The release of important policy documents recently has shown the continuing support for the growth of digital payments in the country. In May 2019, the RBI released two important policy documents reflecting deeply on digital payments:
- the Payment and Settlement Systems in India Vision 2019-21 (the Vision 21 Document) presenting the RBI’s vision for growth of payment and settlement systems through the lens of innovation, competition and customer protection (Reserve Bank of India, 2019a), and
- the Report of the High-Level Committee on Deepening of Digital Payments chaired by Nandan Nilekani (the Report) which reflected upon the status of digital payments in India and provided recommendations for increasing the usage of digital payments (Reserve Bank of India, 2019b).
These releases were followed by Union Budget announcements on 5 July 2019, where Minister of Finance, Nirmala Sitharaman announced key measures to expand the acceptance and subsidisation of digital payments in India. Finally, on 7 August 2019, the RBI’s Third Bi-monthly Monetary Policy Statement for 2019-20 also announced measures to make digital payments more secure and less costly.
In this blog post, we reflect on central recommendations in the Nilekani Report and the Vision 21 Document along with the three key aspects of the user journey for digital payments i.e.
A) improving acceptance,
B) improving usage and
C) improving redress.
We then reflect on announcements in the Union Budget and the RBI’s recent Monetary Policy Statement relevant to digital payments, and their impact on widening access to a larger range of payment methods.
1. The Nilekani Committee Report and the Vision 21 Document
Both the Report and the Vision 21 Document identify high costs of digital payments as a barrier to the wide deployment of acceptance infrastructure for digital payments. Both documents then go on to recommend reducing costs through fiscal stimuli such as tax reduction and subsidies. They also encourage innovating for affordable, less cost-intensive modes.
A. On improving acceptance
The Nilekani Committee Report recommends reducing the costs incurred by merchants in accepting digital payments
Reduction of acceptance infrastructure costs: Costs incurred by merchants can broadly be categorised into infrastructural costs and transactional costs. Infrastructural costs arise from paying for the hardware (e.g. PoS (Point of Sales) machines) while transactional costs are those that a merchant incurs outside of the value of a transaction (e.g. paying the Merchant Discount Rate (MDR)). The Committee recommends the subsidisation of MDR costs incurred by merchants. Interestingly, this recommendation was in alignment with announcements in the recent Union Budget. The Report recommends reducing the interchange fee on card payments by 15 basis points. It also recommends lowering the taxes levied on required accessories and devices to reduce the costs of infrastructure.
Widening the acceptance infrastructure base: The Report recommends encouraging merchants to use their phones and QR codes for accepting payments through the Unified Payments Interface (UPI) because such measures do not require additional expensive infrastructure.
The Vision 21 Document also seeks to reduce the cost of acceptance by subsidising merchant costs and expanding the card-acceptance infrastructure
Expansion of card acceptance infrastructure: The Vision 21 Document seeks to expand the deployment of the card acceptance infrastructure across the country, including infrastructure for contactless payments. It also proposes changing existing regulation to allow NBFCs and Regional Rural Banks to become acquirers of cards, in order to increase the number of acquirers of cards (Reserve Bank of India, 2009).
Subsidising PoS infrastructure and devices: The Vision 21 Document also proposes to create a separate Acceptance Development Fund (ADF) to subsidise acquirers deploying PoS infrastructure in tier 3-6 cities. It also proposes to incentivise innovations for creating low-cost acceptance infrastructure and the adoption of the Bharat QR.
B. On improving usage
Both documents focus on reducing costs to increase the usage and adoption of digital payments. Additionally, both recognise the need to innovate for offline segments and incorporate more features in the USSD channel. There is also a deliberate focus on the need to reduce technical failures and to increase the availability of existing digital payments channels such as NEFT and RTGS.
The Nilekani Committee Report addresses the challenge of increasing usage of digital payments by making the case for innovating for the offline and USSD-based segments
Acknowledging the need to develop financial solutions for segments that do not use smartphones, the report focusses on the need for designing payments solutions for non-smartphone users.
Developing digital payments solutions compatible with feature phones: The Report recommends that the proposed Regulatory Sandbox (RS) should be used to prioritise “mass market payment use cases related to payments through feature phones” (Reserve Bank of India, 2019b).
Developing offline digital payments solutions: To reach out to non-mobile phone users, the Report considers the three following channels for expansion.
- BHIM Aadhaar Pay: BHIM Aadhaar Pay enables merchants to receive payments from consumers over the counter by authenticating the consumer’s biometrics (National Payments Corporation of India, 2017). The Report recommends that BHIM Aadhaar Pay be encouraged as a non-mobile payment mode.
- Point of Sale (PoS): The Report recommends that users in possession of existing cards should be incentivised to use them at the PoS by providing discounts. Separately, it is also recommended that small merchants could use their PoS to provide cash-out facilities to consumers for a small fee.
- Business Correspondents (BCs): The Report calls upon the existing BC to act as digital assistants who provide educational and operational support to consumers for the use of digital payment platforms.
Creating and monitoring a digital financial inclusion index: The Report recommends that the RBI develop a quantitative financial index to identify the gaps in adoption of digital payment platforms. It recommends revising this index on a monthly basis, PIN code-wise. Monitoring this index can help in identifying gaps in usage and facilitate better interventions.
The Vision 21 Document identifies reducing the cost to the consumer as the most effective way of increasing usage and improving the users’ experience
The Vision 21 Document nudges Payments System Operators (PSOs) to reduce the ‘cost per transaction’ to the user. It seeks to improve the users’ experience of existing channels by increasing their hours of operation, expanding the range of features available and making them interoperable. More specifically, the Vision 21 document recognises the following action points to improve users’ experience.
- Reducing the costs for USSD-based transactions: The RBI has nudged the NPCI to improve the USSD based users’ experience by rationalising costs. It seeks to increase the engagement by adding more features to this payments channel.
- Reducing the costs of receiving remittances: The Vision 21 Document emphasises on the need to rationalise the costs of receiving remittances. Though, the RBI has already undertaken some steps to rationalise costs by including more intermediaries, increasing the number of authorised money transfer agents needs to be done to reduce costs.
- Encouraging innovation for offline segments: The RBI also wants the PSOs to innovate for offline segments considering the barriers to internet connectivity. However, the push remains on mobile-based, offline payments solutions.
- Increasing the accessibility and availability of existing modes of digital payments: The RBI also indicated the possibility of increasing the availability of the existing modes of payments, including RTGS and NEFT. This will include reconsidering their operating hours and limits, potentially operating them round the clock and gradually increasing their limits. This has now been officially announced in the context of the NEFT. The Vision 21 Document also consider the implementation of e-mandates / standing instructions for retail payment systems, subject to customer protection and adequate safeguards like authenticating payment instrument registration. It also emphasises on the need to reduce technical declines (on account of technical failures) and business declines by handholding merchants and consumers.
- Ensuring interoperability in the payments system: The RBI appears committed to achieving interoperability across payments systems. During the period of the Vision 21 Document, the RBI will consider the role of standardisation and the use of universally accepted standards among payment system operators and other participants.
Both the documents, therefore, recognise the importance of innovating for offline segments and improving the supply side delivery of payments products to encourage usage.
C. Improving grievance redress
Both the Report and the Vision 21 Document contemplate the use of technology to resolve grievances. They also focus on creating accessible channels for users to lodge complaints and tracking complaints on frauds.
The Nilekani Committee Report recommends creating an Online Dispute Resolution System for consumers’ complaints and a centralised fraud-registry
The Online Dispute Resolution System (ODR): The ODR system is envisioned to be implemented at the payment system operator’s level. This ODR system will provide the first level of dispute resolution through machine learning. The second level of dispute resolution will be through the regulator’s ombudsman. Further, it also recommends that the user should be able to report issues with the digital payment platform through various touchpoints – mobile app, net banking interface, ATM, POS, SMS, email, call-centre etc.
Collecting and analysing complaints data: According to the Annual Report of the RBI Banking Ombudsman 2017-18, 64% of total complaints are currently made electronically. Given this reality, the Committee recognised the need for a common point of collection of all the information related to a complaint which is spread across multiple organisations (Reserve Bank of India, 2019b). It recommends that aggregate, bank-wise data on issues reported and resolution should be reported, for the regulator to have visibility into the health of the payment system.
Creating a Centralised Fraud Registry: To track all the reported frauds and enable real-time analysis of fraud risk, the Report recommends creating a Centralised Fraud registry, accessible to all payment system participants. This recommendation appears to have been accepted by the RBI as per the third bi-monthly Monetary Policy Press Conference 2019, which announced the creation of a Central Payment Fraud Registry.
The Vision 21 Document focuses on improving grievance redress by emphasising on the need to create accessible, round-the-clock available grievance redress channels for consumers
Operating a 24*7 helpline for addressing consumer experiences: To disseminate information regarding digital payment products, security aspects and recourse, the RBI has recommended operating a 24*7 helpline, steered by a self-regulatory organisation of the Payment Service Industry (which is also a new proposal of the Document).
Collecting and sharing fraud-related data for payment systems: Such data will inform the analysis of differentiating fraudulent and legitimate transactions; oversight and supervision, and for providing guidelines to entities for minimising risks of similar frauds. The RBI also aspires to use such analytics to proactively identify instances and predict frauds and using it to trigger instant responses such as blocking irregular transactions, before the payment authorisation.
Together, both these documents appear to be aligned in direction with each presenting a bouquet of strategies to overcome demand-side barriers to digital adoption.
2. Digital payments in the Union Budget and the RBI’s Third Bi-monthly Monetary Policy Statement for 2019-20
Interestingly, the release of the two RBI documents was followed closely by the Union Budget announcements which contained a slew of incentives and penalties aimed at encouraging take-up of digital payments.
- Mandatorily offering consumers the option to pay digitally: Businesses with an annual turnover over Rs. 50 crores will now mandatorily need to offer low-cost digital modes of payment to customers (Ministry of Finance, 2019a). The Finance Bill amended the Income Tax Act (inserting new section 269SU) to impose the mandatory requirement on companies with over Rs. 50 crore turnover to accept digital payments (Ministry of Finance, 2019b). It also introduced a penalty of Rs 5000 a day for every day that companies failed to provide such an acceptance facility. A new provision was also incorporated (new section 31A) to the Central Goods and Services Tax Act to prescribe that suppliers should mandatorily offer digital payments facilities to recipients of goods or services.
- Subsidising Merchant Discount Rate (MDR): The Finance Minister announced in the Budget that no charges or Merchant Discount Rate would be imposed from such increased access for customers and merchants. The Finance Bill introduced a new section 10A to the Payment and Settlement Systems Act, 2007 stating that banks and system providers shall not impose charges upon anyone using electronic modes of payment (as a result of the requirements detailed above). This indicates that the RBI and banks would absorb the costs from the savings that would accrue from a rise in digital payments (Ministry of Finance, 2019a).
- Penalising the withdrawal of high value of cash: The Finance Minister also announced a charge on withdrawals in excess of Rs. 1 crore from any bank account in a year, to discourage large cash withdrawals (Ministry of Finance, 2019a).
- Cashbacks on using BHIM and Rupay: The Medium-Term Fiscal Policy cum Fiscal Policy Strategy Statement released with the Budget made a recommendation to allow cashback of 20% of GST paid up to Rs. 100 to all customers using BHIM or Rupay to make payments by scanning the QR code (Ministry of Finance, 2019b). This may incentivise wider use of the QR code for making transactions, which has been an objective of the policy documents. Considering that QR codes can be scanned by merchants’ phones, they may hold the potential to resolve the problem of high costs of accepting digital payments.
More recently, the RBI’s third Monetary Policy Press Commentary on 7 August 2019 announced that the National Electronic Fund Transfer System (NEFT) will be available 24*7 in India from December 2019. This is one of four big measures aimed at entrenching the digital payments ecosystem in India. The other three are:
- allowing all kinds of billing entities offering recurring payments to voluntarily use the Bharat Bill Payment System (BBPS);
- the creation of the Central Payment Fraud Registry for tracking payment system frauds, and
- on-tap authorisation for providers to operate as platforms for the BBP Operating Unit (BBPOU), Trade Receivables Discounting System (TReDS); and White Label ATMs (WLAs).
These proposals indicate the RBI’s approval of and action on some salient policy proposals made for digital payments made in the Report and the Vision 21 document. Similarly, the Union Budget announcements aim to reduce the adoption costs of digital payments, another policy objective that can be located in both the Nilekani Report and the Vision 21 Document.
3. Conclusion: Longer-term questions for digital payments inclusion
These policy movements reveal broad alignment around the need for a concerted push towards digital payments. Many of the measures are aimed at cutting the cost to the consumer and the merchant when undertaking a digital payment. This focus is indeed welcome. However, the interventions suggested could also have unintended consequences that may raise costs or impact the growth of the market in the long run.
For instance, the long-term consequences of regulatory interventions to reduce MDR remain unclear ((The Business Standard, 2019), (ET tech, 2019)). Similar issues were considered in the Report of the Watal Committee on Digital Payments in 2016 (Reserve Bank of India, 2016). The Watal Committee, however, proposed that market-driven mechanisms (rather than regulatory caps) to set MDR would provide incentives to the growth of payments and card acceptance infrastructure. Given these differing perspectives, the effect of subsidising MDR on uptake of cards, market dynamics and competition will warrant consideration.
In addition, other non-cost factors also play a role in driving adoption. For instance, studies in Rajasthan have shown that even when merchants have the means to afford acceptance infrastructure, they may be reluctant to accept digital payments due to other factors such as perceptions of lack-of-demand from their own consumers and the lack of clarity of the benefits of using digital payments (Ligon, Malick, Sheth, & Trachtman, 2019). In this context, it becomes essential to innovate on new user-cases, relevant to the specific needs of payees and recipients.
Finally, it is important to avoid penalties and pricing strategies that might leave lower-income consumers worse off. For instance, the Vision 21 Document proposes a change in pricing of digital transactions from the current situation (where they are charged ad valorem, i.e. as a proportion of the amount being paid) to a flat-fee irrespective of the quantum of the transaction. This would act as a disincentive, especially for low-income households who need small or recurring digital payments. Similarly, there exists the penalty fee for not being able to honour direct debit payments through the ECS (Electronic Clearing System). This can be as high as 750 Rs per transaction, which may make it unattractive as a solution for some (First Post, 2014). This may unfairly impact consumers who may have lower balance accounts, and disincentivise their usage of direct debit systems.
Overall, the push towards digital payments is based on the underlying assumption of the superior efficiency of digital payments compared to cash, i.e. that there is declining marginal costs of digital payments as opposed to the high cost of handling cash are a relief to the exchequer. To preserve these features of digital payments and ensure that there is demand-led growth, ultimately digital payments will need to address the users’ needs intuitively to become as relevant as cash.
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 Merchant Discount Rate (MDR) is defined as the cost that is paid by the merchant to a bank for accepting credit and debit card payments from consumers using a PoS machine. The MDR is split between the bank that issues the card (an interchange fee), the bank that acquired the payments (acquirer’s margin) and the fee that is charged by the card network (scheme fee) (Khan, 2013) (IFMR Finance Foundation, 2017).
 The Bharat Bill Payment System (BBPS) is an integrated bill payment platform in India that offers interoperable and accessible bill payment service to customers through a network of agents. The BBPS is operated by the National Payments Corporation of India (NPCI) (Bharat BillPay, n.a.).
 Bharat Bill Payment Operating Units (BBPOU) are authorised operational units that work under the Bharat Bill Payment Central Unit (BPPCU) (the NPCI), which is responsible for setting business standards, rules, and procedures for all BBPOUs. BBPOUs are RBI-authorised entities that can conduct bill payments and aggregation business under the BBPS (Bharat BillPay, n.a.).
 Trade Receivables Discounting System (TReDS) is an institutional mechanism set up to facilitate the financing of trade receivables of Micro, Small and Medium Enterprises (MSMEs) from corporate buyers through multiple financiers. This system facilitates the discounting of both invoices as well as bills of exchange (Reserve Bank of India, 2014).
White Label ATMs (WLA) are ATMs set up, owned and operated by non-bank entities. They are authorised under the Payment & Settlement Systems Act, 2007 by the RBI. While they conduct most functions of a regular ATM, they may not accept deposits (Reserve Bank of India, 2012).