Cashless Society – Digital Payments, Demonetization, etc.

Analysing the success of NPCI


From UPSC perspective, the following things are important :

Prelims level: MDR, IMPS, RTGS, NEFT

Mains level: Paper 3- Role of NPCI in transforming digital payment infrastructure in India

The article tracks the evolution of digital payments system in India and the transformational role played by the NPCI in it.

Adoption of digital payments in India

  • Digital payments have found strong ground in India reducing all other modes of payments to the background.
  • Through a faster system of simultaneous debits and credits, 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 companies.

Evolution of digital payments in India

  • 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.
  • It substantially reduced the time taken for settlements.
  • Around the same time, the RBI introduced National Electronic Funds Transfer, or NEFT to support retail payments.
  • Now, NEFT is available round the clock and RTGS will follow from December 2020 — only a few countries have achieved this.
  • These systems were seeded and reinforced with the setting up of the umbrella retail payments institution: National Payments Corporation of India (NPCI).
  • NPCI was set up by 10 lead banks at the instance of the RBI in 2009.
  •  The NPCI as a not-for-profit company

How NPCI transformed retail payment systems in India

  • The NPCI’s success against deeply entranced formidable international players, supported by innovative technology, viz. Unified Payments Interface (UPI) and Immediate Payment Service (IMPS), is well recognised by central banks in many other countries.
  • The Bank for International Settlements’s endorsement of the NPCI model in 2019 is a major accolade.
  • 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 direct or indirect control by powerful private interests could dilute the public good character of the outfit.

Issue of converting NPCI into for-profit

  • Converting NPCI intro for-profit company will be a retrograde step with huge potential for loss of consumer surplus along with other strategic implications.
  • Instead 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.

Issue fo MDR

  • In Budget 2020-21, the government prescribed zero Merchant Discount Rate (MDR) for RuPay and UPI, both NPCI products.
  • Zero MDR on UPI and RuPay will help to popularise digital payments benefiting both customers and merchants.
  • There is justification in this zero MDR prescription by the government.
  • It is justified because depositors implicitly pay around 3% to banks as net interest margin, being the difference between saving and risk free bond rate, for enjoying certain payments services traditionally.
  • When banks enjoy such a huge amount of current account savings account (CASA) deposits, in return, is it not incumbent on them to provide such payment services?
  • The government left out other providers of digital payment products from this MDR prescription.
  • Taking advantage of this dichotomy, many issuing banks switched to mainly Visa and Master cards for monetary gains.
  • As customers were induced by such supplier banks, it created a kind of indirect market segmentation and cartel formation, though there is hardly any quality difference in payment products.
  • It may be noted that even the European Central Bank imposed a ceiling on MDR for all, protecting consumer interest.
  • It is hoped that the government will take corrective action in the next Budget to ensure a level playing field and to relieve the NPCI from such policy-induced market imperfection.

Pricing for digital payments

  • The ideal pricing for digital payments products should be based on an analysis of-(i) producer surplus (ii) consumer surplus (i.e. gain or loss of utility due to pricing) (iii) social welfare for which we need cost-volume-price data.
  • A factor which needs to be reckoned is the float funds digital payments allow (cash withdrawal is a drain on the banking system), which is a source of sizeable income for banks.
  • The RBI will do well to study and arrive at a rational structure of pricing including MDR (possibly also penalty on default by customer).

Consider the question “Elaborate on how the NPCI has been successful in transforming the digital payment landscape in the country through innovations? What are the challenges facing retail payments infrastructures?”


Given that the digital payment system is like a national superhighway, for which the government has a crucial role to play in protecting consumers against exploitation.

Back2Basics: RTGS and NEFT

  • With NEFT (National Electronic Funds Transfer)
    you can transfer any amount to the recipient’s account in a one-on-one transfer basis.
  • NEFT transactions don’t have a maximum limit for funds that can be transferred in a single day.
  • The NEFT system is available round the clock throughout the year on all days (24x7x365).
  • Funds are transferred in batches that are settled in 48 half-hourly time slots throughout the day.
  • There is no maximum or minimum limit on the amount of funds that could be transferred through NEFT.

RTGS (Real Time Gross Settlement)

  • Business owners can use RTGS when they need to transfer large amounts instantly.
  • One advantage that RTGS has over the other methods is the transaction speed, since the entire amount is transferred in real time.
  • The available hours for RTGS transactions vary based on the individual banks and their branches.
  • There’s a minimum limit of Rs. 2 lakhs for RTGS transactions, and there’s no maximum limit as such.

What is MDR?

  • The merchant discount rate (MDR) is charged to merchants for processing debit and credit card transactions.
  • To accept debit and credit cards, merchants must set up this service and agree to the rate.
  • The merchant discount rate is a fee, typically between 1%-3%, that merchants must consider when managing business costs

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