Watal panel suggests ground rules for digital payments system

The Ratan Watal Committee set up to recommend measures to push the digital payments system has suggested that the government and the regulator lay down the ground rules for a competitive market so that markets constantly improve solutions, reduce prices, retain existing consumers and find new ones.

The role of the state should be minimal and be driven towards creating an enabling ecosystem. It should focus on identifying and addressing market failures, situations when the competitive outcome of markets is not satisfactory from the point of view of society. The actions of the state should consider its capacity to intervene, the committee pointed out.

''Banks perform both banking and payments services. Traditionally, the field of payments has been bank driven. Technology has led to payments emerging as a distinct industry: one that is increasingly dominated by fintech companies.

''Payments is a business of transferring money. In contrast, banking is the business of giving assured returns on deposits and lending. India needs the combined effort of banks and non-banks to promote digital payments. The policy analysis needs to focus on strengthening the ecosystems and suggest ways to enable the markets to be competitive and innovative; safe and resilient; accessible and inclusive.

''Banks, the incumbents, today face increasing competition from new fintech PSPs. They earn revenues (i) by using low cost current account, savings account (CASA) deposits of consumers for onward lending at higher rates; (ii) when consumers undertake payments transactions, and (iii) from 'the float' when payments transactions move slowly. This business model is now increasingly under pressure, more so for those banks who are not geared to compete and innovate.

''Fintech companies that require to connect to banking systems to serve their customers tend to face restrictive practices. This anti-competitive setting is not conducive for innovation and consumer interest. Moreover, India stands to lose out on benefits from global innovation as international technology based PSPs do not find it attractive to grow in India and Indian banks are not challenged to become truly globally competitive.

Payments now need to be regulated independently. The approach of RBI has already been to regulate non-banks in payments lightly. This has enabled them to emerge as significant players in a relatively short time frame. This growth now needs to be nurtured so that banks have competitive pressure to innovate and non-banks have an equal opportunity to compete. Globally, this has been recognised and structural changes have been put in place to ensure that the consumers benefit the most from this technology led payments revolution. This is true for many progressive economies including countries in European Union (including UK), Australia and South Africa. The common theme across these jurisdiction is to promote increased participation of non-banks in payments, and promote access and competition in the payments industry.

India has a unique opportunity to leverage the Jan Dhan, Aadhaar and Mobile (JAM) trinity to rapidly enable ordinary Indians to participate in digital payments. In addition to the high Aadhaar and mobile penetration, 65 per cent of our population is below 35 years of age. This population could find it easier to adopt to new ways of doing payments.

However, this transformational phase is accompanied by heightened concerns around consumer protection, competition, safety and convenience. The anonymity of cash transaction is a non-trivial barrier to digital payments and is a constant battle between government and those who steal taxes.

Following the demonetisation of high denomination paper currency notes, the prime minister urged small traders to embrace technology by using digital payment systems. In his address to the nation on 27 November 2016, the prime minister emphasised that by embracing technology, we can bring about a big transformation in the form of a cashless society.

It is in this context, that the committee has evaluated the current digital payments landscape in India, and has calibrated its recommendations to fast track the attainment of its vision of significantly reducing cash usage in the economy, and facilitating the provision of ubiquitous digital payment services and infrastructure in the country.

The committee suggested that the government may consider the following recommendations:

Make regulation of payments independent from the function of central banking. The committee weighed two options on how best this be implemented:

• Create an new payments regulator, or
• Make the current board for regulation and supervision of payment and settlement systems (BPSS) within RBI more independent.

While both the options would serve the intended objective, the committee recommends that the BPSS be given an independent status which it today lacks by being a sub-committee of the central board of RBI. The statutory status of the new board, within the overall structure of RBI, called Payments Regulatory Board (PRB) should be enshrined in the Payments and Settlement Systems Act, 2007. The committee has suggested that the finance ministry finalise the structure of the PRB within 30 days.

The committee has suggested a review of the current Payments and Settlement Systems Act, 2007 to include explicit mandate for:

• Competition and innovation,
• Open access and interoperability,
• Consumer protection, including penalties and independent appeal mechanism,
• Regulations on systemic risks,
• Data protection and security and
• A process of regulatory governance.

The committee has provided drafting instructions for the new Payments and Settlement Systems Act and this may be initiated at the earliest. It has suggested that the finance ministry finalise the amendment bill and place the same before the union cabinet witin 30 days.

The committee said the government should promote digital payments and receipts within government by:

• Adopting digital payments for all its needs,
• Withdrawal of all charges levied by government department and utilities on digital payments and bear the cost of such transactions,
• Mandating government departments and agencies to provide option to consumers to pay digitally,
• Incentivising consumers to make payments (including payment of fines and penalties) to government electronically by giving a discount or cash back,
• Enabling consumers to make payments (including taxes) to government through suitable digital means like cards and wallets,
• Special emphasis to promote digital payments for recurring low value transactions and
• Reduction in custom duties on payments acceptance equipment.

Implementation agencies listed in recommendation section. Steps may be initiated in 30 days and reviewed fortnightly.

The committee suggested the creation of a fund `proposed as DIPAYAN, from savings generated from cashless transactions to expand digital payments.

Besides the committee suggested capacity building of audit capability to measure savings by the finance ministry as well as the ministries of social justice, tribal affairs and the ministry of development of North Eastern region. The implementing agencies should consider implementation of these within a period of 60 days, it said.

The committee suggested a ranking and reward framework to encourage and recognise government departments, state governments, districts and panchayats and other market participants who lead the efforts on enabling digital payments. NITI Aayog should undertake implementation of this along with state governments and this should be achieved in 60-90 days.

The committee suggested measures to promote digital payments, including:

• Promoting Aadaar based eKYC and paperless authentication (including where Permanent Account Number (PAN) has not been obtained),
• Providing disincentives for usage of cash and
• Creating awareness and transparency on cost of cash

Implementation of the measures should be undertaken by the finance ministry, UIDAI, CBDT, Telecom Regulatory Authority of India (TRAI), ministry of HRD, DoPT and RBI. This may be initiated in the next 60-90 days.

The committee also suggested that the RBI may, within the existing regulatory framework of Payments and Settlement Act, 2007, immediately initiate steps to consider outsourcing the function of operation of payment systems like Real Time Gross Settlement (RTGS) and National Electronic Fund Transafer (NEFT).

While moving RTGS to a separate operator is not envisaged for now – a cost benefit analysis may be initiated as an initial step. Overtime, multiple payment system operators should be encouraged and payment systems should be operated by market entities. The committee wants a consultation paper on this to be released in the next 180 days.

RBI, the committee said, may upgrade payment systems like RTGS and NEFT to operate on 24x7 basis in due course of time. RBI should progressively increase their timings over due course. (A consultation paper may be released over 90 days).

The committee also wants RBI to allow non-bank PSPs to directly access payment systems and issue regulations for consultation over 60 days.

The committee envisages the NPCI to be payments centric in its ownership and objectives. Ownership of NPCI should be diversified widely to include more banks and include non-banks. Its board should be represented by majority public interest directors and include shareholder directors.

NPCI should be allowed to function independently the committee said, adding that regulations for this may be released for consultation over the next 60 days.

The committee wants payments to be inter-operable between bank and non-banks as well as within non-banks. Mobile number and Aadhaar based fully inter-operable payments should be prioritised, the committee said, adding that NPCI may enable this on its platforms over 60 days.

It also suggested creation of a formal mechanism to enable innovations and new business models and issue of a consultation paper on this over the next 90-120 days.

Besides the committee wants other supplementary measures to promote digital payments, including issuing regulations on Systemically Important Payment System (SIPS) and Systemically Important Financial Institutions (SIFIs), growing acceptance network, enabling faster and cheaper credit and promoting cross border payments. The committee suggested that regulations on these may be released for consultation over the next 60-180 days.

The RBI may within two weeks of releasing this report, develop a comprehensive metric to quantitatively measure and monitor the enhancement of digital payment services in India, it added.