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Digital payments have found strong ground, especially in India, increasingly relegating all other modes of payments to the background. It is through a faster system of simultaneous debits and credits that the money value is transferred from one account to the other across banks. With such versatility and ease of settling financial transactions, the growth of digital payments is going to be phenomenal, supported by banks and Fin-Tech, or financial technology, companies.
Evolution of digital payments in India
- There is a long and interesting history behind the evolution of digital payments in India, piloted by the Reserve Bank of India (RBI) and succinctly captured in the Payment Systems in India, published in 1998.
- A major thrust toward large value payments was effected through the Real Time Gross Settlement System, or RTGS, launched by the RBI in March 2004. The large value payments on stock trading, government bond trading and other customer payments were covered under the RTGS, providing finality of settlement, thereby reducing huge risks. Besides this, it substantially reduced the time taken for settlements.
- The RBI introduced National Electronic Funds Transfer, or NEFT, and bulk debits and credits to support retail payments around the same time. Now, NEFT is available round the clock and RTGS will follow from December 2020 — only a few countries have achieved this.
Formation of National Payments Corporation of India
- The sterling contribution of this robust payment system, especially retail payments, was seeded and reinforced with the setting up of the National Payments Corporation of India (NPCI) by 10 lead banks at the instance of the RBI in 2009.
- The idea for this umbrella retail payments institution emerged in the vision document on payments system, 2005-08 released by RBI in 2005.
- The setting up of such an umbrella organisation to build a super highway for digital payments has a strong appeal which was well-appreciated by Dr. Y.V. Reddy, the then RBI Governor, taking a number of policy decisions to spread digital payments and protect consumer interest. However, there were many within and outside the RBI, including in the Indian Banks’ Association, who had apprehensions about the success of such a model for the NPCI.
- With digital payment being a public good like currency notes, it was necessary that the corporation was fully supported by the RBI and the government as an extended arm of the sovereign.
- It was also necessary to contain expectations on profits, avoiding gyrations of the stock market along with direct or indirect control by powerful private interests which had the potential to dilute the public good character of the outfit.
- There is a demand from some quarters that the NPCI should be converted into a for-profit company to withstand competition. The shareholders of the NPCI can have windfall gains too. But this will be a retrograde step with huge potential for loss of consumer surplus along with other strategic implications.
- The ideal pricing for digital payments products should be based on an analysis of producer surplus, consumer surplus (i.e. gain or loss of utility due to pricing) and social welfare for which we need cost-volume-price data.
- Instead, like the RBI providing free use of the RTGS and other products, the strategy should be to assist the NPCI financially, either by the RBI or the government, to provide retail payment services at reduced price (in certain priority areas). This may also help support expansion of the payment system network and infrastructure in rural and semi-urban areas in partnership with Fin-Tech companies and banks.
- It is not the intention to deny a fair amount of return to payment service providers including Fin-Tech companies. But should this be at the cost of huge loss of consumer surplus? Ideally, it should be a case of win-win for all.