Explained: Everything you need to know about RBI's Payments Infrastructure Development Fund

As of October, there were 54 lakh PoS terminals, 26 lakh BharatQR codes, and 6.5 crore UPI QR code stickers in India.

The Reserve Bank of India (RBI) on January 5 announced the operationalisation of the Payments Infrastructure Development Fund, or PIDF. In a public note, the banking regulator said the fund will be used to subsidise deployment of Points of Sale (PoS) infrastructure (both physical and digital modes) in tier-3 to tier-6 centres and north-eastern states.

But what is PIDF, and how will it benefit the digital payments ecosystem in the country?

Let us go back a bit to understand the context. Back in 2019, the government had announced that all RuPay debit cards and UPI interchange fees will be made zero.

This meant that whatever banks were earning from each digital transaction undertaken through these modes became nil. This created a massive furore in the market, and payment operators and banks said if there is no money to be made from payments, then they would not have any incentive to expand the digital payments network in the country.

Further expansion of the payments infrastructure continued to happen in large cities. Rural India and the north-east continued to rely on cash. To at least address the issue of deployment, the RBI came up with the idea of setting up a fund dedicated to subsidise the cost of deploying terminals in far-off regions of the country.

On October 4, 2019, the RBI announced the creation of the ADF, or acceptance development fund, as it was known then. This would subsidise the cost banks incurred while deploying card payment infrastructure in the country and solve the cost issue faced by them. The attempt is to encourage banks to deploy card payment terminals, and at the same time ensure that merchants or customers did not have to pay extra to accept payments digitally.

 So what exactly is PIDF?

PIDF is a fund which has been set up by the RBI, with major contribution from the central bank itself, and additional funds being brought in by banks and card networks. As of now, the RBI has pumped in Rs 250 crore, while Rs 95 crore have come from the major card networks of the country. The target is to manage a Rs 500-crore fund at all times. The fund will be managed by an advisory council which has members from the RBI, industry as well as the card networks and will be operational from three years from January 1, 2021. It is meant to support deployment of digital payments acceptance infrastructure in the country.

Okay. But what is a digital payments acceptance infrastructure?

In simple words, PoS terminals, card-reading devices through which digital payments can be processed. Additionally, PIDF will also recognise deployment of QR codes, mobile PoS terminals and other infrastructure required for processing digital payments. The main aim of PIDF is to expand the acceptance infrastructure of digital payments beyond large cities and towns.

Got it! So how will this fund be managed?

To manage this fund, the RBI has created an ex-officio advisory council comprising industry members, representatives of the card networks, NABARD, and RBI officials including the deputy governor in-charge of payments. The council has already begun work and has set up certain sub-committees to manage specific issues like fund management, setting targets, managing banks and card networks and others.

 Will there be an eligibility criteria for these funds?

The RBI has set out some broad guidelines to begin with, eventually the advisory council will set up wide-ranging rules of application and operations through a consultation process. The primary focus is to set up digital payment facilities in small towns and target those merchants who do not have PoS machines or QR code stickers yet. Banks and payment companies will be allocated some targets like 30 percent of their total deployment to be in tier 3 or 4 locations, 60 percent in tier 5 and 6 locations and 10 percent in the north-eastern states. While the amount of money to be reimbursed will be based on how much of the target is achieved, players will be encouraged to achieve 100 percent of their set targets.

Wow! So what kind of target are we talking about here?

For the next three years, the RBI wants to deploy 30 lakh touch points, 10 lakh physical PoS machines, and 20 lakh digital acceptance points. As of October, there are 54 lakh PoS terminals, 26 lakh BharatQR codes, and 6.5 crore UPI QR code stickers.

So the targets look extremely lofty given the current progress.

Yes. The targets are extremely lofty, since just installing digital payments infrastructure does not complete the game, the real challenge is to get them to be used regularly. Post-demonetisation, multiple PoS terminals were deployed by banks and industry insiders have said in private that many of them found their way back, because of disuse. However, now the push is coming from the top and even the government is keen to digitise the country’s economy, so hopefully if not PoS terminals, at least QR codes will become popular across the country.

Last, but the most important question, will the RBI keep pouring money into the fund or others will pitch in too?

Absolutely not! The RBI has made it very clear that it has put in 50 percent of the initial corpus of Rs 500 crore, and some money has come from the card networks too. Now it is up to the issuing banks and card networks to continue funding this initiative. The RBI has laid out that card networks like Visa, Mastercard, RuPay will pay 1 basis point for every card transaction to the fund. Second issuing banks, that is banks which have issued that card, will pay 1 basis point for every debit card transaction and 2 basis points for every credit card transaction. Additionally, for every new debit card issued they will pay Re 1, and Rs 3 for every credit card issued. Only if there is a shortfall will the regulator chip in.