RBI's lagged credit proposal may raise costs, need switch changes

RBI's proposal for lagged credits in digital payments could require switch-level changes, raising costs for UPI ecosystem and banks, industry sources say

The Reserve Bank of India’s (RBI’s) proposal to introduce “lagged credits” for digital payments could require significant changes at the switch level, including for the Unified Payments Interface (UPI), potentially raising transaction costs, according to sources.

 

The central bank has suggested to introduce a one-hour lag on account-to-account transfers above ₹10,000 via digital payment methods, with an aim to curb rising financial scams. This would allow customers to cancel a transaction within the stipulated time should suspicion of a fraud arise.

 

Industry players believe that this is likely to lead to higher costs on the technology service provider (TSP) side, which will be naturally passed on to banks, increasing the processing cost of a transaction.

 

However, core banking systems (CBS) of banks are unlikely to require any major modifications, said a source with knowledge of the matter.

 

“Orchestration at the switch level will increase. It is likely to create an overload on the UPI switch predominantly. It will come as a cost to the bank because TSPs will pass on the cost to the lender,” the source said.

 

In digital payments, a switch is a central transaction-routing system that connects multiple participants such as banks, payment service providers, and organisations such as the National Payments Corporation of India (NPCI), which operates UPI, and directs payment messages between them in real time.

 

The proposal is part of a discussion paper where the central bank has kept the window for comments open until May 8. The RBI will review feedback before issuing draft guidelines.

 

The suggestion comes at a time when the value of digital payment frauds has risen more than 40 times in the past five years driven by fraudsters who trick individuals into paying money through socially engineered scams.

 

In India, more than 85 per cent of digital payment transactions by volume happen on UPI.

 

RBI data shows that transactions over ₹10,000 account for about 45 per cent of fraud cases by volume and 98.5 per cent by value.

 

“Some of the ideas mentioned in the discussion paper are evolutionary in nature. Our members will deliberate on the discussion paper and we will give our feedback to the RBI,” said Vishwas Patel, director, Self-Regulated PSO Association (SRPA), a self-regulatory body for the payment system operator (PSO) sector.

 

The system with lagged credits will come with exemptions for merchant payments, recurring payments, and payments by cheque. This is because most payments to merchants are enabled only after due diligence by banks and payment aggregators, while no comparable safeguard exists for account-to-account transactions.

 

Among other measures, the paper has outlined steps such as additional authentication by “trusted individuals” for vulnerable users, a tighter scrutiny of accounts receiving large credits, and expanded customer-controlled safeguards.