RBI panel suggests deepening the digital payments ecosystem

04 Jun 2019

A committee set up by the Reserve Bank of India (RBI) on deepening the digital payments ecosystem in the country has suggested increased focus on low value high volume low-cost transactions to achieve a ten-fold increase in digital payment volumes over the next three years, against the ten-fold increase achieved over the last five years.

The committee, headed by Nandan Nilekani, has recommended that the government, being the single largest participant in payments, take the lead in all aspects of digitisation of payments - just as the government budgets for accepting payments in cash, it also budget for accepting digital transactions, ensuring that no convenience fee is charged on C2G payments, the committee said.

The committee also draws attention to the need to promote universal consumer access through standardisation, to support interoperability, and safety. The committee wants banks and non-banks to continue to compete, innovate and grow the ecosystem, which should be agnostic to specific technologies and business models. This will ensure a vibrant, rich acceptance ecosystem that addresses the diverse needs of the Indian consumer.

To expand the acceptance infrastructure across the country and remove friction, the committee has recommended the following:

Correct the cost structures that currently inhibit acquirers and merchants;
Reduce the “overall” cost to the consumer such as KYC process at multiple stages and service charges for digital payments;
Increase consumer confidence in digital transactions; and
Offer solutions for feature phone as well and ‘no mobile phone’ segments.

To shift transactions from cash to digital modes, the ecosystem for digital payments will essentially need to compete with and win over the robust acceptance ecosystem of cash.

While market forces must result in transaction pricing that creates a viable ecosystem, in the case of card payments, the committee noted with concern the possible market failure, which led to a sluggish growth of the acceptance infrastructure. The committee has recommended that the regulator should adjust the interchange rate and let the market compete on MDR ultimately growing the acceptance ecosystem rather than inhibiting it.

The committee also recommends that the BPSS (Baseline Personnel Security Standard) conduct a periodic review of each payment system, to ensure that the market mechanisms are working well.

In the transition period, users will reduce their cash holdings only if they have a safety net and are confident of being able to convert digital money to cash when required. Hence, the committee has made recommendations on the creation of a widespread, robust cash in / cash out network.

Interestingly, the acceptance infrastructure can also serve the role of a cash-out network, leading to a synergy in the two efforts.

Beyond removing impedances to digital payments, the committee considered enabling high volume use cases which, if digitised, could help change user behaviour and enable India to become a digital nation.

These include:

Recurring payments, such as equal monthly installments, bill payments, subscriptions, and systematic investment plans;
High frequency use cases such as mobility and transit payments;
Ticketing (mobility and events); and
Low value transactions at a small merchant.

As users go digital, they will expect a higher quality of service from digital payments. They will also expect better protection from fraud and risk. The committee recommends that payment systems use machine driven, online dispute resolution systems to handle complaints.

To manage fraud, the committee recommends the creation of shared fraud registries that must be created and used to grade each payment transaction for risk.

This transition to a digital economy will require all payments acceptance systems to move to digital as the default option. Similarly, on the bank side, digital transactions must be a part of serving the customer. No additional charges should be levied on the consumer for such transactions.

The committee noted that the digital economy still continues to exclude a large part of the population, which may include the rural poor, people with disabilities, and women. Digitisation provides an opportunity to measure and bridge some of these gaps and the committee has made recommendations to overcome some of the challenges in this regard.

Considering the need for orchestrated actions by diverse players across the ecosystem to improve the digital payments ecosystem, the committee has suggested that the RBI and the government put in place an appropriate mechanism to monitor the digital payment systems and make aggregated information based on blocks, and PIN code, available to all players on a monthly basis, so that they can make the necessary adjustments.

The committee has recommended that the data should include schemewise performance data (users, volume, value, failure rates) from payment systems operators.

The committee also suggested mapping of users, the demand, infrastructure, and usage at a granular level (PIN code) from banks, and data from user surveys.

Besides, a digital financial inclusion index should be created, so that progress of an area can be measured along a common scale indicating the evolution of the users and steps taken for correcting the imbalance.

Sharing high quality data that can only be collated centrally with district level officers who are in touch with ground level realities empowers them to make the right local decisions (such as placement of ATMs, extent of BC networks, acceptance infrastructure, cash out network, etc) to move towards the inclusion goals, the committee noted.

The committee thus has listed specific role of SLBCs (State Level Bankers Committee in ensuring digital access to accounts in financial institutions, monitoring levels of digitisation in G2M/P and P2M/P and vice versa, removing the hurdles in terms of training and connectivity issues.

Considering the size and diversity of India, the committee noted the need for enabling of innovation within the ecosystem.

While commending the recent moves by the RBI to create a regulatory sandbox, the committee also recommended the use of risk based, light touch regulation, allowing greater freedom for the regulated players to serve the customer in a viable manner, and to allow the markets to determine the right price points for these services.

Finally, the committee has suggested assessing and accepting cost effective, safe and scalable payment technologies that are evolving abroad. Simultaneously, the committee suggested that the technologies developed here should be considered for internationalisation in order to enhance the ecosystem, as well as increase the confidence amongst the users.