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• GS 3 || Economy || Banking & Financial Sector || Money

Why in news?

Customers prefer the simplicity of the quick real-time payment method during the pandemic, which has seen a threefold increase in volume and value over the previous fiscal year.

Background:

The Unified Payments Interface (UPI) is a lifesaver in a world where social alienation is the most crucial norm. The quick real-time payment system has proven to be India’s best financial innovation since independence, and it has begun the process of completely replacing the cash economy. It has contributed to the country’s status as one of the world’s fastest-growing digital economies.

What is UPI?

• It’s a system that combines many banking services, smooth fund routing, and merchant payments into a single mobile application (of any partner bank).
• Each bank has its own UPI application.

The Importance of UPI:

• It established interoperability between all sources and recipients of funds (consumers, businesses, fintechs, wallets, 140 member banks), settled funds instantly inside the central bank in fiat money – convenience for consumers and merchants, and weakened data monopolies (big tech firms have strong autonomy but weak fiduciary responsibilities over customer data).

India’s Digital Payments Evolution:

• India had long been a financially impoverished country, with only 17% of Indians having a bank account in 2011. According to the World Bank, 80 percent of Indians would have waited 50 years longer to open a bank account if they had done so before 2011.
• India’s digital payments system has been steadily improving for several years, fueled by advances in information and communication technology and nurtured in accordance with the Reserve Bank of India’s goal.
• Since its inception in 2008, the National Payments Corporation of India (NPCI) has been at the forefront of the development of India’s retail payment system.
• The following are significant milestones in the evolution of the payment system:
  • The issuing of pre-paid instruments (PPI), such as mobile and digital wallets, has been expanded to include non-bank organizations. The National Payments Corporation of India (NPCI) created the BHIM (Bharat Interface for Money) mobile payment app, which is based on the Unified Payments Interface (UPI).

Payment Revolution’s Causes:

• The following factors have influenced India’s payment revolution:
  • Political Will: A clear vision for transforming the system from low volume, high value, and high cost to high volume, low value, and low cost is the source of India’s payment revolution. The Jan Dhana Yojana and Aadhaar embedding are examples of this.
  • The Reserve Bank of India (RBI) established a non-profit market participant entity to level the playing field between banks and non-banks.
  • According to a paper published by the Bank for International Settlements (‘The Design of Digital Financial Infrastructure: Lessons from India shows how “a central bank can be proactive and equal partners with private sector counterparts when it comes to fostering technological innovation in the financial sector.”

Challenges in the Digital Payments:

• Confronting stakeholders: Cyber security is one of the most important challenges confronting players in the digital payment ecosystem. As more people use digital payments, the risk of cyber security concerns such as online fraud, identity theft, and malware or virus attacks increases. E.g. Malicious Software Cerberus
• Lack of Digital literacy: Because of the absence of internet connectivity in rural and remote areas, digital literacy is one of the toughest difficulties today, especially during the Covid-19 Pandemic, when most schools and institutions are giving online classes on online platforms.
• Lowering the cost of digital payments in order to make them more accessible.
• NPCI’s Role: The RBI and the government must fully promote digital payments since they, like currency notes, are a public service. Some suggest, however, that the NPCI should be converted into a for-profit organization to combat competition.
• Digital payment fraud: In India, digital payment fraud accounts for over half of all bank frauds. In light of this, the Reserve Bank of India (RBI) has released certain guidelines for digital payment security and risk mitigation.
• Risk mitigation: In view of this, the Reserve Bank of India (RBI) has also issued some guidelines as security and risk mitigation measures for digital payments.

Opportunities:

• According to NITI AYOG, India’s digital payments market is expected to increase to $1 trillion by 2023, with mobile payments expected to grow from 190 billion to $1 trillion.
• Digital payments provide a unique set of possibilities. Global trends show rising client demands for value-added services, more competition as a result of the advent of FinTechs, new technology, and a constantly shifting regulatory landscape.
• These rising global trends are projected to have an impact on the Indian Digital Payments ecosystem, providing a boost to the sector’s growth.

Steps taken by the government:

• Merchant discount rate: In Budget 2020-21, the government mandated a zero Merchant Discount Rate (MDR) for RuPay and UPI in order to popularize digital payments, which benefit both customers and businesses.
• According to the Committee on Digital Payments 2016 Report, the Ministry of Finance has taken a great step forward in developing a Bill to alter the Payment and Settlement Systems Act, 2007.
• RBI has taken four major policy initiatives:
  • National Electronic Funds Transfer (NEFT) system – Settlement at half-hourly intervals.
  • Master Directions on Prepaid Payment Instruments (PPIs)
  • Rationalisation of Merchant Discount Rate
  • Storage of Payment System Data

Nandan Nilekani Committee on Digital Payments:

• Governor Shaktikanta Das has received recommendations from a committee created by the Reserve Bank of India (RBI) and led by Nandan Nilekani on how to promote digital payments. Now, the RBI will review the committee’s recommendations and, where appropriate, attach action items to its Payment Systems Vision 2021 for execution.
• Key recommendations to encourage digital payments:
  • Formulate an internationalization plan for Indian payment systems like RuPay and BHIM UPI in order to facilitate remittances into India and to assist Indian travelers in making payments overseas.
  • To promote adequate expansion of acquiring infrastructure in the country, the current import duty of 18 percent on POS machines be decreased to nil for a period of three years.
  • Create a way to monitor digital payment systems and make monthly block-based aggregate information and a PIN code available to all players.
  • The regulator must intervene at regular intervals to fine-tune the interchange rate to guarantee that both the issuer and the purchaser have a level playing field in the market.
  • Improve ATM functionality beyond the cash dispenser to support other financial services, such as cash deposit, bill payment, and mobile recharge, to act as a comprehensive digital facilitation point.
  • Consumer payments to government agencies should not be subject to convenience fees, and RTGS and NEFT should be available 24 hours a day, seven days a week.

Conclusion:

Despite security concerns, debit/credit cards are becoming increasingly popular in India, with millennials serving as the key growth drivers. The Reserve Bank of India has predicted a 50% increase in mobile-based payment transactions. According to the RBI’s 2021 vision paper, payment systems such as UPI/IMPS are expected to increase at a rate of over 100% on an annualized basis. Despite the fact that cyber security and digital payment fraud cases offer a significant threat, the digital payment ecosystem can undoubtedly be reinforced, with organizations, users, and the government all sharing responsibility for keeping digital payments secure.

Mains oriented question:

As India’s digital payments industry grows at a breakneck pace, there are a slew of opportunities and difficulties ahead. Comment. (250 words)