Excellent study material for all civil services aspirants - begin learning - Kar ke dikhayenge!
SHARE:
Potholes on the digital payment superhighway
Read more on - Polity | Economy | Schemes | S&T | Environment
- An age of digital payments: Almost all other forms of payments are now secondary in India, compared to digital. In digital payments, simultaneous debits and credits are done across accounts across banks, and money value is transferred fast. All operators are included, local and international, as per regulatory norms. It's clear that future belongs to digital payments, and Banks & fin-tech firms that enable it.
- The history of it: First of all, the RBI effected the RTGS system in 2004 (Real Time Gross Settlement). It was for large payments in stock markets, govt bond trading and customer payments. That provided quick finality of payments, and eliminated risks like seen in Harshad Mehta scam. Soon thereafter came the NEFT (National Electronic Funds Transfer) and bulk debits/credits. Both NEFT and RTGS are available 24x7 basis (RTGS from Dec.) and few countries have been able to do so.
- Motivating the SEBI: RBI's actions motivated the SEBI also which now wants a T+1 settlement (T = transaction date). That will broaden and deepen the markets. [SEBI - Securities and Exchange Board of India]
- Birth of the NPCI: All this came after the NPCI was created by ten lead banks, motivated by the RBI. The team that built it was motivated by the BGC AB of Sweden, a not-for-profit organisation owned by 8 Swedish banks providing retail payment services. So payments was essentially a public good, in the NPCI also. NPCI is a not-for-profit company. [NPCI - National Payments Corporation of India; BGC AB - Bangirocetralen]
- The early years: There was both support for and resistance to the idea of promoting digital payments in India. As slowly digital payments became a public good (like currency notes), it needed fully support by RBI and GoI, like an extended arm of the sovereign. No private firm could be allowed to control it, and dilute the public character of NPCI. Global players were direct competitors. But NPCI's underlying technology - the UPI and IMPS - worked well. In 2019, the BIS endorsed the UPI model. [UPI - Unified Payment Interface; IMPS - Immediate Payment Service; BIS - Bank for International Settlements]
- New demands: Some want the NPCI to be turned into a for-profit company, so it can fight competition better. It will be a bad idea, with loss of consumer surplus. It would be better to support the NPCI financially, via the GoI or RBI, to give retail payment services at reduced prices. Infrastructure can be expanded in rural and semi-urban areas, alongwith Fintech firms and Banks.
- MDR: The govt. brought a zero MDR in Budget 2020-21 for RuPay and UPI (both NPCI products). Why? It wanted to popularise digital payments. Many criticised it as a loss for banks, but it was not. Why not? It is because crores of savers get a very low savings rate in bank deposits, while the sovereign bonds interest rate is at least 3% higher (which banks enjoy). In return, these savers get certain payment services (over many decades). Since banks have huge deposits (current and savings), why can they not provide free digital payments? [MDR - merchant discount rate, that is paid by merchants to scheme providers]
- But why only banks: The govt. should have included other digital payment providers from MDR prescription, which has had adverse effects. So many issuing banks switched over to Visa and Mastercard for monetary gains, and started inducing customers (these are non-NPCI products). Govt. must end this practice.
- How to price digital payments products: There are three aspects - producer surplus, consumer surplus and social welfare. Cash withdrawal is a drain on banking system, but digital allow banks huge float funds. Banks earn a lot. Tomorrow, when digital payments will become humongous, the pricing (including MDR) must be rational, else it would be a windfall for banks and Fintech, at the cost of consumers.
- Govt and RBI must step in: Do not allow Fintech firms and banks to make a killing out of the omnipresence of digital payments, at the cost of huge loss of consumer surplus (defined as gain or loss of utility due to pricing). Make a win-win formula.
* Content sourced from free internet sources (publications, PIB site, international sites, etc.). Take your own subscriptions. Copyrights acknowledged.
COMMENTS