Insights into Editorial: Regulating the digital payment industry
The government’s recent push towards a digital economy by incentivisation has been widely appreciated. However, poised at a juncture when people are transforming payment habits by embracing a particular payment mode, especially the unbanked segments of society, the digital transaction regulatory framework requires a comprehensive legal framework assessment.
- The government is pushing very strongly for a cashless society. After the demonetisation move, several initiatives have been seen to further encourage going cashless. However, while cashless transactions are a convenience and the future, it is being pushed without addressing critical concerns.
- The government’s demonetisation move might have warranted an increase in transaction activity on digital wallets, but measures to ensure the underlying cyber security parameters for digital payments is still kept largely under the ambit of the Information Technology Act. India lacks laws to protect consumers if they lose money during digital.
- The electronic infrastructure space is also still under-developed in India and technology governance is weak. The e-infrastructure today is woefully inadequate to serve the people in semi-urban and rural areas. Internet penetration is low at 30%, and smartphone penetration lower at 17%.
- Anomalies also exist in the form of gaps in the regulatory mechanism of credit and debit cards, and mobile wallets. For instance, the discount rate, charged to a merchant accepting card payments, and sometimes to consumers, is by the banks themselves, and not by the regulator — the Reserve Bank of India, in this case.
What needs to be done?
- A legal framework that can identify and set out the rights and obligations of each payment system participant in the ordinary course of business and in adverse conditions should be put in place.
- Such framework will have to cover the plethora of instruments and test them for conflict such as with the new insolvency and banking laws.
- Seamless cooperation between the bodies involved in policy and regulatory development must be forged so as to oversee consistent application of rules and regulations governing all participants.
- The playing ground for entrepreneurs must be levelled so as to provide confidence, stability and integrity in the financial system. This will enable participants in a payment system to move in their own orbits performing functions that when interwoven ensure that the country has an efficient, secure and reliable payment system that reduces the cost of exchanging goods and services.
- Further, in tune with the self-regulated entrepreneurship that the government is encouraging, the system participant should be encouraged to submit a self-certification assessing and disclosing the technical risks it faces at an enterprise level that can balloon into systemic risks.
- The payments terrain should also expand and be enabled by regulations to accommodate new kinds of participants in the system. This will foster further innovation that is bound to occur from the disruption caused in the payment spaces, without the regulator having to play catch-up.
What should the regulator do?
RBI is the sole regulator for the payments industry space and derives its power to oversee the payments industry from the Payment and Settlement Systems Act (2007) and its accompanying regulations (2008). Several circulars and guidelines have been issued for the regulator to govern prepaid instruments, intermediaries and the payment system operator.
- RBI must now identify certain payment systems as critical and afford them systemic important status similar to how it identified certain non-banking financial companies as systemically important. Such singling out will ensure that their failure in a nascent payment industry does not trigger further disruptions among system participants and stretch to larger financial markets.
- The regulator must also in the days to come set up an end customer protection/guarantee fund so she is protected when the largest participant/debtor in the payment system fails. This allows for the deflection of liquidity crunch, so settlement system clearances are maintained without the participants knocking on the doors of clogged courts.
- Mobile wallets and mobile banking can be vulnerable to security breaches given that most smartphone users have multiple apps installed, and almost all those apps have access to sensitive user information on the phone. To make digital transactions truly secure, the Centre needs to look at restricting the information that mobile apps seek and put a regulatory framework in place.
Government’s recent move to incentivise digital transactions is only one step towards a cashless economy. Both front-end and back-end changes are required to spread awareness and enhance usability of various digital payment modes.
- Special efforts are required to teach both the less tech-savy as well as the unlettered on how they could use such modes of transaction.
- Infrastructure creation — from networks and connectivity to ensuring last-mile availability of ATMs and POS machines, specially in the rural areas — needs to be massively stepped up.
- Ensuring greater acceptability of digital money is also imperative. It is important to dispel doubts and fears that people have about digital money and the security of their transactions.
The digital payment revolution is the best disruption demonetisation has unleashed. An aspiring economy like India should welcome this brave new world. The Centre must now wake up to the need to make digital payments more secure.