
    3. Industry categories: The flat Rs 5 categories account for 17 percent of P2M transactions by volume and 46 percent by value.
    4. Scale of the network: UPI carried more than 24,000 crore transactions worth Rs 314 lakh crore in 2025-26.

    Challenges to the Merchant Discount Rate on UPI

    1. Pass through to customers is unenforced: The Union Ministry of Finance has only advised banks to ensure merchants do not recover the fee from buyers. Eg. Card MDR is routinely recovered through visible surcharges at fuel stations and on utility payments.
      The Fix: Convert the advisory into a binding condition of the acquiring bank’s merchant agreement, with the acquirer answerable for a surcharge its merchant levies.
    2. The Rs 1 lakh threshold creates a splitting incentive: A merchant near the P2PM ceiling gains by routing collections across several QR codes or accounts to stay below it. Eg. Value splitting across accounts is a documented pattern around registration thresholds for small traders under the Goods and Services Tax.
      The Fix: Anchor the P2PM classification to the merchant’s permanent account number rather than to an individual bank account or QR code.
    3. A flat cap favours the largest tickets: Because the charge stops at Rs 300, the effective rate falls as the payment size rises, so the biggest sellers pay proportionately least. Eg. A Rs 5 lakh payment carries an effective rate of 0.06 percent against 0.40 percent on a Rs 10,000 payment.
      The Fix: Tier the cap by merchant turnover band so the concession reaches smaller sellers rather than the largest acquirers.
    4. Concentration in the payments market: MDR revenue accrues to banks and payment service providers in a market where two applications already carry most UPI volume. Eg. NPCI’s own 30 percent market share cap on third party UPI applications has been deferred repeatedly rather than enforced.
      The Fix: Tie disbursal from the small merchant fund to acquirers that add new merchants outside the largest cities.
    5. Adoption risk in the unorganised sector: A visible charge on larger payments gives merchants a reason to steer high value sales back to cash. Eg. Currency in circulation continued to grow through the years of zero MDR and rapid UPI expansion.
      The Fix: Publish the share of high value merchant collections leaving UPI as part of each scheduled review, so the review has a trigger rather than only a date.

    Conclusion

    Costless merchant acceptance on the country’s dominant retail payment network has ended for large payments, and the terms are set to be revisited at fixed intervals rather than settled once. The unresolved question is who finally bears the charge, since the protection against merchants recovering it from customers is an advisory and not a prohibition. The thing to watch at the first review is whether large ticket merchant collections stay on the network or shift back to cash.

    Back2Basics: National Payments Corporation of India

    1. Nature: It is the umbrella organisation for retail payments and settlement systems in India, incorporated as a not for profit company.
    2. Founding: It was set up in 2008 by the Reserve Bank of India and the Indian Banks’ Association, under Section 25 of the Companies Act, 1956, now Section 8 of the Companies Act, 2013.
    3. Statutory basis: It operates under the Payment and Settlement Systems Act, 2007, which gives RBI authority over payment systems.
    4. Products: It runs UPI, RuPay, IMPS, NACH, AePS, FASTag and BHIM.

    Matching Previous Year Question

    “Which of the following is a most likely consequence of implementing the ‘Unified Payments Interface (UPI)’?”

  • Govt: No bank charge on UPI payment up to Rs 2,000

    Why in the News

    The Ministry of Finance has notified that no bank or system provider may impose any charge, directly or indirectly, on a payment made through RuPay debit cards or through the Unified Payments Interface (UPI), the National Payments Corporation of India’s real time system for transferring money between bank accounts using a virtual address, up to Rs 2,000. The notification does not specify any charge for transactions above that amount, which opens the way for a fee on higher value person to merchant payments. It follows the Taxation and Other Laws (Amendment) Bill, 2026, passed by Parliament last month, which removed the statutory bar on charging for these payment modes. The contested point is that a threshold covering 96 per cent of person to merchant transactions by number leaves roughly two thirds of their value open to a charge.

    What is the Merchant Discount Rate?

    1. What it is: The Merchant Discount Rate (MDR) is the fee a bank that processes a card or digital payment levies on the merchant receiving it.
    2. What it pays for: It covers transaction processing, settlement and payment infrastructure costs across the chain of banks and providers that carry the payment.
    3. The usual range: An MDR normally runs between 1 and 3 per cent of transaction value on debit and credit card payments.
    4. The exemption since 2020: No MDR has been levied on RuPay debit cards and UPI transactions since January 2020, a decision taken to promote adoption of digital payments.

    What has the notification done, and who decides a fee above the threshold?

    1. The prohibition: The notification bars any charge, direct or indirect, on RuPay debit card payments and on UPI transactions of up to Rs 2,000, whether imposed on the person making or the person receiving the payment.
    2. The silence above the threshold: The ministry did not specify charges for transactions above Rs 2,000, which is what creates the opening for an MDR on higher value person to merchant payments.
    3. The deciding body: Whether an MDR is imposed above the threshold will be decided by the UPI and Services Steering Committee, headed by the National Payments Corporation of India (NPCI), with 22 members including banks, third party application providers such as PhonePe and Google Pay, the Payments Council of India and the Indian Banks’ Association.
    4. The rate under discussion: Payments industry officials have suggested an MDR of around 0.4 to 0.5 per cent for UPI payments to large merchants, which would help meet the industry’s annual cost of about Rs 20,700 crore.

    What legal change made this possible?

    1. The provision amended: The Bill amended Section 10A of the Payment and Settlement Systems Act, 2007, which had barred any bank or system provider from imposing a charge on payments made through the electronic modes prescribed under Section 269SU.
    2. The modes covered: Those prescribed modes were RuPay debit cards, BHIM UPI and the UPI QR code.
    3. Who the underlying obligation binds: Section 269SU of the Income Tax Act, 1961 applies to businesses with a turnover of over Rs 50 crore, requiring them to offer the prescribed electronic payment modes.
    4. What the amendment enables: Removing the exemption paves the way for an MDR on UPI and RuPay debit card payments to large merchants such as e commerce platforms.
    5. The stated rationale: The amendment is presented as an enabling provision for UPI’s long term sustainability, technological advancement and resilience against emerging risks.

    Why does the Rs 2,000 threshold matter for UPI’s economics?

    1. Small share by number: Only 4 per cent of person to merchant UPI payments in 2025 to 26 were for more than Rs 2,000.
    2. Large share by value: Those same transactions accounted for about two thirds of total person to merchant UPI payment value.
    3. The base: More than 24,000 crore UPI transactions worth Rs 314 lakh crore were made during the year.
    4. What the design achieves: The threshold protects the small ticket everyday payment from any charge while leaving the value where a percentage fee actually earns revenue open to one.

    How has the state paid for zero MDR so far?

    1. The incentive scheme: The government subsidises payments of up to Rs 2,000 made to small merchants through its incentive scheme for promotion of RuPay debit cards and low value BHIM UPI person to merchant transactions.
    2. The cap and the exclusion: The incentive is capped at 0.15 per cent of transaction value, and large merchants are not covered by the scheme at all.
    3. What it costs: The Budget for 2026 to 27 estimated the payout at Rs 2,000 crore. Rs 2,196.21 crore was paid in 2025 to 26, up from Rs 1,922.77 crore in 2024 to 25.
    4. The sustainability finding: A March report of the Standing Committee on Finance recorded that the absence of MDR makes the UPI ecosystem financially unsustainable.

    Challenges to reintroducing a Merchant Discount Rate on UPI

    1. Merchant pass through to the customer: A merchant charged a percentage fee recovers it by quoting a higher price or by preferring cash for large tickets. Eg. Many small retailers added a surcharge on card payments before the Reserve Bank of India barred the practice on debit cards.
      The Fix: Bar surcharging by contract with the acquiring bank and make the ban a condition of merchant onboarding.
    2. Threshold gaming by splitting payments: A fixed value threshold invites a single large payment being broken into several below the cut off. Eg. A Rs 5,000 purchase settled as three separate UPI transfers falls entirely inside the exempt band.
      The Fix: Apply the threshold to the aggregate value settled to one merchant from one payer in a day rather than to a single transaction.
    3. Definition risk on the large merchant: The charge is designed to fall on large merchants, and the line between a large and a small merchant sits on self declared turnover. Eg. Section 269SU already uses a Rs 50 crore turnover test that a merchant can restructure across entities.
      The Fix: Anchor the classification to verified Goods and Services Tax turnover rather than to a declaration made at onboarding.
    4. Fiscal and commercial funding running in parallel: An incentive subsidy and an MDR answer the same infrastructure cost, and running both leaves the split unstated. Eg. The subsidy payout has risen each year while the industry’s stated annual cost has stayed far above it.
      The Fix: Publish a stated glide path withdrawing the incentive as MDR revenue begins, so the two do not fund the same cost twice.

    Conclusion

    The zero fee regime on UPI was paid for by the exchequer, and the bill grew every year while the payments industry’s own cost stayed several times larger. The notification shifts the funding of the large value end of the system from the Budget to the merchant, and leaves the small everyday payment where it was. What to watch is whether the UPI and Services Steering Committee sets a rate above the threshold at all, and whether merchants at that end of the market stay on UPI once it does.

    Back2Basics: National Payments Corporation of India

    1. What it is: NPCI is the umbrella organisation for retail payments and settlement systems in India.
    2. How it was set up: It was incorporated in 2008 as a not for profit company, promoted jointly by the Reserve Bank of India and the Indian Banks’ Association.
    3. Its statutory anchor: It operates under the Payment and Settlement Systems Act, 2007, which is the law governing payment systems in India.
    4. What it runs: Its systems include UPI, RuPay, the Immediate Payment Service, the National Automated Clearing House and FASTag.

    Matching Previous Year Question

    “[2023, GS3, 10 marks] What is the status of digitalization in the Indian economy? Examine the problems faced in this regard and suggest improvements.”

  • Inclusive and trusted intelligent finance pitched at Global Fintech Festival 2026

    Why in News

    The Ministry of Communications set out India’s digital finance record at the Global Fintech Festival 2026 in Mumbai.

    Core facts

    1. Guiding frame: Finance must become inclusive before it becomes intelligent. Connectivity, compute and trust are named the new digital trinity.
    2. Internet access: It expanded from 25 crore users to 100 crore users over a decade.
    3. Broadband access: It grew from 6 crore to 103 crore, a 16 fold rise in ten years. About 6.5 lakh villages now join the digital economy.
    4. 5G rollout: The fifth generation (5G) network covers 99.9% of districts and 85% of the population within 26 months of its 2022 launch. It runs on over 5 lakh base stations with ₹4.5 lakh crore capital expenditure.
    5. Data price: Data costs about 10 cents per gigabyte. India is stated as the world’s most affordable data market.
    6. Unified Payments Interface (UPI): UPI is a real time retail payment system linking bank accounts for instant transfers. It processed 24,162 crore transactions worth ₹314 lakh crore in the 2025 to 2026 financial year. It forms 84% of domestic digital transactions and 49% of global real time payment volumes.
    7. UPI abroad: It is live in nine countries at no cost. Expansion to 20 more nations is planned.
    8. Financial inclusion base: 60 crore Pradhan Mantri Jan Dhan Yojana (PMJDY) accounts are open. 9 billion documents sit on DigiLocker, the government’s digital document wallet.
    9. Rural coverage: Under Digital Bharat Nidhi, 22,000 towers are being placed across 34,000 villages without telecom links.
    10. Fraud tools: Sanchar Saathi blocks suspicious connections and stolen devices. ASTR, an Artificial Intelligence (AI) tool, cut 88 lakh suspicious mobile connections. The Financial Fraud Risk Indicator blocks fraudulent transfers before withdrawal.
    11. Stated vision: A Trust Grid would integrate telecom, digital identity, UPI and financial systems. The 6G mission targets 10% of global patents.

    Static Context

    1. UPI is operated by the National Payments Corporation of India (NPCI). NPCI is an umbrella body for retail payments set up in 2008 under the guidance of the Reserve Bank of India (RBI) and the Indian Banks’ Association.
    2. Digital Bharat Nidhi is the successor to the Universal Service Obligation Fund (USOF). It was renamed under the Telecommunications Act, 2023. It funds telecom access in commercially unviable rural and remote areas.
    3. PMJDY launched in 2014 as the national financial inclusion mission. It provides basic savings accounts, RuPay cards and overdraft access.
    4. DigiLocker operates under the Ministry of Electronics and Information Technology. It issues and stores verified documents linked to Aadhaar.

    Prelims angle

    UPI versus Central Bank Digital Currency (Digital Rupee) distinctions; the operator of UPI is NPCI, not RBI; Digital Bharat Nidhi sits under the Telecommunications Act, 2023 and replaces the USOF; PMJDY launch year 2014; Sanchar Saathi as the fraud reporting platform.

    Mains angle

    GS Paper 3, Indian economy and inclusive growth. The digital public infrastructure stack can frame a question on how far technology driven financial inclusion closes welfare and credit gaps.

    Matching Previous Year Question

    “[2026] Which one of the following statements about Unified Payments Interface (UPI) and Central Bank Digital Currency (Digital Rupee) is NOT correct?
    (a) UPI is a real-time payment system but Digital Rupee is akin to sovereign paper currency
    (b) In case of UPI, settlement for end users happens instantly; in case of Digital Rupee, wallet balance gets transferred to another wallet (no traditional settlement)
    (c) UPI transactions are recorded by banks and reflected in bank statements; in case of Digital Rupee, no data is captured in bank statements
    (d) In both the cases (UPI and Digital Rupee), the liability lies with the users and their respective banks
    Answer: (d)”

    “[2023, GS3, 10 marks] What is the status of digitalization in the Indian economy? Examine the problems faced in this regard and suggest improvements.”

  • Why is BRICS exploring cross-border payments?

    Why in the News

    The 18th BRICS summit in New Delhi, with India as Chair, is expected to push for mechanisms to settle payments between members, including links between national digital payment systems and central bank digital currencies (CBDCs), which are digital versions of a national currency issued by its central bank. Finance ministry and central bank representatives from member countries met at Jaipur on August 12-13 to discuss financial cooperation, payments and the wider use of national currencies in settling trade between members. The push follows a 2024 BRICS report under Russia’s chairmanship, which argued that this part of the financial system is monopolised by a single institution and that the monopoly raises transaction costs. India has framed its own proposal as a way of cutting costs and speeding settlement rather than as a move away from the dollar. The tension is that every workable alternative needs a critical mass of banks and regulators to join before it saves anyone money, and the members most eager to build one are the members others are most wary of joining.

    How does a cross-border payment move today?

    1. The chain of correspondents: Money does not travel directly between the buyer’s bank and the seller’s bank. It moves through a series of correspondent banks that hold accounts with each other. Eg. An importer in Cape Town paying an exporter in Chennai is routed through a larger international bank typically headquartered in London or New York.
    2. The dollar as a vehicle: Very few banks hold both rupees and rand, so the payment is converted from rand to dollars and then from dollars to rupees, with no American party to the trade.
    3. Messaging is separate from settlement: The instructions travel over SWIFT, the Society for Worldwide Interbank Financial Telecommunication, a Belgium-based cooperative overseen by the National Bank of Belgium along with the G-10 central banks including the U.S. Federal Reserve. It carries payment instructions; the money is settled separately.
    4. Why the network is hard to displace: SWIFT is used directly by more than 11,000 institutions in over 200 countries, and smaller banks reach it indirectly through larger member banks.

    What does the chain cost?

    1. Foreign exchange margins are paid twice: Every intermediary charges a fee, and the two currency conversions mean the exchange margin is taken on both legs.
    2. The measured margins: A 2019 BRICS survey of cross-border payment systems conducted by Brazil found Brazilian respondents reporting foreign exchange margins of 2.5 per cent, rising to 8.5 per cent for payments into Africa and in some cases as high as 20 per cent.
    3. The network has thinned: The Bank for International Settlements (BIS) found active correspondent banking relationships fell by 20 per cent between 2011 and 2018, with regional declines ranging from 12 per cent to 30 per cent and Latin America worst affected. The reasons were largely commercial, since payment volumes kept growing through the same period.
    4. Speed is no longer the binding problem: SWIFT states that its Global Payments Innovation service has cut transaction times substantially, and the remaining delays are structural rather than a function of chain length.

    Why does BRICS want to change this system?

    1. Exposure to other countries’ monetary policy: Settling in a handful of dominant currencies, the U.S. dollar, the euro and the Japanese yen, exposes developing economies to policy decisions taken by the issuing countries.
    2. The stated cost argument: The 2024 BRICS report held that concentration of the messaging layer in one institution raises what every participant pays to transact.
    3. Sanctions are the sharpest driver and the sharpest deterrent: Several Russian banks were cut off from SWIFT in 2022 following Russia’s invasion of Ukraine. Sanctions-hit Russia has pushed hardest for an alternative, and that is also the reason other members are wary of joining one.
    4. The adoption problem: An alternative rail is useful only once a large number of banks and regulators have joined it, and a bank that uses one to deal with sanctioned entities risks sanctions itself.

    What alternatives are on the table?

    1. Bilateral linkage of national systems: Two countries can connect their domestic payment systems directly, avoiding correspondent banks and dollar conversion. Eg. India and Singapore have linked the Unified Payments Interface with PayNow for remittances. Building such links pair by pair does not scale.
    2. A shared hub: Project Nexus, designed by the BIS and handed to a company set up by six central banks including the Reserve Bank of India, lets each country join one connection rather than many. It goes live only in 2027 and is not a BRICS initiative.
    3. CBDC settlement on a common platform: Central banks issue digital versions of their currencies for use between banks, a settlement asset distinct from the retail digital rupee held by individuals, and exchange them on one platform. Both legs of a currency swap occur at the same instant or not at all, which removes the risk of paying out before the other side pays and cuts the capital banks must set aside.
    4. The one platform running today: mBridge, built by the BIS with the central banks of China, Thailand, Hong Kong and the UAE, was handed to its participants when the BIS left in October 2024. Over 95 per cent of its settlement volume is in China’s digital yuan, according to People’s Bank of China figures.
    5. The BRICS-specific proposal: The Kazan declaration of 2024 agreed to discuss and study the feasibility of an independent settlement system called BRICS Clear. The Rio declaration the following year did not mention it.

    What is India’s position?

    1. The proposal: India has proposed that members link their CBDCs for trade and tourism payments, extending the linkage idea from retail systems to central bank money.
    2. The framing is deliberate: Indian officials have consistently presented the payment systems as a means of cutting transaction costs and speeding settlement, not as an initiative to displace the dollar.
    3. Other members have gone further: Russian proposals, and those of some Brazilian economists, have moved towards alternative financial systems explicitly aimed at reducing dependence on the dollar.
    4. The reason for the caution: In November 2024 the U.S. President threatened 100 per cent tariffs on BRICS countries that moved away from the dollar, and a further 10 per cent on countries aligning with vaguely defined anti-American BRICS policies. The threats were not carried out.

    Challenges to a linked BRICS payment system

    1. Domestic rails are not built alike: Member systems differ in message formats, operating hours and rules on when a payment becomes final, so linking them forces each participant to change domestic infrastructure. Eg. The Unified Payments Interface settles instantly and around the clock. Several member country systems settle in batches on business days only.
      The Fix: Require every participant to migrate to the ISO 20022 messaging standard and extend operating windows so linked systems overlap for a common settlement period.
    2. Most member currency pairs have no liquid market: Settling directly in national currencies needs someone willing to hold and convert the receiving currency, which does not exist for most BRICS pairs. Eg. Indian exporters accumulated rupee balances in special vostro accounts under the rupee trade settlement mechanism that counterparties could not readily deploy.
      The Fix: Establish central bank swap lines and designated market makers for the main pairs, so balances can be converted rather than parked.
    3. One platform needs one rulebook: Customer verification, anti money laundering standards and dispute resolution differ across members, and a shared platform cannot function on several standards at once. Eg. Financial Action Task Force grey listing constrains banks anywhere from dealing with counterparties in a flagged jurisdiction.
      The Fix: Agree a common rulebook and a named dispute resolution seat before the platform carries live value rather than after.
    4. CBDC readiness is uneven across members: A linkage of central bank digital currencies cannot include a member whose currency has not reached production. Eg. India’s wholesale and retail digital rupee pilots began in 2022 and remain pilots.
      The Fix: Sequence the linkage in waves, beginning with members whose wholesale CBDC is already in live operation.

    Conclusion

    The grouping has no shortage of proposals and a shortage of commitment. Every model on the table asks members to surrender something domestically, either control over settlement or their own infrastructure standards, before any of them saves a rupee. The declarations so far have moved in the opposite direction, agreeing to study a settlement system in one year and passing over it the next. The New Delhi summit is where the members either name one model and a date for it or repeat the study language a third time.

    Back2Basics: Bank for International Settlements

    1. Established in 1930 and headquartered at Basel, Switzerland, it is the oldest international financial institution.
    2. It is owned by 63 member central banks, including the Reserve Bank of India, and functions as a bank for central banks rather than for governments or individuals.
    3. It hosts the committees that set global financial standards, including the Basel Committee on Banking Supervision.
    4. Its Innovation Hub builds payment and settlement prototypes and hands them over to participating central banks, which is how both mBridge and Project Nexus were created.

    Matching Previous Year Question

    “With reference to the Central Bank digital currencies, consider the following statements: 1. It is possible to make payments in a digital currency without using US dollar or SWIFT system. 2. A digital currency can be distributed with a condition programmed into it such as time-frame for spending it. Which of the statements given above is/are correct? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2”

  • A.P. to become third subsea hub on data centre buildout

    A.P. to become third subsea hub on data centre buildout

    Why in the News

    Technology majors Microsoft and Google are building new subsea cable landing stations on the coast of Andhra Pradesh as part of an artificial intelligence linked data centre buildout in the State. Microsoft is part of a consortium with Lightstorm and the Singaporean telecom operator Singtel to land the 3,600 kilometre India Southeast Asia Submarine Cable System, while Google’s globe spanning America India Connect system will land at Visakhapatnam, where the company’s own data centre complex is coming up. Once complete, the buildout will give India, after Mumbai and Chennai, a third digital international gateway, even as a global shortage of fibre threatens to slow the inland network these projects still need.

    What is a subsea cable landing station?

    1. Definition: A subsea cable landing station is the facility where an undersea fibre optic cable comes ashore and connects to a country’s terrestrial network, carrying the bulk of international internet traffic.
    2. Global reliance: The overwhelming majority of the world’s international data traffic travels through such undersea cable systems rather than satellites, making landing stations critical infrastructure.
    3. India’s current concentration: India’s existing landing stations are concentrated in Mumbai and Chennai, leaving the country reliant on a small number of routes.

    What new cable infrastructure is being built off Andhra Pradesh’s coast?

    1. Microsoft’s consortium project: Microsoft, alongside Lightstorm and Singtel, is landing the 3,600 kilometre India Southeast Asia Submarine Cable System, expected to be ready for service in the fourth quarter of 2029.
    2. Google’s own system: Google’s America India Connect system will land at Visakhapatnam, alongside the data centre complex the company is building there as part of what a Google executive described as an artificial intelligence hub.

    What does this make Visakhapatnam?

    1. India’s third gateway: After Mumbai and Chennai, Visakhapatnam becomes India’s third digital international subsea gateway, connecting the country directly with Southeast Asia, Australia and the Middle East.
    2. A new corridor: Lightstorm’s chief executive has described the India Southeast Asia system, which also connects to Chennai, as providing a fresh corridor to South Asia from Singapore and Malaysia.

    Why are companies building on the east coast now?

    1. Ageing existing infrastructure: Most cables currently connecting India’s east coast are old, are already filled to capacity and are approaching the end of their working life.
    2. A search for resilience: Companies are also seeking to reduce the risk of relying on a single route by adding cables on India’s east coast, citing instability in West Asia as a reason to build in an alternate location.

    What inland infrastructure does this buildout require?

    1. A nationwide undertaking: Both projects require installing and lighting thousands of kilometres of new terrestrial fibre linking the coast to major cities, a scale one company executive described as spanning the entire country.
    2. A dedicated corridor: Lightstorm is expected to build a terrestrial corridor connecting Machilipatnam to Mumbai and Hyderabad, and Chennai to Hyderabad and Mumbai, with matching bandwidth.
    3. A global fibre shortage: Fibre, its components and its raw material are in short supply worldwide, including from Indian manufacturers, a constraint industry executives describe as unprecedented in over a decade.

    What will Google’s Visakhapatnam facility do?

    1. Focused on inference: The facility will focus on inference work rather than power intensive training runs, serving domestic enterprises and government agencies given the deep adoption of artificial intelligence across government service delivery.
    2. Power and water choices: Google is seeking to source as much renewable power for the project as possible and is using air cooling technology to minimise water use.

    Challenges to the subsea cable buildout

    1. A global fibre shortage: A worldwide shortage of fibre and its raw material, unprecedented in over a decade, could delay the inland network these projects still need. Eg. Industry executives report that fibre is out of stock across the globe, including from Indian manufacturers. Fix. Expand domestic fibre manufacturing capacity through targeted incentives so the inland rollout is not held back by global supply constraints.
    2. Physical vulnerability of undersea cables: Undersea cables remain exposed to accidental damage from fishing and anchoring activity and to disruption in contested waters. Eg. India’s existing east coast cables are already ageing and running close to capacity, leaving few redundant routes today. Fix. Build multiple, geographically separated landing points and routes, as the new Visakhapatnam gateway is itself intended to do, so a single cable fault cannot isolate India’s connectivity.
    3. Concentration of ownership with foreign firms: The new cable systems and the data centres they serve are being built and operated by foreign technology majors, so India’s expanding gateway capacity depends on the investment decisions of a small number of firms. Eg. Both the India Southeast Asia system and the America India Connect system are anchored by Microsoft and Google respectively rather than Indian carriers. Fix. Encourage Indian telecom operators to invest jointly in landing station capacity so gateway control is not concentrated entirely with foreign firms.

    Conclusion

    Andhra Pradesh’s coastline is emerging as India’s third major digital gateway, as Microsoft and Google build new subsea cable systems into Visakhapatnam alongside the data centres driving the region’s artificial intelligence buildout. Delivering on that promise depends on inland fibre rollout keeping pace despite a global supply crunch, and on India diversifying its cable landing points and ownership so its expanding digital infrastructure does not remain concentrated in a handful of ageing routes and foreign owned systems.

    [2023] “What is the status of digitalization in the Indian economy? Examine the problems faced in this regard and suggest improvements.”