Potholes on Digital Payment

Context: Rising digital payments growth supported by banks and fin-tech companies has assumed significance and, but requires a rational structure of pricing.

Evolution of Digital Payments in India

• Steered by the Reserve Bank of India:
• Real Time Gross Settlement System or RTGS (2004): 
• Covers large value payments on stock trading, government bond trading and other customer payments.
• Reduces huge risks (like Harshad Mehta scam) and time taken for settlements. 
• National Electronic Funds Transfer, or NEFT: ensures bulk debits and credits to support retail payments .

• Securities Exchange Board of India (SEBI’s) T+1 settlement (T is for transaction date) will deepen financial market by attracting more international capital.

• National Payments Corporation of India (NPCI) is the umbrella retail payments institution to build a super highway for digital payments systems and expanding it in rural and semi-urban areas.

• Achievement of NPCI:

• Unified Interface Payments (UPI): Against entranced formidable international players like VISA and Mastercard, UPI is well recognised.
•  The Bank for International Settlements’ (BIS’s) endorsement of the NPCI model in 2019 is a major accolade. 

• Merchant Discount Rate (MDR): Prescription of zero MDR for using RuPay and UPI was aimed at popularising digital payments benefitting both customers and merchants.

Issues with the Payment System in India:

• Rising demand of converting NPCI into for-profit organisation: which act against the basic foundation of the NPCI - 

• The idea of the NPCI as a not-for-pro?t company has a link from the Bangirocentralen (BGC), which considers payments as public good.

• Converting it into a for profit will be a retrograde step with potential loss of consumer surplus and strategic implications.

• Exclusion of digital payment products provider from MDR waiver: is unjustified and had adverse effects.
  • This has forced banks to switch to mainly Visa and Mastercard for monetary gains.
  • As customers were induced by such supplier banks, it created a kind of indirect market segmentation and cartel formation.

• Settle the pricing: 

• It should be based on analysis of producer surplus, consumer surplus and social welfare derived from cost-volume-price data.
• It should ensure fair amount of return to payment service providers including Fin-Tech companies and customers. 
• Supporting the NPCI: like the RBI providing free use of the RTGS and other products, the strategy should be to assist the NPCI ?nancially to provide retail payment services at reduced price.