Cashless Society – Digital Payments, Demonetization, etc.

Cashless Society – Digital Payments, Demonetization, etc.

RBI issues draft on Cybersafety for PSOs


From UPSC perspective, the following things are important :

Prelims level : Payment System Operators (PSOs)

Mains level : Not Much

pso  payment

The Reserve Bank of India has released the draft Master Directions on Cyber Resilience and Digital Payment Security Controls for Payment System Operators (PSOs).

What are Payment System Operators (PSOs)?

  • A payment system operator means a legal entity responsible for operating a payment system.
  • The PSO provides services by operating on certain models.
  • They largely outsource their payment and settlement-related activities to various other entities.
  • Examples of PSOs include: Google Pay (and other apps), Clearing Corporation of India, National Payments Corporation of India, Cards Payment Networks, Cross border Money Transfer, ATM networks, Prepaid Payment Instruments, White Label ATM Operators, Instant Money Transfer, and Trade Receivables Discounting System, Bharat Bill Payment System etc.

Key points from the draft

(1) Governance Mechanisms:

  • The draft emphasizes the need for robust governance mechanisms to manage cybersecurity risks effectively.
  • It covers information security risks and vulnerabilities that PSOs should address.
  • PSOs are expected to establish and maintain a comprehensive cybersecurity framework.

(2) Baseline Security Measures:

  • The draft specifies baseline security measures to be implemented by PSOs.
  • These measures are designed to protect digital payment systems from cybersecurity threats.
  • PSOs must implement controls related to data security, access controls, incident response, and business continuity planning.

(3) Resilience to Cybersecurity Risks:

  • The directions aim to ensure that PSOs are resilient to both traditional and emerging information systems and cybersecurity risks.
  • PSOs are required to conduct periodic risk assessments and implement appropriate controls to mitigate identified risks.
  • The draft emphasizes the importance of continuous monitoring and review of cybersecurity measures.

(4) Safeguarding Digital Payment Transactions:

  • The focus of the directions is to enhance the security of digital payment transactions.
  • PSOs must implement strong authentication mechanisms, encryption standards, and secure communication protocols.
  • The draft highlights the need for robust fraud monitoring and reporting mechanisms.


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Cashless Society – Digital Payments, Demonetization, etc.

Light weight and Portable Payment System (LPSS) for emergencies


From UPSC perspective, the following things are important :

Prelims level : Utkarsh 2.0 initiative, LPPS

Mains level : Cashless payments


Central Idea

The Reserve Bank of India (RBI) has proposed the development of a Light weight and Portable Payment System (LPSS).

Light weight and Portable Payment System (LPSS)

  • LPSS is referred to as a “bunker” equivalent, to ensure uninterrupted digital payments during exigencies such as natural calamities or war.
  • This system will operate independently of existing payment technologies like UPI, NEFT, and RTGS.
  • It can be operated from anywhere by a minimal staff during exigencies.
  • It will process critical transactions, such as bulk payments and interbank payments, during extreme and volatile situations.
  • The system operates on minimalistic hardware and software and is activated only when needed.

Why such move?

  • As part of the Utkarsh 2.0 initiative, the RBI is working on strengthening the oversight framework for Centralised Payment Systems, including NEFT and RTGS.
  • The initiative aims to enhance the existing payment systems and introduce new functionalities to improve efficiency and reliability.

Importance of an LPSS

  • Near-zero downtime: The RBI aims to create a payment system that can operate on minimalistic hardware and software, ensuring near-zero downtime of the payment and settlement system in the country.
  • Continuous liquidity pipeline: The lightweight system will facilitate uninterrupted functioning of essential payment services like bulk payments, interbank payments, and provision of cash to participant institutions, thereby keeping the liquidity pipeline of the economy alive and intact.
  • Stability of the economy: It is expected to process critical transactions, including government and market-related transactions that are crucial for maintaining the stability of the economy.
  • Enhancing public confidence: The resilient nature of the system will act as a bunker equivalent in payment systems, enhancing public confidence in digital payments and financial market infrastructure, even during extreme conditions.

Differences between LPSS and UPI

  • Existing payment systems: The RBI acknowledges the availability of various payment systems in India for individuals and institutions, each with its distinct character and application.
  • Handling large transaction volumes: Conventional systems like RTGS, NEFT, and UPI are designed to handle large volumes of transactions while ensuring sustained availability, relying on complex wired networks and advanced IT infrastructure.
  • Vulnerability to catastrophic events: However, catastrophic events such as natural calamities and war can temporarily render these payment systems unavailable by disrupting the underlying information and communication infrastructure.
  • Preparedness for extreme situations: To address this vulnerability, the RBI believes it is prudent to be prepared with a lightweight payment system capable of functioning in extreme and volatile situations.


  • The RBI has not provided a specific timeline for the launch of the lightweight payment and settlements system.
  • However, the concept serves as a crucial step towards ensuring the resilience of the payment ecosystem during emergencies.
  • Further research and development efforts are necessary to bring this system to fruition and enhance the overall stability and confidence in digital payments in India.


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Cashless Society – Digital Payments, Demonetization, etc.

Demonetization and the digital payment ecosystem


From UPSC perspective, the following things are important :

Prelims level : E-rupee

Mains level : UPI and future of E-rupee



  • Paperless payments have been a big national goal ever since 8 November 2016, when India rendered ₹500 and ₹1,000 currency notes useless in a stunning decision that was upheld as valid by the Supreme Court on recently. Today, our cash intensity remains roughly on the same incline as it was earlier. But online payments have soared. This means a fine policy judgement call will need to be made soon.

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Demonetization: A brief Analysis

  • The supreme court rejected petitions arguing that demonetization was done illegally and by 4:1 bench majority Supreme court held the process as satisfactory.
  • The overnight note-ban was also found to satisfy a general test of proportionality. For all the hardship caused by weeks of cash starvation, that exercise of authority was not judged too drastic for its aims.
  • The extent to which unaccounted-for money was flushed out, terror funding frozen and commerce formalized cannot reliably be estimated, but small businesses were clearly hit hard and India’s economy slowed down soon after.


The changing trend: How we are transacting?

  • Rise of digitals payments: The past half decade’s big trend in our use of money has been the exponential rise of a platform that’s part of our digital stack of public goods.
  • Spectacular success of UPI: Designed for instant transfers between bank accounts done via mobile phones, the Unified Payments Interface (UPI) has been a spectacular success since its 2016 launch.
  • UPI transactions for instance: According to National Payments Corporation of India (NPCI), its operator, UPI processed more than 74 billion transactions in 2022, up 90% over 2021, worth almost ₹126 trillion, a 76% leap.

Examining feasibility of levying user fee on UPI and the E-rupee

  • Financial support to UPI: The case for UPI as India’s payment bedrock is weakened by the fact that while it levies no user fee, it isn’t a costless service. Last year, the finance ministry justified financial support for UPI on the ground that it’s a digital public good with immense convenience for the public and productivity gains for the economy.
  • Coast benefit review must be done: If public funds are increasingly needed to back UPI as it expands, we must put it to a cost-benefit review as we go along; UPI is already logging huge sums and the total for 2023 may be much more.
  • Promoting E-rupee: It’s not just a cost consideration that should make us promote RBI’s retail e-rupee instead for routine payments.
  • E-rupee is a direct liability of RBI: The E-rupee’s mass usage would involve circulation of money that’s a direct liability of the central bank (an IOU issued by it, i.e., like cash), which would better serve the cause of economic stability. This is because what RBI owes its currency bearers is entirely free of risk, while the same cannot be said of banks.


Why India needs a digital rupee?

  • Online transactions: India is a leader in digital payments, but cash remains dominant for small-value transactions.
  • High currency in circulation: India has a fairly high currency-to-GDP ratio.
  • Cost of currency management: An official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.


  • For superior systemic safety, the e-rupee should get a significant share of online payment swipes. Even if its holdings earn no interest, it could catch on if the security of its value, ease of liquidity and erasure of data trails (below a limit) are duly advertised. For an e-rupee to aid macro level prudence, it will have to eat into UPI.

Cashless Society – Digital Payments, Demonetization, etc.

India’s Central bank digital currency (CBDC) in detail


From UPSC perspective, the following things are important :

Prelims level : CBDC and applications

Mains level : Read the attached article in detail


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  • The Reserve Bank of India (RBI) has launched the first pilot of the retail digital rupee, also known as e₹-R, on December 1, 2022. The digital token that represents legal tender will be issued in the same denominations as paper currency and coins. The RBI’s pilot on the digital rupee will test the robustness of the new system. Let’s understand it in detail.


The first pilot project of retail digital rupee

  • Allowed banks: Initially, only four banks- State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank in four cities have been allowed to offer e₹-R. The scope of the pilot will be increased gradually to include more banks, users and locations.
  • Transaction: People will get e₹-R from banks and will be able to make transactions via their digital wallets. The digital rupee can be stored on mobile phones or devices.

What is a Central bank digital currency (CBDC)?

  • Like fiat currency in digital form: CBDC is a legal tender issued by the central bank in digital form. Like rupee notes or coins, which are in physical form. Like fiat currency, it can also be exchanged between people. Simply, put it’s just like rupee (₹) notes but in digital form (e₹). You can also exchange e₹ for physical currency notes.
  • Unlike fiat currency no need to have account: However, unlike fiat currency that’s usually stored in banks and hence their liability, CBDC is a liability on the RBI’s balance sheet. That’s why you don’t necessarily need to have a bank account to own a digital rupee.

Why do we need CBDC?

  • Cost efficient management: CBDC will cut the cost related to physical cash management. India spent ₹4,984.80 crore on printing money in FY22 and ₹4,012.10 crore a year before that. These expenses are borne by people, businesses, banks and the RBI. e₹ cuts all kinds of printing, storage, transportation and replacement and settlement costs. Though the RBI will invest a significant amount in building CBDC infrastructure, subsequent marginal operating costs will be very low.
  • Boost to digital economy and financial inclusion: It’ll fulfil the higher cash requirement of the country. The government will be able to make money available in areas where it’s a challenge to provide physical cash. Also, it’ll boost India’s digital economy, enhance financial inclusion, and make the financial system efficient.
  • People will have money in uncertain times: Since e₹ is the central bank money, in any uncertain situation like COVID-19, it’ll save people’s savings. Banks only insure deposits up to Rs 5 lakh. In case of defaults, people could lose their savings.
  • Multiple saving and transaction options: e₹ will provide you with other options like e-wallets, mobile banking, and UPI to make payments.
  • Much safer payment option: e₹ is a safe central bank instrument, with direct access to the RBI money for payment and settlement. It is an electronic version of cash, whose main use case is retail


Will CBDC replace UPI?

  • Not expected to substitute but supplement payment option: The CBDC-based payment system is not expected to substitute other modes of existing payment options. It will supplement by providing another payment avenue to people.
  • India already has a sound payment system: UPI uses your money deposited with banks but with CBDC, the money becomes the liability of RBI India already has a sound payment system, with payment products like RTGS, NEFT and UPI, etc., coupled with an exponential increase in digital transactions.

No interest on e₹? but why?

  • No interest on digital money: According to the RBI, if it starts paying interest on digital money, it could lead to a massive disintermediation in the financial system, in which banks will lose deposits, and thus hurt their credit creation capacity in the economy.
  • Rationale behind No interest on digital rupee: Banks may be compelled to increase deposit rates, which will increase their costs of funding and decrease net interest income. Ultimately, the cost will be passed on to borrowers.
  • CBDC will be attractive payment option without interest: If there is no interest, CBDC can still be attractive as a medium of payment, even while its attractiveness as a savings instrument diminishes. Also, banks would restrain themselves from distributing CBDCs if they find it as a threat to bank deposits, which can hamper credit flows and the adoption of CBDCs.


How will CBDC be different from crypto?

  • CBDC is Algorithm based unlike crypto mining: The central bank will be issuing CBDCs based on algorithm-driven processes, rather than mining through competitive reward methods. These algorithms will have energy efficiency and environmental friendliness as their core principles, unlike private crypto mining.
  • Less energy consumption unlike crypto: Therefore, issuance and management of CBDCs are expected to have much lesser energy consumption vis-à-vis more energy-intensive processes normally associated with the mining and distribution of private cryptocurrencies.
  • Legal consumer protection: Unlike private cryptos wherein any individual can compete to mine and create the cryptocurrency, only the central bank can issue the CBDC and can simply opt for conversion of the bank’s existing balances to CBDC balances. So, CBDCs will provide the public with the benefits of virtual currencies, while ensuring consumer protection by avoiding the damaging social and economic consequences of private virtual currencies.

Why India needs a digital rupee?

  • Online transactions: India is a leader in digital payments, but cash remains dominant for small-value transactions.
  • High currency in circulation: India has a fairly high currency-to-GDP ratio.
  • Cost of currency management: An official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.


  • e₹-R is a digital token that has real value like rupee notes or coins. CBDC will make transactions and currency exchange smoother, and it’ll boost financial inclusion. The RBI’s pilot on the digital rupee will test the robustness of the new system.

Mains question

Q. What is central bank digital currency? Why do we need CBDC? It is said that digital rupee is different from crypto currency. Discuss.

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Cashless Society – Digital Payments, Demonetization, etc.

Sovereign green bond (SGB)


From UPSC perspective, the following things are important :

Prelims level : Central Bank Digital Currency

Mains level : Paper 3- CBDC and Sovereign Green Bond


The other two major budget announcements pertain to the issuance of sovereign green bonds and a central bank digital currency. While geopolitical turbulence might make the current moment inopportune for experimentation, the government seems firm on both the proposals and they will most probably be rolled out.

Sovereign green bond (SGB):  how it is different from a traditional bond

  • The sovereign green bond is a novel idea.
  •  It will be a part of the government’s borrowing programme.
  • The gross borrowing programme of the government is pegged at Rs 14.95 lakh crore.
  • The SGB (sovereign green bond) raised will be part of the aggregate borrowing programme and has to be used for projects which are ESG (environment, social and governance) compliant.
  • Hence, if the bond is being used to finance a power project or road, or in case it is used to finance revenue expenditure, it has to be ESG compliant.
  • If they succeed at the central level, green bonds can be replicated by states.

Challenges for SGB

  • Pricing challenge: As these bonds are different from G-secs (government securities), they may have to provide a better return as all ESG compliant companies have to make special investments that will push up costs.
  • Low-interest rate: Further, given the low-interest rates prevailing today — real returns on deposits are negative — the SGBs can be issued as tax-free bonds, open to the public.
  • This will evince a lot of interest given that these are government-issued bonds.
  • The RBI and the government have been trying to get retail investors to participate in the government’s borrowing programme, and this move will expedite the process.

Central bank digital currency (CBDC) and challenges

  •  For launching such a currency, the RBI has to address certain fundamental questions.
  • 1] Will it replace currency: Is a CBDC going to replace currency at some point in the future?
  • One must remember that there are several sections in India that are not conversant with technology.
  • 2] How will it be different from digital payments: If it is going to coexist with currency, how different will it be for the public from the digital payments that are being made today?
  • Will people need to choose between a mobile wallet and a CBDC wallet?
  • 3] Security of owner’s information: any issuance of CBDC on a voluntary basis also raises a question on the security of the owner’s information.
  • CBDC has to be clear on the issue of confidentiality as it is bound to be a matter of concern.
  • 4] The future of the banking system: If people have to be incentivised to move voluntarily to the CBDC, the cash exchanged must earn interest or else all money will go to bank accounts where a minimal interest rate can be earned.
  • Will we require savings bank accounts with commercial banks in case all cash goes to the RBI?
  • Will we then require ATMs for cash withdrawal? Will bank tellers become redundant? Will we need logistics companies that handle cash?
  • These finer issues need to be addressed by the RBI as the widespread use of CBDC will progressively lead to lesser need for banks.
  • 5] Issue of security: Any financial system that runs on technology can be hacked.
  • It has to be foolproof and power failure resistant.
  • There is a real danger of cyber fraud increasing as the majority of the population is not tech-savvy.
  • Similarly, there is always downtime for bank servers when banking transactions cannot be carried on.
  • This cannot be allowed to be the case with CBDC as it has to be available on a 24 x 7 basis.

Consider the question “What are green bonds? How the green bonds can act as a tool to achieve the targets of sustainable development as a means of finance?”


The arguments for CBDC are compelling on the grounds of keeping up with the central banks of other countries, and the possibilities of taking advantage of new technologies like blockchain. But before embarking on these measures, it might be useful to keep in mind the issues flagged above.

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Cashless Society – Digital Payments, Demonetization, etc.

[pib] Better Than Cash Alliance


From UPSC perspective, the following things are important :

Prelims level : Better Than Cash Alliance

Mains level : Not Much

The Government of India, FICCI, and the Better Than Cash Alliance has come under the partnership to achieve the industry level commitment of responsible digitization of merchants.

Make a note here that it is a BTCA is a global partnership with diverse funding, a UN office as its secretariat and Indian being its member.

Better Than Cash Alliance

  • The Better Than Cash Alliance is a global partnership of 75 governments, companies, and international organizations that accelerates the transition from cash to digital payments in order to reduce poverty and drive inclusive growth.
  • It was created in September 2012 by the United Nations Capital Development Fund (Secretariat), the US Agency for International Development, the Bill & Melinda Gates Foundation and Visa Inc. among others.
  • Based at the UN, the Alliance has over 50 members, works closely with other global organizations, and is an implementing partner for the G20 Global Partnership for Financial Inclusion.
  • India became a member of the alliance in 2015 to digitize payments to achieve financial inclusion and to share success stories from PM Jan Dhan Yojana, the world’s largest financial inclusion program.

Working method

The Better Than Cash Alliance partners with governments, companies, and international organizations that are the key drivers behind the transition to make digital payments widely available by:

  1. Advocating for the transition from cash to digital payments in a way that advances financial inclusion and promotes responsible digital finance.
  2. Conducting research and sharing the experiences of our members to inform strategies for making the transition.
  3. Catalyzing the development of inclusive digital payments ecosystems in member countries to reduce costs, increase transparency, advance financial inclusion– particularly for women– and drive inclusive growth.

Cashless Society – Digital Payments, Demonetization, etc.

[pib] Better Than Cash Alliance (BTCA)


From UPSC perspective, the following things are important :

Prelims level : BTCA

Mains level : Digital banking facilitation measures

The Union Ministry of Finance and UN-Based Better Than Cash Alliance (BTCA) organized a joint Peer learning exchange on fintech solutions for responsible digital payments at the last mile.

Make a note here that it is a BTCA is a global partnership with diverse funding, a UN office as its secretariat and Indian being its member.

Better Than Cash Alliance

  • The BTCA is a global partnership of 75 governments, companies, and international organizations that accelerates the transition from cash to digital payments in order to reduce poverty and drive inclusive growth.
  • The United Nations Capital Development Fund serves as the secretariat. It was created in September 2012.
  • The Alliance is funded by the Bill and Melinda Gates Foundation, Citi, MasterCard, Omidyar Network, USAID, and Visa Inc.
  • By the time it launched, the program was already being rolled out in Peru, Kenya, Colombia, and the Philippines.

India and the BTCA

  • India became a member of the alliance in 2015 to digitize payments to achieve financial inclusion and to share success stories from Pradhan Mantri Jan Dhan Yojana, the world’s largest financial inclusion program.
  • The alliance is working with several state governments towards the goal of building knowledge and programs where people, governments, and businesses can make and receive digital payments.

Cashless Society – Digital Payments, Demonetization, etc.

NPCI caps UPI transactions on third-party apps at 30%


From UPSC perspective, the following things are important :

Prelims level : UPI

Mains level : Paper 3- Cap on UPI transactions by TPAPs and issues with it

The article deals with the recent NPCI decision to cap the number of transactions by third party application providers (TPAPs).


  • The National Payments Corp of India (NPCI), in its recent guidelines imposed a 30% volume-based cap on the share of transactions by TPAPs and payment service providers (PSPs), effective from January 2021.

 5 issues with the volume-based cap

1) It undermines cashless economy

  • The growth and recognition of UPI would not have been possible had a cap been in place.
  • Typically, customers limit themselves to one or two TPAPs of their choice.
  • A transaction cap that forces users to use multiple apps may result in more transaction failures and dilute UPI’s popularity and impact.
  • Lack of accessibility and user-friendliness would push users away from UPI towards other payment methods, or even cash.

2) It’s an anti-consumer decision

  • Open markets and user choice have been crucial factors in the exponential increase seen in UPI adoption and its transactions.
  • A volume-based cap would compel TPAPs to either limit the number of transactions on their platforms or stop enrolling new users, which in turn would restrict the customer’s use of UPI.
  • TPAPs will likely be forced to redact customer incentives like cashbacks, coupons and the like.
  • This could go against consumer interests by reducing choice.

3) It will also make the Indian market less attractive for investors:

  • The cap would raise compliance and regulatory costs for players in the sector, which could deter new investors from entering.
  • It would also adversely affect the growth potential of existing UPI players.

4) No regulatory impact assessment

  • The idea of a volume-based cap does not appear to have undergone an assessment of its impact on the sector.
  • As a general principle, before any such rule is imposed, an RIA (Regulatory Impact Assessment) needs to be undertaken.
  • Systemic risks are not restricted to UPI and are common in all financial systems; yet, a similar cap has not been suggested for, say, retail bank transactions.

5) Impact on Atmanirbhar Bharat

  •  In order for Indian businesses to grow and compete at the global level, we need to integrate business processes with the global economy.
  • Indian start-ups, in particular, need tools and infrastructure that lets them gain an international edge.
  • Atmanirbhar Bharat envisions a self-reliant India that thrives on innovation, technology and entrepreneurship.
  • But this vision cannot be fulfilled if our policies restrain the growth of a cashless economy.


India’s UPI ecosystem is nascent, but has demonstrated significant growth and has had a positive impact on the economy by providing the backbone needed to move towards cashless commerce. Any policy decision by regulators at this point should aim at catalysing innovation in this space. Stifling it would serve India badly.

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

Cashless Society – Digital Payments, Demonetization, etc.

Payments Infrastructure Development Fund (PIDF)


From UPSC perspective, the following things are important :

Prelims level : Payment Infrastructure Development fund

Mains level : Paper 3- Digital payment in India

The RBI has created a Payments Infrastructure Development Fund (PIDF) with an outlay of Rs. 500 Cr.

Possible prelims question:
Q. Which of the following is the major aim of Payments Infrastructure Development Fund (PIDF) recently created by the Reserve Bank of India (RBI)?
a) Promotion of UPI payments

b) Deploying Points of Sale (PoS) infrastructure

c) Creation of digital wallets

d)All of the above

Payments Infrastructure Development Fund (PIDF)

  • PIDF aims to encourage acquirers to deploy Points of Sale (PoS) infrastructure — both physical and digital modes in tier-3 to tier-6 centres and north eastern states.
  • The setting of PIDF is in line with the measures proposed by the vision document on payment and settlement systems in India 2019-2021.
  • It is also in line with the RBI’s proposal to set up an Acceptance Development Fund which will be used to develop card acceptance infrastructure across small towns and cities.

Its working

  • The PIDF will be governed through an Advisory Council and managed and administered by RBI.
  • It will also receive recurring contributions to cover operational expenses from card-issuing banks and card networks.
  • RBI will also contribute to its yearly shortfalls, if necessary.

Why need PIDF?

  • Over the years, the payments ecosystem in the country has evolved with a wide range of options such as bank accounts, mobile phones, cards, etc.
  • To provide further fillip to digitization of payment systems, it is necessary to give impetus to acceptance infrastructure across the country, more so in under-served areas.

Cashless Society – Digital Payments, Demonetization, etc.

Digital currency plan made in China


From UPSC perspective, the following things are important :

Prelims level : BIS, cryptocurrency.

Mains level : Paper 3- Challenges and opportunity in cryptocurrencies.

Central banks all over the world have had mixed feelings towards cryptocurrencies. Some of them have resorted to banning them altogether. And yet, cryptocurrencies exist and have been flourishing. But China seems to be bent on taking the “road less travelled”. This article explains the various aspects underlying the China’s move. These somehow apply to all the central banks, including the RBI. Read more to know more about such aspects.

Digital currency by China’s central bank

  • In December 2019, a pilot programme was launched in Beijing to intensively advance the trial work of fintech innovation regulation.
  • This pilot has now been expanded to include several other cities.
  • This expansion of the pilot marks the initiation of China’s central bank digital currency (CBDC).
  • Christened Digital Currency Electronic Payment (DCEP), available via a mobile wallet app.
  • It is pegged 1:1 with fiat currency, and designed to replace M0 which comprises currency issued by the PBoC less the amount held by banking institutions.
  • This is the first such serious initiative in the whole world.

Why central banks are sceptical of cryptocurrencies?

  • Historically, monetary authorities everywhere have been sceptical of cryptocurrencies.
  • The reasons for scepticism includes following problems-
  • 1) Wild fluctuations in the value of cryptocurrencies.
  • 2) The implied challenge to the monopoly of central banks in issuing fiat currencies.
  • 3) The looming possibility of software bugs.
  • 4) The tainted shadow of the dark web.

But some central banks have been planning to issue fiat digital currency

  • Authorities were far more intrigued by CBDCs.
  • In fact, the Basel-based Bank for International Settlement (BIS) has been conducting surveys on this issue for some time.
  • The recent survey of 2019 “Proceeding with Caution – a Survey on Central Bank Digital Currency” revealed that while in general, central banks have been proceeding cautiously towards introducing central banks digital currencies.
  • Some have been planning to issue a fiat digital currency in the short to medium term.
  • In particular, the survey revealed that nearly 25% of central banks have the required authority to issue a CBDC, while a third do not, and 40% remain unsure.

If you cannot beat them, join them

  • So, what factors led China to release the cryptocurrency?
  • Chinese investors were always attracted to cryptocurrencies.
  • With the bearish turn in the Chinese stock market in 2015-16, bitcoins became increasingly popular as an alternative asset class in China.
  • As in media reports, in the recent past, China has emerged as the capital of the crypto ecosystem, accounting for nearly 90% of trading volumes and hosting two-thirds of bitcoin mining operations.
  • The PBoC tried hard to curtail this exuberance but achieved limited success.
  • The recent move to introduce the CBDC in China is a logical outcome of the efforts to curb and tackle its runaway cryptomarket practices.
  • Or, the philosophy of the PBoC could simply have been, if you cannot beat them, join them.

Advantages and concerns

  • At a practical level, the benefits of CBDC are manifold.
  • First, paper money comes with high handling charges and eats up 1% to 2% of GDP.
  • Second, by acting as a powerful antidote for tax evasion, money laundering and terror financing, CBDCs can materially boost tax revenues while also improving financial compliance and national security.
  • Third, as a tool of financial inclusion, particularly in emergencies, direct benefit transfers can be instantly delivered by state authorities deep into rural areas, directly into the mobile wallets of citizens who need them.
  •  Fourth, CBDCs can provide central banks with an uncluttered view and powerful insights into purchasing patterns at the citizen scale.
  • In the long run, it is believed that CBDCs will make cross-border payments fast and frictionless.


  • All these salutary benefits come packaged with a deep and abiding concern about the relentless rise of a surveillance state and the concomitant erosion in citizen privacy and anonymity.
  • If face-recognition technology enables states to spy on the physical movement of citizens, will CBDCs be used to spy on every movement of their money?

But how Central bank’s digital currency is different from private cryptocurrencies such as Bitcoin?

  • An earlier research paper by PBoC Deputy Governor favoured a two-tier CBDC model.
  • In this model instead of directly interacting with the public, the central bank would involve financial intermediaries such as commercial banks.
  • In tier 1, the central bank would interface with financial intermediaries.
  • In tier 2, the financial intermediaries would interface with the general public.
  • Advantage? Such a model is accretive in that it preserves the power of existing financial systems and extends their influence further.
  • It is believed that the DCEP uses a DLT architecture (with central controls) which preserves the primacy of the monetary authority, unlike private cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) that are truly decentralised.

Silver bullet to slay three dragons

  • What may China be signalling with the launch of DCEP?
  • First, on the world economic stage, it may want DCEP to challenge the hegemony of the U.S. dollar as the default global reserve currency.
  • Second, in its war with American BigTech, it may want to showcase DCEP as its weapon of choice to counter FB or Facebook’s Libra, which is planning to offer a common cryptocurrency to 2 billion-plus FB users across the world.
  • Third, and still in the realm of speculation, it may wish to use the DCEP to clip the wings of AliPay and WeChatPay, gigantic fintech duopolies that control 90% of the China’s domestic digital payments, and whose ambitions may one day pose a threat to the aura and authority of the central bank.

Consider the question “Most of the central banks have been sceptical in their attitude toward the cryptocurrencies. Yet, they persisted. Next came the Supreme Court decision lifting ban on them. In light of this, examine the advantages and concerns that come with the cryptocurrencies.”


From gold to silver to paper to digital, the march of currencies goes on. China has rolled the dice on central bank digital currencies, challenging other nations to follow. Welcome to the future of money.

Cashless Society – Digital Payments, Demonetization, etc.

The billion standard


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- How UPI is transforming payment and settlement, what makes UPI a success.


India has crossed the target of a billion monthly digital payments. Now, to a billion transactions a day.

The story of payment revolution and financial inclusion in India

  • Progress on the financial inclusion: India was long a financially excluded nation –only 17 per cent of Indians had a bank account in 2011.
    • 50 more years estimate: The World Bank suggests it would have taken 50 more years for 80 per cent of Indians to get a bank account at the pre-2011 speed.
    • Yet, we reached that milestone in 2018.
    • How? A magical combination of
    • Political will (Jan Dhana Yojana and Aadhaar embedding).
    • A proactive central bank (creating a non-profit market participant entity and levelling the playing field between non-banks and banks).
    • And a technology stack with three layers (identity, payments, and data).
  • The rise of UPI
    • The swift rise in use: The digital payment transactions on the Universal Payment Interface (UPI) platform rising from 0.1 million in October 2016 to 1.3 billion in January 2020.
    • Result of working together: This represents the magic of entrepreneurs, nonprofits and policymakers working together.
    • And gives us a new target — a billion transactions a day.
  • India’s Payment revolution
    • What are the components of the payment revolution: India’s payment revolution comes from-
    • A clear vision: Shifting the system from low volume, high value, and high cost to high volume, low value, low cost.
    • A clear strategy: Regulated and unregulated private players innovating on top of public infrastructure.
    • And trade-offs balanced by design: Regulation vs innovation, privacy vs personalisation, and ease-of-use vs fraud prevention.
  • What consumers wanted?
    • Consumers wanted a payment experience that was mobile-first, low-cost, 24/7, instant, convenient, interoperable, fintech friendly, inside banking, and safe.
  • Answers lies in UPI.
    • What did UPI achieve?
    • Interoperability: UPI created interoperability between all sources and recipients of funds -consumers, businesses, fintechs, wallets, 140 member banks.
    • Instant settlement: UPI settles instantly inside the central bank in fiat money -state-issued money declared by the sovereign to be legal tender.
    • Blunted data monopolies: Big tech firms have strong autonomy but weak fiduciary responsibilities over customer data, it was taken care of by UPI.

5 Policy lessons from the success of UPI

  • First- how the India stack: Interconnected yet independent platforms or open APIs — are a public good that-
    • Lowers costs, spur innovation and blunts the natural digital winner-takes-all.
    • Replication in other areas: Replicating this in education, healthcare, and government services are likely to be a harbinger of large scale multi-domain collaborative innovation.
  • Second-collaboration: Collaboration can create ecosystems that overcome the birth defects of its constituents
    • The execution deficit of government, the trust deficit of private companies, and the scale deficit of nonprofits.
  • Third-policy intervention: Complementary policy interventions are important.
    • Demonetisation and GST are changing the stories that firms and individuals tell themselves around cash and informality.
  • Fourth-human capital and diversity matter: This revolution needed career bureaucrats to partner with academics, tech entrepreneurs, venture capitalists, global giants and private firms.
  • The final lesson-Western model is not needed always: India doesn’t need to be Western or Chinese to be modern. If our policymakers had copied Alipay or US banks, we wouldn’t have leapfrogged their birth defects.

Way forward

  • Fix the deadline: The central government must deadline digitising all its payments.
  • RBI implement 100+ action items: The RBI must implement the 100-plus action items arising from its own Vision 2021 document and the Nandan Nilekani Committee for Deepening Digital Payments.
  • UPI for inward remittances: RBI must also make UPI and RuPay fit for use in our $70 billion inward remittances that currently come through exploitative financial institutions which don’t have clients but hostages.
  • Replication of UPI in bank credit: The RBI must replicate the core design of UPI — fierce but sustainable private and public competition in bank credit-
    • Our 50 per cent credit-to -GDP ratio is one of the reasons India is poor.
    • China’s 300 per cent is the wrong number, but reaching the OECD average of 100 per cent needs the RBI to do many things-
    • Raising its human capital and technology game in regulation and supervision.
    • Catalysing an ecosystem for lending against the rapidly expanding digital exhaust of small firms and individuals.
    • Issuing more private bank licences, facilitating management changes in old private banks with market caps that signal questions about book value, and shepherding governance and human capital revolution at PSU banks.


Converting the collective independence our citizens got in 1947 to individual freedom surely involved universal financial inclusion. The gap between this aspiration and reality was not a lie but a disappointment because our capital got handicapped without labour and our labour got handicapped without capital. Change has begun -the RBI, the finance ministry, and many individuals deserve our gratitude and dues for a billion digital payments a month. We now ask you for a billion digital payments a day.

Cashless Society – Digital Payments, Demonetization, etc.

[op-ed snap] Cybersecurity a critical challenge for India’s digital payments ecosys


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Digital payments in India, growth potential, various security challenges and how to tackle it.


Digital payments in India are witnessing consistent growth at a compound annual growth rate (CAGR) of 12.7%.

Growth potential and challenges involved in digital payments

  • Expected growth in mobile wallet payment: The mobile wallet market is expected to continuously grow at a CAGR of 52.2% by volume between 2019-23, according to a recent report by KPMG.
    • This digital explosion can be seen in the accelerating rise in the download and use of electronic wallets as well as an unprecedented increase in digital transactions/payments.
    • UPI/IMPS use growth: Payment systems such as UPI/IMPS are likely to register average annualised growth of over 100%, according to RBI’s 2021 vision document.
  • Challenge of Cybersecurity: Cybersecurity is one of the most critical challenges faced by stakeholders of the digital payment ecosystem.
    • Types of risks involved: With more and more users preferring digital payments, the chances of getting exposed to cybersecurity risks such as-
    • Online fraud
    • Information theft.
    • Malware or virus attacks are also increasing.
    • Digital payment frauds account for about half of all bank frauds in India.

Steps taken by the RBI

  • Guidelines issued: In view of risks, the Reserve Bank of India (RBI) has also issued some guidelines as security and risk mitigation measures for digital payments.
    • It has also issued guidelines that limit the liability of customers on unauthorised electronic banking transactions
  • Steps taken: The central bank has taken steps for securing card transactions, internet banking, electronic payments, ATM transactions, and prepaid payment instruments (PPIs).

Securing the fintech revolution

  • Fraudsters building advanced technologies: The changing nature of cybersecurity attacks such as-
    • Web application attack.
    • Ransomware.
    • Reconnaissance.
    • The DDoS attack clearly establishes cyber-risk as a new reality.
  • What needs to be done to secure the fintech revolution?
    • A robust regulatory framework.
    • An effective customer redressal framework.
    • Foolproof security measures to enable confidence and trust.
    • Incentives for larger participation and benefits similar to cash transactions- are some measures that can help ensure long-term success for digital payments.
  • Leveraging technology: Technology can be leveraged for making popular methods of cashless payments secure.
    • Biometric authentication-enabled cards can provide a greater layer of security by enabling replacement of the traditional PIN.
    • Through biometric authentication, consumers can authenticate transactions by placing their finger on a fingerprint sensor embedded in the card.
    • Ensuring security: Safety is ensured as the consumer’s fingerprint is stored only in the secure chip within the card and the same chip is used to match the scanned fingerprint with the stored one.
    • The biggest advantage: The biggest advantage is that the bank or merchant cannot access the consumer’s biometric data, which also counters potential privacy concerns.


To reap the advantages of the promising fintech revolution steps must be taken to secure the digital environment.




In this article we will explain what Cashless economy is, what are the major advantages of cashless economy and what challenges India will face in moving towards a cashless economy.

  • What is a cashless economy?
  • Benefits of Cashless economy
  • Challenges in making India a cashless economy
  • Steps taken by RBI and Government to discourage use of cash
  • What else needs to be done?


India continues to be driven by the use of cash; less than 5% of all payments happen electronically however the finance minister, in 2016 budget speech, talked about the idea of making India a cashless society, with the aim of curbing the flow of black money.

Even the RBI has also recently unveiled unveiled a document — “Payments and Settlement Systems in India: Vision 2018” — setting out a plan to encourage electronic payments and to enable India to move towards a cashless society or economy in the medium and long term.

What is a cashless economy and where does India stand?

  • A cashless economy is one in which all the transactions are done using cards or digital means. The circulation of physical currency is minimal.
  • India uses too much cash for transactions. The ratio of cash to gross domestic product is one of the highest in the world—12.42% in 2014, compared with 9.47% in China or 4% in Brazil.
  • Less than 5% of all payments happen electronically
  • The number of currency notes in circulation is also far higher than in other large economies. India had 76.47 billion currency notes in circulation in 2012-13 compared with 34.5 billion in the US.
  • Some studies show that cash dominates even in malls, which are visited by people who are likely to have credit cards, so it is no surprise that cash dominates in other markets as well.


Benefits of Cashless economy

  • Reduced instances of tax avoidance because it is financial institutions based economy where transaction trails are left.
  • It will curb generation of black money
  • Will reduce real estate prices because of curbs on black money as most of black money is invested in Real estate prices which inflates the prices of Real estate markets
  • In Financial year 2015, RBI spent Rs 27 billion on just the activity of currency issuance and management. This could be avoided if we become cashless society.
  • It will pave way for universal availability of banking services to all as no physical infrastructure is needed other than digital.
  • There will be greater efficiency in welfare programmes as money is wired directly into the accounts of recipients. Thus once money is transferred directly into a beneficiary’s bank account, the entire process becomes transparent. Payments can be easily traced and collected, and corruption will automatically drop, so people will no longer have to pay to collect what is rightfully theirs.
  • There will be efficiency gains as transaction costs across the economy should also come down.
  • 1 in 7 notes is supposed to be fake, which has a huge negative impact on economy, by going cashless, that can be avoided.
  • Hygiene – Soiled, tobacco stained notes full of germs are a norm in India. There are many such incidents in our life where we knowingly or unknowingly give and take germs in the form of rupee notes. This could be avoided if we move towards Cashless economy.
  • In a cashless economy there will be no problem of soiled notes or counterfeit currency
  • Reduced costs of operating ATMs.
  • Speed and satisfaction of operations for customers, no delays and queues, no interactions with bank staff required.
  • A Moody’s report pegged the impact of electronic transactions to 0.8% increase in GDP for emerging markets and 0.3% increase for developed markets because of increased velocity of money

An increased use of credit cards instead of cash would primarily enable a more detailed record of all the transactions which take place in the society, allowing more transparency in business operations and money transfers.

This will eventually have the following chain effect:

  1. Improvement in credit access and financial inclusion, which will benefit the growth of SMEs in the medium/long run.
  2. Reduce tax avoidance and money laundering thanks to the higher traceability of all the transactions.
  3. The increased use of credit cards will definitely reduce the amount of cash that people will carry and as a consequence, reduce the risk and the cost associated with that.

Challenges in making India a cashless economy

  • Availability of internet connection and financial literacy.
  • Though bank accounts have been opened through Jan Dhan Yojana, most of them are lying un operational. Unless people start operating bank accounts cashless economy is not possible.
  • There is also vested interest in not moving towards cashless economy.
  • India is dominated by small retailers. They don’t have enough resources to invest in electronic payment infrastructure.
  • The perception of consumers also sometimes acts a barrier. The benefit of cashless transactions is not evident to even those who have credit cards. Cash, on the other hand, is perceived to be the fastest way of transacting for 82% of credit card users. It is universally believed that having cash helps you negotiate better.
  • Most card and cash users fear that they will be charged more if they use cards. Further, non-users of credit cards are not aware of the benefits of credit cards.
  • Indian banks are making it difficult for digital wallets issued by private sector companies to be used on the respective bank websites. It could be restrictions on using bank accounts to refill digital wallets or a lack of access to payment gateways. Regulators will have to take a tough stand against such rent-seeking behaviour by the banks.

Steps taken by RBI and Government to discourage use of cash

  • Licensing of Payment banks
  • Government is also promoting mobile wallets.Mobile wallet allows users to instantly send money, pay bills, recharge mobiles, book movie tickets, send physical and e-gifts both online and offline. Recently, the RBI had issued certain guidelines that allow the users to increase their limit to Rs 1,00,000 based on a certain KYC verification
  • Promotion of e-commerce by liberalizing the FDI norms for this sector.
  • Government has also launched UPI which will make Electronic transaction much simpler and faster.
  • Government has also withdrawn surcharge, service charge on cards and digital payments

What else needs to be done?

  • Open Bank accounts and ensure they are operationalized.
  • Abolishment of government fees on credit card transactions; reduction of interchange fee on card transactions; increase in taxes on ATM withdrawals.
  • Tax rebates for consumers and for merchants who adopt electronic payments.
  • Making Electronic payment infrastructure completely safe and secure so that incidents of Cyber crimes could be minimized and people develop faith in electronic payment system.
  • Create a culture of saving and faith in financial system among the rural poor.
  • The Reserve Bank of India too will have to come to terms with a few issues, from figuring out what digital payments across borders means for its capital controls to how the new modes of payment affect key monetary variables such as the velocity of money.
  • RBI will also have to shed some of its conservatism, part of which is because it has often seen itself as the protector of banking interests rather than overall financial development.
  • The regulators also need to keep a sharp eye on any potential restrictive practices that banks may indulge in to maintain their current dominance over the lucrative payments business.

Though it will take time for moving towards a complete cashless economy, efforts should be made to convert urban areas as cashless areas. As 70% of India’s GDP comes from urban areas if government can convert that into cashless it will be a huge gain. Therefore different trajectories need to be planned for migration to cashless for those having bank account and for those not having.


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