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Insights into Editorial: Potholes on the digital payment superhighway



Digital payments have found strong ground, especially in India, increasingly relegating all other modes of payments to the background.

It is through a faster system of simultaneous debits and credits that the money value is transferred from one account to the other across banks.

It embraces all kinds of operators (including direct benefit transfer by the government) across the country and even internationally, subject to regulatory forbearance.

According to a report, Indian digital payment industry is expected to reach $1 trillion by 2023.

The Indian start-up ecosystem is expected to play a crucial role in enabling this industry as it is capable of leveraging the opportunities by addressing a multitude of challenges.

With such versatility and ease of settling financial transactions, the growth of digital payments is going to be phenomenal, supported by banks and Fin-Tech, or financial technology, companies.

Evolution of digital payments in India: steered by the RBI:

  1. There is a long and interesting history behind the evolution of digital payments in India, piloted by the Reserve Bank of India (RBI) and succinctly captured in the Payment Systems in India, published in 1998.
  2. A major thrust toward large value payments was affected through the Real Time Gross Settlement System, or RTGS, launched by the RBI in March 2004.
  3. This acted as a major thrust toward large value payments such as government bond trading, reducing huge risks such as large scams and reduced the time taken for settlements.
  4. Introduction of National Electronic Funds Transfer (NEFT) and bulk debits and credits to support retail payments around the same time.
  5. Now, NEFT is available round the clock and RTGS will follow from December 2020 only a few countries have achieved this.
  6. Such historical changes by RBI triggered major changes in the corporate and capital market transactions.
  7. The large value payments on stock trading, government bond trading and other customer payments were covered under the RTGS, providing finality of settlement, thereby reducing huge risks such as the Harshad Mehta scam; besides this, it substantially reduced the time taken for settlements.
  8. Such historical changes brought about by the RBI triggered major changes in the corporate and capital market transactions as well.
  9. Time Bound Settlements: Today, the Securities and Exchange Board of India (SEBI), the market regulator, is contemplating a T+1 settlement (T is for transaction date) because the underlying consideration of the sale proceeds of the shares get exchanged very fast under the payments system.
  10. This is expected to attract more international capital into the Indian market, in turn broadening and deepening the financial market.

An umbrella system:

  1. The sterling contribution of this robust payment system, especially retail payments, was seeded and reinforced with the setting up of the National Payments Corporation of India (NPCI) by 10 lead banks at the instance of the RBI in 2009.
  2. The idea for this umbrella retail payments institution emerged in the vision document on payments system, 2005-08 released by RBI in 2005.
  3. Very few people know about the unwritten history of the background under which this umbrella organisation was mooted.
  4. The model appeared as an attractive proposition as payments is basically a public good.
  5. Thus, the idea of the NPCI as a not-for-profit company has a link from the BGC.
  6. The setting up of such an umbrella organisation to build a super highway for digital payments has a strong appeal which was well-appreciated by Dr. Y.V. Reddy, the then RBI Governor, taking a number of policy decisions to spread digital payments and protect consumer interest.
  7. However, there were many within and outside the RBI, including in the Indian Banks’ Association, who had apprehensions about the success of such a model for the NPCI.

Indicators of success:

  1. With digital payment being a public good like currency notes, it was necessary that the corporation was fully supported by the RBI and the government as an extended arm of the sovereign.
  2. It was also necessary to contain expectations on profits, avoiding gyrations of the stock market along with direct or indirect control by powerful private interests which had the potential to dilute the public good character of the outfit.
  3. The NPCI’s success against deeply entranced formidable international players, supported by innovative technology, viz. Unified Payments Interface (UPI) and Immediate Payment Service (IMPS), is well recognised by central banks in many other countries.
  4. The Bank for International Settlements endorsement of the NPCI model in 2019 is a major accolade.
  5. If the NPCI has gained such a rare distinction in just 10 years of its successful and path breaking journey, we should be proud to preserve this precious jewel.
  6. There is a demand from some quarters that the NPCI should be converted into a for-profit company to withstand competition. The shareholders of the NPCI can have windfall gains too.
  7. But this will be a retrograde step with huge potential for loss of consumer surplus along with other strategic implications.
  8. Instead, like the RBI providing free use of the RTGS and other products, the strategy should be to assist the NPCI financially, either by the RBI or the government, to provide retail payment services at reduced price (in certain priority areas).
  9. 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.

On Merchant Discount Rate:

  1. The Merchant Discount Rate (MDR) is the rate charged to a merchant for the payment processing of debit and credit card transactions from their customers.
  2. In Budget 2020-21, the government prescribed zero Merchant Discount Rate (MDR), the rate merchants pay to scheme providers, for RuPay and UPI, both NPCI products, to popularise digital payments benefiting both customers and merchants.
  3. There is justification in this prescription by the government because depositors implicitly pay around 3% to banks as net interest margin, being the difference between saving and risk-free bond rate, for enjoying certain payments services traditionally.
  4. When banks enjoy such a huge amount of current account savings account (CASA) deposits, in return, is it not incumbent on them to provide such payment services, costing only a small fraction of such a gain?
  5. For reasons unknown, the government left out other providers of digital payment products from this MDR prescription, which is unjustified and had adverse effects.
  6. Taking advantage of this dichotomy, many issuing banks switched to mainly Visa and Master cards for monetary gains.
  7. As customers were induced by such supplier banks, it created a kind of indirect market segmentation and cartel formation, though there is hardly any quality difference in payment products.
  8. It may be noted that even the European Central Bank imposed a ceiling on MDR for all, protecting consumer interest.
  9. It is hoped that the government will take corrective action in the next Budget to ensure a level playing field and to relieve the NPCI from such policy-induced market imperfection.

In order to boost Digital Payments in India:

The central government must deadline digitising all its payments. The RBI must implement the 100-plus action items arising from its own Vision 2021 document and the Nandan Nilekani Committee for Deepening Digital Payments.

RBI must also make UPI and RuPay fit for use in our $70 billion inward remittances that currently come through exploitative financial institutions.

The RBI must replicate the design of UPI (sustainable private and public competition) in bank credit as credit-to-GDP ratio (ratio of the magnitude of loans given by financial institutions in an economy to the GDP of the country) in India is low i.e. 50% against 300% in China.

However, this needs to be complemented by raising India’s human capital and technology game in regulation and supervision, issuing more private bank licences, facilitating management changes in old private banks and human capital revolution at PSU banks.


The introduction of UPI by National Payments Corporation of India has shown a remarkable result. Also, RBI’s Vision 2021 is a step in the right direction as it looks to create a robust digital payment ecosystem by moving towards a cash-lite economy.

While India has a robust start-up ecosystem capable of addressing several digital payment challenges, Government should help accelerate the process through better policies and framework.

In this context, government has a crucial role to play in protecting consumers against exploitation.

With versatility and ease of settling financial transactions, the growth of digital payments in India can be phenomenal with mutual support from banks and Fin-Tech companies.