By Zaheer Merchant and Nikhil Pahwa
Kotak Mahindra Bank will begin charging customers for peer-to-peer Unified Payments Interface (UPI) transactions from May 1, becoming the first bank to do so, the Times of India reported. According to the report:
- From May, Kotak Mahindra Bank customers will be able to make 30 free P2P transfers each month using UPI.
- After this the bank will charge Rs 2.50 per transaction for transfers of Rs 1,000 or less, and Rs 5 plus 18% GST for transfers of more than Rs 1,000.
Rohit Rao, chief communication officer, Kotak Mahindra Group, told the Hindu, “More than 95% of our customers do an average of 5-10 UPI transactions a month. [The new charge] is intended to prevent abuse of the UPI system and will not impact genuine customers. Receiving money through UPI as well as all merchant transactions continue to be free.” The Hindu also said other banks such as ICICI, HDFC and SBI were likely to follow suit, according to banking industry sources. In all 142 banks currently offer UPI payments.
Data released by NPCI revealed that almost 80 crore UPI transactions were carried out in March. The total value of these transactions was Rs 1.33 lakh crore, almost 24% higher than in February, when 67.4 crore transactions valued at Rs 1.07 lakh crore were carried out. The average transaction value rose to almost Rs 1,700 in March after hovering between Rs 1,500 and Rs 1,600 from December 2018 to February 2019.
- Addressing users gaming the system: Indian users have often gamed the system, and largely done P2P transactions to meet the numbers, and get cashbacks and rewards. Google Pay, Paytm and PhonePe have all given rewards for usage. PhonePe had said once that most of the Paytm transactions coming to them were low value and meant to enable cashbacks, saying that:”Paytm’s transaction volumes are clearly influenced by significant per-transaction cashback incentives that appeal to a very small population.”In October 2018, the NPCI restricted the number of P2P transactions to 10 per day. That’s one way of restricting usage for cashbacks. Another is to put a transaction fee. Given the restriction that NPCI had put in of 10 P2P transactions a month – is it still active? How will users do more than 30 P2P transactions on Kotak then? – the limit of 30 free P2P transactions seems reasonable, and limited to P2P and not merchants, seems fine.
- Convenience fee for banking: Somebody’s got to pay for the cost of digital transactions. When demonetisation was announced we had said that the cost of cash is borne by the government, while the cost of digital is borne by the merchant or the customer. In merchant transactions, the merchant bears the cost of payments (and the cost gets transferred to the consumer, in terms of cost of product/service). In P2P, which was meant to be free, the cost will now be borne by the customer. Either way, the bank charging for P2P transactions, instead of having to bear the cost of a teller allowing you to take cash out shouldn’t really that of the customer, but it is.
- Doing the math: According to its investor presentation, Kotak Mahindra Bank reported 31 million transactions a month in December 2018. I’m going to make a bunch of assumptions about how this will work.
- Highest revenue assumption: say 100% of all transactions are P2P (which they’re not), and of which 100% were paid, and 100% were more than Rs 1000. That means that the maximum possible revenue from UPI for Kotak Mahindra Bank that month would have been Rs 15.50 crore. This isn’t possible because users get 30 free P2P transactions per month.
- High revenue assumption: Say 80% of the 31 million transactions are P2P of which 30% are free and 70% are paid. If we assume that 20% of these are below Rs 1000 and 80% are above Rs 1000, then the revenue that Kotak would have made that month is Rs 8.25 crores.
- A moderate revenue assumption: Say 50% of the 31 million transactions are P2P of which 50% are free and 50% cross the line of a user doing more than 30 transactions a month. That means that there were, we assume, 7,750,000 paid transactions. If we assume that 50% of these are below Rs 1000 and 50% are above Rs 1000, then the revenue that Kotak would have made that month is Rs 2.325 crores.
- A low revenue assumption: Say 80% transactions are P2M, 20% are P2P. Of these, 80% are free and 20% are paid. Of the 20%, 80% are below Rs 1000 and 20% above, then the revenue that Kotak would have made that month is Rs 37.20 lakh
A prediction: So the range of revenue per month for Kotak here is from Rs 37 lakh on the lower side, to close to or less than Rs 15.5 crores on the higher side. A bank that did Rs 1291 crores in profit after tax in a quarter might not want to consider very seriously a revenue item that would have yielded around Rs 8.25 crore in its best month (24.5 crores in the quarter, or a contribution of 1.9% of profit post inclusion.
This is more about creating a habit, and getting users used to paying for UPI. Give it time. In time, every UPI transaction will be paid, and the cost of money would have transferred 100% to the customer.