Digital payment in India GS: 3 "EMPOWER IAS"

 

Context: 

• As the growth of digital payments in India is going to be phenomenal, several opportunities and challenges are waiting ahead.

 

Digital payment in India:

• Steered by the RBI: The evolution of digital payments in India is piloted by the Reserve Bank of India (RBI) and captured in the Payment Systems in India, published in 1998. 
• Introduction of RTGS: 
  • Launched by the RBI in 2004,  Real Time Gross Settlement System (RTGS) gave a major thrust toward large value payments. 
  • It covered payments on stock trading, government bond trading and other customer payments. It substantially reduced the time taken for settlements. 
• RBI introduced National Electronic Funds Transfer (NEFT): NEFT is available round the clock and RTGS will follow from December 2020.
• Contribution of Securities and Exchange Board of India (SEBI): The market regulator is attracting more international capital into the Indian market, in turn broadening and deepening the financial market.
• Setting up of the National Payments Corporation of India (NPCI): 
  • It was set up by 10 lead banks of the RBI in 2009, based on the vision document on payments system, 2005-08 released by RBI in 2005. 
  • 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. 
  • Success story of NPCI: The NPCI’s success supported by innovative technology, viz. Unified Payments Interface (UPI) and Immediate Payment Service (IMPS), is well recognised by central banks in many other countries. 

 

Challenges: 

• Reducing cost of digital payments: To make digital payments more inclusive.
• Role of NPCI: With digital payment being a public good like currency notes, it is necessary that the corporation is fully supported by the RBI and the government. 
• However, there is a demand from some quarters that the NPCI should be converted into a for-profit company to withstand competition. 

 

Evolution of Digital Payments in India

• India’s digital payments system - has been evolving robustly over the past many years, spurred by developments in information and communication technology, and fostered in consonance with the path envisioned by the Reserve Bank of India.
• National Payments Corporation of India (NPCI) was established in 2008–has been spearheading the development of the retail payments system.
• Important milestones attained in process of development of the payments system include:
  • Introduction of MICR clearing in the early 1980s. It is online image-based cheque clearing system where cheque images and magnetic ink character recognition (MICR) data are captured at the collecting bank branch and transmitted electronically.
  • Electronic Clearing Service and Electronic Funds Transfer in the 1990s.
  • Issuance of credit and debit cards by banks in the 1990s.
  • National Financial Switch in 2003 that brought about interconnectivity of ATMs across the country.
  • RTGS and NEFT in 2004.
  • Cheque Truncation System (CTS) in 2008. Cheque Truncation System (CTS) or Image-based Clearing System (ICS) is for faster clearing of cheques. Cheque truncation means stopping the flow of the physical cheques issued by a drawer to the drawee branch.
  • 'Card not present' transaction in 2009. It is most commonly used for payments made over Internet, but also mail-order transactions by mail or fax, or over the telephone.
  • New RTGS with enhanced features in 2013 that required banks to adopt ISO 20022 standard messaging formats. The objective of introducing ISO 20022 standard message format for payment system is to bring about standardisation in the messaging formats for various payment systems in the country and to conform to international standard.
  • Non-bank entities have been introduced in the issuance of pre-paid instruments (PPI), including mobile and digital wallets. BHIM (Bharat Interface for Money) is a mobile payment App developed by the National Payments Corporation of India (NPCI), based on the Unified Payments Interface (UPI).

 

Trends during 2016-17 and 2017-18

• The demonetization in early November 2016 and other series of measures announced by the Government and the RBI to promote the movement from cash to non-cash modes of transactions impacted the volume and value of payments systems.

 

Volume: Instrument Wise Growth Trends (Data source – RBI)

• Transactions relating to IMPS, PPI and Debit card had exhibited growth rates in triple digits in the year 2016-17. This growth trend however has slowed down in 2017-18 and all these instruments exhibited double digit growth.
• UPI has grown multi-fold in the year 2017-18 and touched 915.2 mn transactions in 2017-18. This instrument had minimal presence in year 2016-17.
• The volume of paper clearing had been persistently showing negative growth throughout the year 2017-18 compared to the positive growth in 2016-17.
• NEFT volumes had showed an impressive increase in 2016-17. It continued to grow in 2017-18 albeit a slower pace.

 

New Modes of Digital Payments

In addition to UPI which was introduced recently, several other modes have been introduced by NPCI.

• Bharat Bill Payment System (BBPS): Bharat Bill Payment System is a tiered structure for operating a unified bill payment system. NPCI functions as the authorised Bharat Bill Payment Central Unit (BBPCU), which is responsible for setting business standards, rules and procedures for technical and business requirements for all the participants. Under BBPS the Bharat Bill Payment Operating Units (BBPOUs) will function as entities facilitating collection of repetitive payments for everyday utility services, such as, electricity, water, gas, telephone and Direct-to-Home (DTH).
• Bharat Interface for Money (BHIM): Bharat Interface for Money is a mobile application that enables simple, easy and quick payment transactions using Unified Payments Interface (UPI). Instant bank-to-bank payments and Pay and Collect Options are facilitated using just Mobile number and Virtual Payment Address (VPA). The application was launched by NPCI.
• Bharat Quick Response Code Solution (Bharat QR): An interoperable solution for QR code, developed by NPCI, MasterCard and Visa. Merchants can display these QR codes at their premises and customers can pay through linked account by scanning these QR codes via Bharat QR enabled application in an interoperable environment.

 

 

Growth Drivers for Digital Payments

• In 2017-18, the Volume segment in Digital Payments is dominated by Debit Cards, PPIs and IMPS. These, together constitute close to 50 % of the total volume of Digital Payments. Their combined share in 2011-12 was about 14%.
• In 2017-18, Value segment is dominated by RTGS and NEFT. These together constitute about 53 % of the total value of Digital Payments, which is almost same as in 2011-12.

 

Authorized Payment Service Providers

• Reserve Bank of India under the Payment and Settlement Systems Act, 2007 issues Certificates of Authorization for Setting up and Operating Payment System in India.
• Regulations for Authorisation process:
  • Board for Regulation and Supervision of Payment and Settlement Systems Regulations, 2008.
  • Payment and Settlement Systems Regulations, 2008.
• The 58 banks permitted to issue pre-paid cards in India as on 22nd June 2018.

 

Digital Payments Service Charges

• RTGS Service Charges: These charges would consist of monthly membership fee and processing charges per transaction.
• NEFT Service Charges:
  • Inward transactions at destination bank branches (for credit to beneficiary accounts) – Free, no charges to be levied on beneficiaries.
  • Outward transactions at originating bank branches – charges applicable for the remitter. Originating banks are required to pay a nominal charge of 25 paise each per transaction to the clearing house as well as destination bank as service charge. However, these charges cannot be passed on to the customers by the banks.
• PPI/Mobile Banking/IMPS/USSD: No charges are prescribed by RBI and the charges are determined by the entity. As a temporary measure, it was decided that all participating banks and Prepaid Instrument (PPI) issuers would not levy any charges on customers for transactions up to Rs. 1000 settled on the Immediate Payment Service (IMPS). Also, no charges are levied on USSD-based *99# and Unified Payment Interface (UPI) systems.

 

Emerging Global Trends:

• As per the report of Capgemini on ‘Trends in Payments 2018’, the Top 5 trends in Digital Payments across the world are as follows:
• Alternate payment channels such as contactless payments fulfill customer demands for convenience and speed and could soon become main-stream.
  • Contactless payments enable consumers to make everyday purchases quickly and safely especially for low-value transactions. (Contactless payment is a secure method for consumers to purchase products or services via debit, credit or smartcards (also known as chip cards). To make a contactless payment, a person simply needs to tap their card near a point-of-sale terminal & do not require a signature or a PIN, transactions sizes on cards are limited).
  • Augmented Reality (AR)-integrated payment gateway delivers a superior customer experience. Mastercard now allows customers to log in to the mobile payment app Masterpass by scanning their iris (one of the safest means of facial recognition).
• Banks and Fin-Tech (Financial Technology) companies explore distributed ledger technology to transform cross-border payments.
  • The current cross-border payments model lacks an international clearinghouse and relies on correspondent banks, which causes inefficiency, slow speed, and high cost. As a result, corporate customers are demanding transformation.
  • A distributed ledger-based cross-border payments model is expected to result in improved efficiency, enhanced security, and lower costs.
• Instant payments ‘new normal’ for corporate treasurers, industry: Banks are leveraging instant payments platform to connect with third parties to deliver better digital customer experience and provide innovative products and services to both retail and corporate customers.
• As global cyber-attacks rise, regulators focus on data-privacy law compliance:
  • Based on estimates, cyber-attacks cost the global economy 1% of annual GDP.
  • The cyber insurance industry grew 35% in 2016 to $1.35 billion in terms of direct written premium, which shows that corporates are looking to protect themselves from liabilities related to cyber-security laws.
  • Lack of harmonization in cyber-security laws in different countries is a challenge for multinational companies operating across the globe.
  • Regulators across the world are bringing in new cyber-security regulations and standards which could impose heavy fines, injunctions, audits, even criminal liability on firms for a data breach.
• Payments Infrastructure rationalization is likely through mergers and acquisitions to expand the reach of the payments firms, increase their value proposition to meet changing customer expectations, and create customized solutions.

 

Steps taken by the government: 

• On merchant discount rate: In Budget 2020-21, the government prescribed zero Merchant Discount Rate (MDR), the rate merchants pay to scheme providers, for RuPay and UPI, to popularise digital payments benefiting both customers and merchants. 

 

Different digital payment modes in India:

• Cards:
  • Banking cards offer consumers more security, convenience, and control than any other payment method.
  • There are wide variety of cards available – including credit, debit and prepaid.
• Internet Banking
  • It is an electronic payment system that enables customers of a bank or other financial institution to conduct a range of financial transactions through the financial institution's website.
  • Different types of online financial transactions are: National Electronic Fund Transfer (NEFT), Real Time Gross Settlement (RTGS), and Immediate Payment Service (IMPS).
• Unstructured Supplementary Service Data (USSD):
  • This service allows mobile banking transactions using basic feature mobile phone (dialling *99#), there is no need to have mobile internet data facility for using USSD based mobile banking.
  • Key services offered under *99# service include, interbank account to account fund transfer, balance enquiry, mini statement besides host of other services.
• Mobile Banking
  • Mobile banking is a service provided by a bank that allows its customers to conduct different types of financial transactions remotely using a mobile device.
  • It uses software, usually called an app, provided by the banks or financial institution for the purpose. Each Bank provides its own mobile banking App.
• Unified Payments Interface (UPI)
  • It is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood.
  • Each Bank provides its own UPI App.
• Mobile Wallets
  • It is a way to carry cash in digital format. Instead of using physical plastic card to make purchases, we can pay with our smartphone, tablet, or smart watch.
  • An individual's account is required to be linked to the digital wallet to load money in it.
• Aadhaar Enabled Payment System (AEPS)
  • AEPS is a bank led model which allows online interoperable financial transaction at PoS (Point of Sale / Micro ATM) through the Business Correspondent or Bank Mitra of any bank using the Aadhaar authentication.

 

Way ahead: 

• Rational structure of pricing: 
  • The ideal pricing for digital payments products should be based on an analysis of producer surplus, consumer surplus (i.e. gain or loss of utility due to pricing) and social welfare for which we need cost-volume-price data. 
• Supporting NPCI:
  • Like the RBI is providing free use of the RTGS and other products, the strategy should be to assist the NPCI financially, to provide retail payment services at reduced price in certain priority areas. 
  • This may also help support expansion of the payment system network and infrastructure in rural and semi-urban areas in partnership with Fin-Tech companies and banks.