Digital Payments & Ratan Waval Committee

Digital Payment is the payment that takes place online with the help of some digital financial instrument (for example credit / debit card credentials, electronic cheques etc.) and is backed by a bank or an intermediary or by a legal tender.

Problem with traditional payment system

The biggest drawback of the traditional system of payment is that it is much slower than the digital payments. Traditional system of payment is not a secure mode of transaction because most of the confidential data is present in the form of a paper, which can led to leakage. This is unlike digital payment which is end-to-end encrypted. Thirdly, the traditional method is not convenient because the user has to physically go to bank or business to make or receive payments. Fourthly, the traditional payment modes such as cheques and Demand drafts cannot be exchanged in real time. Last but not the least, the traditional payment systems involved informal transactions which makes it very difficult to track and monitor the movement of money. This gives rise to tax evasion and breed corruption.

Advantages Offered by Digital Payment System

The biggest motivator for digital payments is the ease of conducting the transaction. There is no need to carry debit or credit cards or stand in queue. The transactions are recorded so, people can keep track of their spending. Also helps in filing income tax returns and explain the spends in case of scrutiny. Further, there is increased privacy and transparency of payments.

Hurdles in Digital Payments

Firstly, a large fraction of the population is still out of banking net and depends on cash transaction. Even for the people with access to banking, digital payment is very difficult because there are only 1.46 million points of sale (PoS) at present. Secondly, majority of the workforce is from informal sector and it is not quite easy for them to switch from traditional to digital mode. Thirdly, at 17.4%, India has lowest internet penetration of all the major countries in Asia Pacific. This is due to digital divided and less digital literacy. If we compare rural with urban, condition is even worse. Ironically, India is appreciated globally for providing IT services. Fourthly, there is a gap in adoption of digital technology across different demographic groups within the country. Fifthly, the quality of telecom network is very poor. Sixthly, many traders believe that online payment would decrease their competitiveness, because of fear of increase in good cost due to various service charge present in digital payment. Further, there security concerns around digital payments have not been addressed.

Tax evasion is also one of the major issues behind digital payments. There is a general preference of cash transaction in India. Merchant prefer not keep record in order to avoid paying taxes and buyer find cash payment more convenient.

Government Policy on Digital Payments

The government is proactively promoting digital payments to bring maximum people within the tax compliance. In recent times, it has taken several steps to promote digital payments. Some of these include:

• Waiver of service charges to promote electronic payment using debit card, Internet and Mobile phones.
• Centre announced to provide 2 lakh point of sales terminal to village at free of cost
• Air Channel “Digishala” to educate people about digital transaction.
• Lucky Grahak Yojana and Digi Dhan Vyapari Yojana to be run by NPCI (National payment corporation of India) to promote digital payment
• Insurance companies announce to offer discount up to 10 percentage on payment of insurance premium through digital means.
• Cashless transaction of Direct benefits in Jandhan Accounts.
• Digital tags for toll payments at roads.
• Applications such as BHIM for Aadhaar / UPI based digital payments.

Safety Concerns in Digital Payments

As per the RBI figures, 13,083 and 11,997 cases related to ATM, credit, debit card and net banking fraud were reported in 2014-2015 and 2015-16. Demonetisation, subsequent cash crunch, and subsequent government agenda to push for digital payments has brought the safety and privacy concerns of digital payments on the fore.

We note that there are three kinds of risks that are unique to digital payments. First is the Device related risks. For example, if someone loses the mobile phone and there is no password protection of the phone, the e-wallet may be compromised. Second is the access risk. Connecting the E-wallet with the other apps such as social networking apps could pose a risk of data leakage. Third is the negligence in password secrecy. Sharing password or OTP with others can result in loss of money from accounts or e-wallets.

Further, there are other risks involved such as snooping, tempering, capture reply, spoofing etc.

Current Legal Framework Around Digital Payments

The first major legislative step towards digital payments was the Payment and Settlement Systems Act, 2007. This law enabled the RBI to “regulate, supervise and lay down policies involving payment and settlement space in India.” Apart from some basic instructions to banks as to the personal and confidential nature of customer payments, supervising the timely payment and settlement of all transactions, the RBI has actively encouraged all banks and consumers to embrace e-payments. However, so far there is no law dedicated to digital payments, as its altogether a new animal in Indian economic ecosystem.

Ratan Watal Committee on Digital Payments

In order to strengthen existing law and to protect privacy of consumer government appointed a committee under special adviser NITI Aayog and former Finance Secretary Ratan Watal. This committee has come up with some of the far reaching recommendations to promote digital payments and taking India towards becoming a less-cash economy. The key recommendations are as follows:

Establish an independent Payment Regulatory Board

The committee has mooted creation of a separate Payments Regulatory Board (PRB) as an independent decision making body having some members from outside RBI. Thus, the regulation of payments should be made independent from the function of central banking by the Reserve Bank of India. Only systematically important transactions should come within the purview of RBI.

Strengthen the existing law

The committee suggested that the current payments and settlements act should be stronger and should include clauses for consumer protection. The Board for Regulation and Supervision of Payment and Settlement Systems should be given a statutory status. The objective is to ensure that a customer is not liable for losses arising from unauthorized transactions, as well as an option to approach the regulator for grievances. It has also sought to address issues on data protection and security.

Widen the scope of real time payment systems

The committee recommended opening up of the payment systems like the real-time gross settlement system (RTGS ) even to non-bank payment service providers. It proposed that online fund transfer systems such as RTGS and NEFT (national electronic funds transfer) be operational round the clock and stressed the need to have full interoperability between banks and payment service providers as well as between the payment service providers.

Government should take the lead

The  committee suggested withdrawal of all charges levied by government departments and utilities on digital payments and making it mandatory for government departments and agencies to provide option to consumers to pay digitally. Besides, there should be incentives for consumers to make payments (including payment of fines and penalties) to government electronically by giving a discount or cash back and enable consumers to make payments (including taxes) to government through suitable digital means like cards and wallets.’

Ranking System

The committee has proposed a ranking of the state, districts and Panchayats to motivate low ranking units to scale up their efforts towards more and more digital payments.

DIPAYAN Fund

The committee has proposed a DIPAYAN Fund from savings generated from cashless transactions to expand digital payments.

Roadmap

The committee has come up with a digital roadmap also. In that, it sets a three year goal to:

• growth digital payments from current 5% to 25% of consumption expenditure.
• Cut Cash to GDP Ratio from 12% at present to 6% in these three years.

The committee has come up with several advantages of its recommendations such as larger share of formal economy, new business models and markets, curb tax leakages, check on funds for criminal activities and reduction in cash related.

Current Status

Finance ministry has released this report in public domain and invited comments over it from various stakeholders in 15 days. The reactions have started pouring in of which most important is the opposition of RBI towards an independent regulator.