Digital payments in India going through a significant change, growing a factor of 10 in the last 5 years. In addition to the volume, the space is growing in richness with a diversity of solutions. There is a requirement for the regulator to be nimble, to be able to guide the industry through a growth spurt.High Level Committee Report on Deepening of Digital Payments
A High Level Committee was constituted by the Reserve Bank of India (“RBI”) which released its Report on Deepening of Digital Payments dated May 17, 2019. The Report took note of India’s large volume and retail payment systems and its able regulatory system The Per Capita Digital Transactions is targeted to increase ten times from March 2019 to March 2022 with targeted digital payment users (active in the month) in three years to increase to 300 Million from the current 100 Million. The Committee acknowledged the momentous strides made in India’s digital payments infrastructure. However, the committee noted the lagging anatomy of acceptance ecosystem. The Report asserted the need to address this gap between the digital credits received by the consumer and the digital debits he needs to make to boost the country’s overall digital payments.
Per the Committee, the Regulator should stand firm on few pillars (viz. protection against systemic risks, customer protection, inclusion, competitive markets and enabling innovators) and leave technology and pricing to the market. The Government, being the single largest participant in payments was recommended to lead on all aspects of digitization of payments.
The committee made several recommendations, primary of which are as follows:
- Correction of the cost structure currently inhibiting acquirers and merchants.
- Overall costs incurred by the consumer for digital payments be reduced.
- Consumer confidence needs strengthening.
- Cash In/Cash Out (“CICO”) network needs to be made robust.
- Waiver of convenience fee on C2G payments.
- Digital Financial Inclusion Index and Data collation by RBI.
The limitation of acceptance infrastructure stems from the unviable nature of card transaction acquisition. This, the Committee noted required changing, so as to bring in more players, innovation and investment. Preparing scale requires strengthening CICO network, changing user behaviour by enabling high volume use cases (by including recurring payments, bill payments, transit payments and small merchant transaction) and removing friction by addressing specific problems encountered in the ecosystem. Various elements of the ecosystem were assessed, as discussed below.
The Committee suggested various interventions for Cards (Credit/Debit, NCMC, Kisan Cards). These include subsidizing transactions, redistributing costs to change interchange fee, reducing real costs in the system and to incentivize activation and transactions.
While ideally, interchange fee should be determined by the market, the committee thought that was failing as there were fewer acquirer and to correct this situation, it recommended a reduction of interchange on card payment to be reduced by 15 basis points (0.15%).
Another notable suggestion was of setting up an Acceptance Development Fund to which issuers would be required to contribute from the interchange fees, matched by funds from the RBI. This fund would primarily be used to improve the acquisition of infrastructure in lower-tier areas to ensure optimum utilization of millions of cards issued to customers, resulting in increased digitization in deficit centres, which could also be utilized for incentivizing digital transactions by Jan Dhan Account holders.
It was also recommended that Point of Sale (“PoS”) be installed at Government utility payment point.
Non-Card Retail Payment
Immediate Payment Service (“IMPS”) is a fast payment system operated by NPCI. It is available 24*7 on a real time basis. Electronic Clearing Service (“ECS”) is operated by the RBI and bank. It has two variants – Credit and Debit – for facilitating one-to-many payments such as dividend, salary, interest payments etc. National Automated Clearing House (“NACH”) has features similar to ECS with a centralized mandate management system. NACH is also used for making payments related to Government benefits, e.g. subsidies. It is operated by NPCI.
A variant of NACH called eNACH has been created, which is digital, and relies on a digital signature of the user (based on eSign with Aadhaar). Recently, the RBI approved the use of other authentication methods for eNach including net banking and debit card. However, it was noted that ECS and NACH rely on paper forms as well as it is very difficult to stop these mandates. Even digitally approved mandates can take a while to approve. To this tune, the Committee recommended signing Service Level Agreements (“SLA”) with banks for NACH Registrations. The average turnover time and the number of SLA breaches would be reported to RBI.
BHIM UPI Platform is an app-based platform enabling customers to provide just a registered virtual access to make and receive payments. It was launched in August 2016 and enables two-factor authentication. It facilitates instant money transfer through a simple payment address. BHIM-UPI neared 800 M transactions per month in March in less than three years from its launch. To enable this platform to reach its full potential, the Committee recommended it include support for repeat payments, in control of the user; as also to enable the user to see a list of all active mandates, payments against these mandates, and to revoke them at will. This will reduce friction in high-volume payments and boost bill payments, subscriptions, EMIs and SIPs. Other recommendations to improve the efficiency of this platform are as follows:
- Enhance BHIM UPI protocols to include currency conversion support.
- Allow foreign inward remittance to accounts, where remittance is permitted today.
- Direct connection to global payment systems, ensuring an immediate, low-cost inward remittance through BHIM UPI.
- Allow Indian users to use BHIM UPI when they travel abroad.
- This is like Chinese users being able to use We Chat in many jurisdictions
- License BHIM UPI specifications and technology to other operators.
- NPCI could act as payment systems operator in other geographies.
OTHER PAYMENT RELATED SYSTEMS
Bharat Bill Payments System (“BBPS”) is integrated bill payment system offering anytime anywhere interoperable bill payment service to customers using online payments as well as through its network of physical agent locations. The Committee reimagined BBPS as an API platform which would enable any legitimate biller to easily connect to the system and present a bill. To this tune, it recommended the creation of a robust CICO Network so BBPS payments would be accepted at all points in its network and at other banking access points.
Bharat QR Code (“BQR”) Code is an interoperable QR Code which obviates the need to have QR codes at a merchant location for each of the card payment network. BQR based payment is initiated by a cardholder using his/her phone. It sees a low volume of transactions. The Committee thus recommended onboarding of small merchants as also to ease the generation of the code through various channels including the branch, USSD, or phones etc.
Over the past few years, most central government outflow has been in the form of digital transactions and there has been significant digitization even in the collection of both direct and indirect taxes and accounting of online direct taxes and reporting of payments as well as receipts on-line direct taxes. The Committee, however, assessed the roadblocks to reaching the optimal position and made several recommendations. It recommended digitization of Government Accounts including any necessary business process re-engineering. It also recommended meeting the gaps existing at State Government Level and the many more gaps existing at the urban local body and panchayat raj level. It recommended that G2C/Business payments must ensure that all payouts are through digital means (includes salaries, pensions, DBT, Payment for goods or services procured) Further, it recommended digitization of Citizen/Business to Government Payments (includes all government services, taxes, fees; public transport procurement costs such as earnest money deposits etc; public sector services’ utilities and transportation)
DIGITAL FINANCIAL INCLUSION
RBI defines Financial Inclusion as a “process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low-income groups in particular, at an affordable cost in a fair and transparent manner by regulated, mainstream institutional players“. It is especially linked to benefit disadvantaged groups such as women, youth, disadvantaged groups of society and rural communities residing especially in unbanked/ underbanked areas. Digital Financial inclusion refers broadly to the use of digital financial services to advance financial inclusion.
The committee recognized the following issues with India’s financial exclusivity:
- Undignified service that is meted out to beneficiaries, particularly in the rural areas where beneficiaries end up having to sit on the floors and in heat in queues for an entire day.
- Dedication of account for each scheme leads to the operation of several accounts which doubles the first issue, beneficiaries end up losing on multiple days pays. Additionally, this is also burdensome for the banks.
- Distance from banking access point leads to an unreasonable denial of access for beneficiaries from their accounts.
The Committee recognized the need to map all financial institutions (Regional Rural Banks, Post Offices, Payment Banks, Co-operative Banks, BC, ATMs, PoS Devices. It recommended that local bodies such as SLBS need to ensure that no user is more than 5 km away from a banking access point.
In order to enable RBI to drive the desired financial inclusion, it recommended RBI to create an efficient data and in that, to take assistance from SLBC & DLCC to ensure that infrastructure grows in tandem with demand and usage, and is thus viable.
Introduction of Digital Financial Inclusion Index (to be computed on a monthly basis) was also recommended to include the following:
- The fraction of the population that has bank accounts
- The fraction of women-owned accounts where she is the first/sole owner.
- The fraction of accounts which have done at least one user-initiated transactions that month
- The fraction of accounts which have enabled mobile/ internet banking
- The fraction of accounts which have done at least one user-initiated digital payment transaction that month.
- The fraction of accounts which have a woman as the first (or sole) owner that are digitally active.
This data must be made available to the SLBC, and DLCC, who can use it to identify what needs to be done to increase the number of activated accounts and encourage usage. This could be in the form of user education, creation of more infrastructure, etc. The SLBC and DLCC can help ensure that the infrastructure grows in tandem with demand and usage, ensuring that it is viable.
Furthermore, the Committee recommended the following with a view to push financial inclusion:
- Providing encouragement to small merchant acceptance, removal of language and acceptability barriers,
- Indian Banking Association to collate Code of Conduct for BC agents – SLBC/DLCC monitoring
- Rationalization of USSD charges
- Monitoring telecom infrastructure so that issues like delay in receiving OTP, limited availability of data network can be addressed.
- Raising financial literacy.
- Promotion of Digital Transactions at Rural Farmers Markets.
- Improving customer experience with Basic Savings Bank Deposit Accounts (BSBDA).
- Create a standing committee on digital payments at SLBC
- Upgrade BSBD and small accounts to ensure that DBT payments/ Government grants/ welfare benefits are not included in the limits placed on these accounts.
- Promote BHIM Aadhaar Pay to serve customers without phones
- Revisit Micro ATM and APBS Architecture and improve it to support other banking services beyond dispensing cash.
- IDRBT, NPCI and the DBT cell revisit the architecture of the APBS, and DBT delivery, so that beneficiaries have greater visibility and control into the funds flow, and that they are able to onboard themselves into various schemes.
- efforts should be enhanced to ensure that adequate digital infrastructure is available on priority at all wholesale grain mandis, village haats, etc.
- With a view to including feature phone users into digital payments, the committee recommends that the regulator may encourage innovation through the regulatory sandbox on priority to develop new enabling solutions for this user to make, and receive digital payments, interoperable with the rest of the ecosystem. For instance, QR codes have become a popular lightweight acceptance infrastructure, and it may be possible to enable feature phone users to use this facility
- Bring in Regional Rural Banks into the digital payments ecosystem
- Convert business correspondents into digital assistants. –
- Promote financial literacy through frontline staff and agents
- Enable Kisan Cards for digital payments The committee recommends that going forward, Kisan Credit Cards be completely migrated to a more common digital platform so that the user’s transactions can be simplified.
RBI’s Proactive approach
RBI vide its Press Release No. 2018-2019/2914 dated June 11, 2019 declared that it had constituted a Committee to examine the entire gamut of ATM charges and fees. The terms of Reference for this committee include a review of existing structures and patterns of costs, charges and interchange fees for ATM transactions, review of overall patterns of usage of ATMs by cardholders and assess the impact, if any, on charges and interchange fees. Part of the mandate is to assess the entire gamut of costs in respect of the ATM ecosystem and to make recommendations on the optimal charge/interchange fee structure and pattern. The constituted committee comprises of the CEO, NPCI, Chief Executive, IBA, Group Head, HDFC Bank Ltd., Director, Confederation of ATM Industry and CEO, Tata Communications Payment Solutions Ltd.
With a view to providing an impetus to digital funds movement, RBI vides its Notification No. DPSS (CO) RPPD No.2557/04.03.01/2018-19 dated June 11, 2019, waived processing charges and time-varying charges levied on banks by it for outwards transactions undertaken using the RTGS system, as also the processing charges levied by it for transactions processed in the NEFT system.
Earlier this year, RBI vide its Press Release No. 2018-2019/1802 dated January 31, 2019 announced its scheme to provide a cost-free and expeditious complaint redressal mechanism relating to deficiency in customer services in digital transactions conducted through non-bank entities regulated by RBI. Complains relating to digital transactions conducted through banks will continue to be handled under the Banking Ombudsman Scheme.