India has made significant progress on its journey towards a less cash society. Though demonetisation gave digital payments a sharp impetus, the secular growth is creditable.
At just over 10 percent of PCE (Personal Consumption Expenditure) being transacted digitally, the journey, however, has just begun. The Reserve Bank of India (RBI) has played a key catalyst role in the digital payment narrative, with its articulated focus on the five Cs as elaborated in its Vision 2018—Coverage, Convenience, Confidence, Convergence and Cost.
To its credit, the RBI has walked the talk, in particular, with initiatives such as interoperability of PPI guidelines, the transition of India’s massive card base to secure EMV chip-based cards and guidelines for tokenization to name a few.
Setting up of the Nandan Nilekani committee to recommend steps on Deepening of Digital Payments further highlights the RBI’s intent to accelerate the pace of digital penetration across India. So as the RBI committee continues to solicit industry views, here are some suggestions to widen the net for digital payments in India.
Regulate to facilitate growth
Open ecosystems with multiple players mitigate risk by allowing for redundancy, eliminating the single point of failure scenario and spurring competition between payment players, thereby giving rise to innovative product and services as well as enhanced security measures and greater reliability.
A competitive payment landscape buoyed by transparent regulatory frameworks will encourage investment and innovation in the private sector. Establishing a level playing field with ‘incentives for all or none’ encourages competition among state-owned, domestic and global players, giving consumers the best choices, value and functionalities. The open and competitive approach adopted by the Monetary Authority of Singapore (MAS) is worth emulating, given its considerable success in driving digital payments through NETS, the local payments brand, and international networks.
Technology often moves faster than regulations, as seen in the wake of IoT and cryptocurrencies. It will be fitting to transition to a principles-based regulatory framework, allowing already regulated entities to innovate and co-create solutions, intervening when necessary. Resources can instead be channelled towards fostering consumer protection initiatives, eliminating systemic risks and alleviating potential single points of failure.
Security needs to be embedded deep into payment business models. With Indian digital payments expected to touch $1 trillion by 2023, efficient transaction monitoring methods like risk-based authentication is required. Players can then focus on high-risk categories/merchants, suspicious transactions etc., to reduce transaction dropouts and increase payment success rates. Geotagging transactions can also provide behavioural insights to facilitate policy intervention, financial inclusion and more efficient fraud prevention.
Regulations may at times stunt creativity, necessitating a regulatory ‘sandbox’ to aid innovation. This environment would, through selective application of otherwise potentially restrictive regulations, promote concept testing and financial services innovation while protecting core customer, financial system and regulatory interests. Such sandboxes in places like the UK and Singapore have pushed over 100 applicants through their systems in just two years.
Let payments profit
Businesses will not invest or innovate without the incentive to profit. Market forces determining competitive prices for interchange and Merchant Discount Rate (MDR) will ensure that incentives are spread across participants, negating the need for creative solutions to offset the revenue loss with other charges.
With just 4 million acceptance points for a country the size of India, introduction of an Acceptance Infrastructure Development Fund (AIDF) funded by payment players could subsidise acceptance infrastructure costs and motivate banks and other acquirers to accelerate merchant acquiring.
Additionally, the regulator could also allow non-banks to acquire merchants, currently exclusive to banks, giving rise to healthy competition. This could reduce acquiring costs and broaden alternatives for end users. Countries such as Poland, Indonesia and Malaysia have successfully rolled out AIDF linked projects to drive digital expansion.
Interoperability at scale
Innovations in retail payment markets can raise new questions regarding standardisation. There is a growing challenge for standardisation on a global as well as domestic level, particularly for underlying technical standards. For central banks, the challenge is to ensure an appropriate level of involvement in such activities. Similar to the PPI guidelines, it is time for the RBI to consider interoperability of retail payment systems to ensure quicker adoption and stickiness across consumers and merchants alike.
Extending credit to the needy could be as easy as leveraging NBFCs for credit card issuance. This form of financial inclusion will address the limited availability of short-term credit, currently skewed towards affluent segments and Tier 1 cities. It will also diversify the concentration risk in the ecosystem.
Mass transit payments will soon become a growth driver for digital payments if given the right direction. Typically, these are low value, repetitive payments whose experience must be seamless, not different from a regular transaction. Enabling open loop, interoperable account-based ticketing will offer consumers the choice to “just turn up and ride”. RBI has been a strong proponent of EMV contactless payments in India; it is only logical then to consider the option of enabling consumers to use their bank-issued debit or credit contactless card for commutes.
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Make benefits tangible and monetary
Cash is seen as a no-cost payment method, though its actual cost is estimated at around $28 billion in India itself. Shifting to digital payments confers a range of benefits, including formalising transaction trails, clamping down on the informal economy and curbing corruption – thereby boosting tax revenue and economic growth. But for the taxpayer, it is an incentive only when he or she benefits directly from it.
The RBI could explore the introduction of tangible benefits such as income tax incentives based on the digital transactions consumers initiate, while merchants could get GST credits based on the volume of digital payments they accept. Surcharge removal and MDR subsidies on government payments like taxes, tolls and utility bills could help a large chunk of payments go digital.
As the telecom revolution has taught us, we are a nation of digitally savvy consumers. Competitive pricing, easier onboarding, seamless experiences and an incentive to transition are key drivers that continue to be important. We look forward to the views of the Nilekani committee that is expected to come up with the next set of enablers to accelerate the digital payments journey.The author is Group Country Manager, India and South Asia for Visa.