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Digital Payments

2021 APR 19

Mains   > Economic Development   >   Indian Economy and issues   >   Digital technology

WHY IN NEWS:

  • Digital payments in India are set to account for 71.7% of the total payments volume by 2025, leaving cash and cheques at 28.3%, according to a report by a US-based payment systems company ACI worldwide

DEFINITION OF DIGITAL PAYMENT:

  • The Payment and Settlement Act, 2007 has defined Digital Payments.
  • As per this any “electronic funds transfer” means any transfer of funds which is initiated by a person by way of instruction, authorization or order to a bank to debit or credit an account maintained with that bank through electronic means and includes:
    • Point of sale transfers
    • Automated teller machine transactions
    • Direct deposits or withdrawal of funds
    • Transfers initiated by telephone, internet and, card payment

SEGMENTS OF PAYMENT SYSTEMS:

  • The payment system could be bifurcated into two main segments.
    • Systemically Important Financial Market Infrastructure (SIFMIs):
      • Real Time Gross Settlement (RTGS), Collateralized Borrowing and Lending Obligation (CBLO), Government Securities etc.
    • Retail Payments:
      • Under the Retail Payments segment which has a large user base, there are three broad categories of instruments.
      • They are Paper Clearing, Retail Electronic Clearing and Card Payments
      • Examples of such payments are Immediate Payment Service (IMPS), UPI, credit card, debit card etc.

STATISTICS:

  • The number of digital payments per capita has raised 10 fold from 2.4 in 2014 to 22.4 in 2019.
  • Digital payments in India are witnessing consistent growth at a compound annual growth rate (CAGR) of 12.7%
  • The total digital payment market in India will grow to US$1 trillion by 2023 led by the growth in mobile payments

GOVERNMENT INITIATIVES:

  • Digital India initiative:
    • It aims for development of secure and stable digital infrastructure, delivering government services digitally, and universal digital literacy >> which is imperative for the development of a robust digital payment ecosystem
  • Building infrastructure and institutions:
    • India Stack:
      • It is a set of APIs that allows governments, businesses, startups and developers to utilise an unique digital Infrastructure to solve India’s hard problems towards presence-less, paperless, and cashless service delivery
    • Aadhaar
    • National Payments Corporation of India (NPCI)
      • NPCI was set up to build a superhighway for digital payments, taking a number of policy decisions to spread digital payments and protect consumer interest.
  • Demonetization
    • Demonetization resulted in the withdrawal of 86% of India’s total currency value in circulation, leading to an enormous increase in the adoption and dependence on digital payments
  • Awareness generation:
    • DigiShala:
      • Educational TV Channel for Digital Payments for creating awareness.
    • Vittiya Saksharta Abhiyan (VISAKA)
      • by Ministry of Education to actively engage the youth/ students of Higher Education Institutions to encourage and motivate all payers and payees to use a digitally enabled cashless economics system for transfer of funds.
    • Pradhan Mantri Gramin Digital Saksharta Abhiyaan:
      • To make 6 crore persons in rural across States/UTs, digitally literate.
  • New Modes of Digital Payments
    • Bharat Bill Payment System (BBPS)
    • Bharat Interface for Money (BHIM)
    • Bharat Quick Response Code Solution (Bharat QR)
  • Amendments to the Payment and Settlement Systems Act, 2007:
    • To adopt provisions conducive to the emerging digital payment ecosystem
  • Financial Inclusion Fund:
    • To support the creation of financial inclusion infrastructure across the country including development of digital payment infrastructure
  • Initiatives taken by RBI:
    • National Electronic Funds Transfer (NEFT) system
    • RBI had issued guidelines for issuance and operations of prepaid payment instruments (PPIs)
    • Rationalisation of Merchant Discount Rate:
      • MDR aims at achieving the twin objectives of increased usage of debit cards and ensuring sustainability of the business for the entities involved.
      • No Merchant Discount Rate (MDR) charges will be imposed on customers as well as merchants for transactions through Rupay debit card and UPI
    • Safety and security of payment system data:
      • RBI issued an order that mandates all system providers to store the data relating to payment systems only in India.
  • Dis-incentivizing cash transactions:
    • Imposition of 2% tax on cash withdrawal of over 1 crore from a bank account to discourage the practice of making business payment in cash
  • Mandates for business entities:
    • Business units with turnover of 50 crore will be mandated to offer low cost digital modes of payments such BHIM UPI, Aadhaar pay etc.
  • Schemes to promote digital payments:
    • Lucky Grahak Yojana and Digi Dhan Vyapar Yojana
      • To give cash awards to consumers and merchants who utilize digital payment instruments for personal consumption expenditures
  • Targets to central ministries:
    • Digital payment transaction targets have been assigned to Central Ministries with high citizen points
  • Digital payment dashboards:
    • To track and monitor the progress of digital transactions achieved by banks
  • Committees on digital payments:
    • Ratan Watal Committee on promotion of digital payments ecosystem in India.
    • RBI appointed Nandan Nilekani Committee on Deepening of Digital Payments in India

ISSUES:

  • Monopolistic behavior by big tech companies:
    • There are allegations that Google is using its market dominance to arbitrarily enforce policies and target competitors
    • Play Store is the key app store for Google’s Android operating system, which runs over 90% of smartphones in India.
    • For example: in Sept 2020, Google “arbitrarily” shut off Paytm from its app store.
    • Google also announced that it will start enforcing a 30% commission on all payments made for digital services in apps from its Play Store.
  • Cyber security:
    • With more and more users preferring digital payments, the chances of getting exposed to cyber security risks such as online fraud, information theft, and malware or virus attacks are also increasing.
    • Frauds in digital payments account for about half of all bank fraud cases in India
  • Lack of internet penetration:
    • Access to internet is the key to enable digital payments.
    • As per a consultation paper by TRAI, around 65 per cent of rural India does not have access to the internet.
  • Low penetration of digital payments:
    • India is still behind many other nations in digital payments per capita (96.7 for China and 148.5 for Brazil)
  • High dependence on cash:
    • Due to benefits of cash usage:
      • Ease of usage, universal availability and acceptance, low cost to consumer, and no requirement of KYC – continues to play a significant role in payments.
    • Gaps in ‘digital credit’ and ‘digital debit’:
      • Digital payments have steadily become a significant mode for the inflow to the Indian consumer via Government benefit payments and salaries in the organized sector
      • Cash is still the dominant mode for the outflow for this Indian consumer because of the underdeveloped nature of the acceptance ecosystem for digital payments
      • Additionally, the unorganized sector continues to depend on cash for both their credits and debit
  • Challenges on the acceptance side
    • High cost structures, including interchange fees, as well as limited financial service offerings impede merchants from accepting digital payments.
  • Lack of a dedicated grievance redressal mechanism

WAY FORWARD:

  • Recommendations of Ratan Watal committee:
    • Make regulation of payments independent from function of central banking by:
      • Creating an new payments regulator or
      • Providing statutory status to the new Board, within the overall structure of RBI, called Payments Regulatory Board (PRB)
    • Update the current Payments and Settlement Systems Act, 2007:
      • To include explicit mandate for competition and innovation; open access and interoperability; consumer protection; data protection and security etc.
    • Measures to be undertaken by the Government:
      • Promote digital payments and receipts within Government and create infrastructure for all such needs
      • Mandate government departments and agencies to provide option to consumers to pay digitally.
      • Withdraw various charges on different electronic payments  and bear cost of electronic transactions
      • Incentivise consumers to make payments (including payment of taxes, fines and penalties) to Government electronically by giving a discount or cash back.
      • Promote digital payments for low value transactions
      • Create DIPAYAN (Digital Payments Action Network) fund from savings generated from cash-less transactions to promote public education and acceptance of digital payments.
      • Create a ranking and reward framework to encourage and recognise government departments, State Governments, districts and panchayats and other market participants.
    • Measures to be taken by RBI
      • Upgrade payment systems like RTGS and NEFT to operate on 24x7 basis
      • Create a formal mechanism to allow innovations and new business models
  • Recommendations of the Nandan Nilekani committee:
    • Reducing charges:
      • Merchant Discount Rate (MDR) should be subsidised by the government and interchange fee on card payments should be reduced to incentivise digital payments
    • Fiscal measures:
      • Removal of import duties from point-of-sale (POS) devices and waiving GST on Immediate Payment Service
    • Promote financial inclusion:
      • Regional Rural Banks should be brought under digital payment ecosystem to further inclusion
      • RBI should develop a Financial Inclusion Index to compare different areas
      • A digital payment subcommittee should be setup at state level to map financial institutions and identify gaps
    • Simplifying KYC process:
      • The Committee recommended that existing rules need to be modified to recognise valid documents that are digitally signed by the customer to simplify KYC process
  • Need for measurement of digital payments
    • Measurement of digital payments is extremely important to monitor progress.
    • The different components of digital payments have to be comprehensively studied with respect to global best practices and the list of indicators which are universally acceptable and relevant in the current context may be considered by RBI.
  • Rational structure of pricing:
    • The ideal pricing for digital payments products should be based on an analysis of producer surplus, consumer surplus and social welfare for which we need cost-volume-price data.
  • Foolproof security measures to enable confidence and trust
    • For example: Biometric authentication-enabled cards can provide a greater layer of security by enabling replacement of traditional PIN

PRACTICE QUESTION:

Q. ‘Cyber-security is one of the most critical challenges faced by stakeholders of the digital payment ecosystem’. Discuss.