Digital Payment

Context: With the rising importance of digital payments infrastructure, there is a need to strengthen the cybersecurity architecture and address issues in the Unified Payment Interface (UPI) for smooth service delivery.

Need for Robust Digital Payment Infrastructure:

• Data Vulnerability: There have been many instances of data breaches in the past, which has increased the vulnerability of the user and the financial ecosystem. 
• Singapore-based cybersecurity company Group-IB claimed that a vast tranche of debit and credit data had been hacked and was up for sale on the web. 
• Sophos, a Britain based cybersecurity firm, claimed that more than 90% of all Indian organizations suffered public cloud security incidents that resulted in a data breach or account-level data compromise.
• Increased Digitization:  India tops the list of countries processing real-time transactions, at 41million a day.
• Over one billion debit and credit cards are in circulation clocking 1 billion transactions per month
• Unified Payments Interface (UPI) processes more than $41billion from nearly 1.5 billion transactions per month.
• Online shopping has seen a 73% increase in Tier-1cities and a four-fold increase in Tier-2 and Tier-3 cities during COVID-19.
• Absence of Insurance against security threats: Neither bank deposits nor payments are insured; therefore it is even more critical to protect the interests of consumers. 
• Absence of Fraud Early Warning (FEW) System: While the RBI has recently decided to put in place a proactive cyber immunity surveillance framework (CISF), for supervised entities, it does nothing to boost FEW systems.

Issues with Digital Payment Ecosystem:

• Weak Fraud Management: The prevailing attitude of the Companies is to deny the existence of fraud after it has been discovered or to diminish the magnitude of the problem.

• Government Interference: Government’s continuous interference has made the growth of digital payments susceptible to uncertainty.
• Removal of Merchant Discount Rate(MDR) by the government for accepting payments through UPI or RuPay cards.
• It has posed viability challenges to the business model of credit card companies and UPI apps since they are hugely dependent on MDR.
• Some private banks recently began charging for UPI transactions beyond a prescribed limit which was later rolled back.
• This has led to rampant downtimes on some of the UPI apps, as they depend on banks to power the infrastructure for enabling consumers to make a digital transaction.
• Revenue shrinkage has led to many small UPI apps to vanish. Only apps with deep pockets like Paytm, PhonePe and Google Pay have remained.
• Cap on Market Share: National Payments Corporation of India(NPCI) also recently envisaged imposing a market share cap on UPI apps up to 50% in the first year, 40% in the second, and 33% in the third. 
• This will lead to the creation of non-competitive digital payments space, which will, in turn, reduce innovation in the field.

Way Ahead:

• Robust Fraud Early Warning System: Enforcing a universal and auditable FEW standards, with a minimum number of automated and manual checks to curb phishing, malware and other intruders.
• Creation of indigenous app store has recently gained attraction, for which security is of utmost importance rather than the cost.
• App developers will be willing to pay a premium as they do in the US and China in order to ensure system integrity.

• Minimizing Government Interference: Interference from the government should be curtailed in terms of setting pricing or rules of engagement.
• Open sourcing the UPI platform can help private players innovate on the existing infrastructure to address viability and reliability concerns.
•  RBI’s recent mandate to set up a new umbrella entity (NUE) for payments, is a welcome step.
• Breakdown of NPCI: Carving out NPCI into 4-5 smaller entities would help, since it regulates and provides a vast number of digital payment facilities.
• A cards payments network to grow home-grown RuPay against Visa and Mastercard.
• A consumer payments company to facilitate UPI, bill payments, FASTag, etc.
• An automatic clearinghouse to facilitate interbank, high-volume electronic transactions such as the distribution of subsidies and pensions.
• AePS (Aadhaar-Enabled Payment System)is for transactions over handheld micro ATMs and cheque truncation system for processing cheques.