Cashless Society – Digital Payments, Demonetization, etc.

Cashless Society – Digital Payments, Demonetization, etc.

[pib] Better Than Cash Alliance (BTCA)

Note4Students

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%

Note4Students

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).

Context

  • 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.

Conclusion

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

Note4Students

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?”

Conclusion

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)

Note4Students

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

Note4Students

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.

Concerns

  • 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.”

Conclusion

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

Note4Students

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.

Context

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.

Conclusion

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

Note4Students

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.

Context

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.

Conclusion

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

 

 

 

Cashless Society – Digital Payments, Demonetization, etc.

[op-ed snap] The great disruption of 2016

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Demonetisation - Impact

Context

India’s overnight ban on high-value currency notes in 2016 was a shock. 

Studies

  • According to a study published recently by the US National Bureau of Economic Research, demonetization reduced jobs by up to 3%.
  • It also hurt economic activity by a similar magnitude in the first two months after it took effect. 
  • Research has also found that the exercise—aimed at spiking black money, curbing corruption and depriving terrorists of funds—led to a 2% decline in bank lending in that period.
  • The research paper examines the impact of demonetization across the country at the district level to make national-effect estimates.
  • The paper concludes that figures put out earlier had underestimated the economic impact of the move.

Research

  • The research method employed reveals that the note ban’s shock was felt unevenly across the country.
  • Some regions were hit harder than others because they had a higher proportion of high-value notes in circulation. 
  • The study’s period of analysis has not captured the secondary effects of the ban which are still being felt. 
  • Late 2016 disrupted a recovery of India’s economy and sent it into a prolonged slump from which it is yet to emerge.

Cashless Society – Digital Payments, Demonetization, etc.

Bharat Bill Payment System (BBPS)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : BBPS

Mains level : Promoting cashless transactions in India


  • The RBI has expanded the scope of the Bharat Bill Payment System (BBPS) by adding other categories of recurring payments through the portal.

Why in news?

  • With the expansion of the scope of the payment facility, other recurring payments such as school fees, municipal taxes, insurance premiums can also be paid via BBPS.
  • Till now, the Bharat Bill Payment System used to cater to just five segments — direct to home (DTH), electricity, gas, telecom and water.

About BBPS

  • The Bharat Bill Payment System was launched by the National Payment Corporation of India on 31 August 2016 under the recommendation of RBI executive director G. Padmanabhan committee.
  • The platform allows customers across the country to use one single website or outlet to pay all their bills with reliability and safety of transactions.
  • According to a report, a total of 338 million transactions took place on the BBPS network over the course of 2018-19.
  • BBPS payments can be made using cash, cheques as well as through digital methods such as internet banking, debit, credit card, among others.
  • The payment service is provided to customers through a network of agents, enabling multiple payment modes, including cash, and an instant confirmation of payment is provided after the transaction.
  • It even has a standardized system to handle grievances for both online and offline transactions.

Cashless Society – Digital Payments, Demonetization, etc.

VG Kannan committee to review ATM pricing

Note4Students

From UPSC perspective, the following things are important :

Prelims level : VG Kannan committee

Mains level : Read the attached story

VG Kannan committee

  • The RBI has set up a six-member committee, headed by VG Kannan, Chief Executive, Indian Banks’ Association, to review the ATM interchange fee structure.
  • It aims for giving a fillip to ATM deployment in unbanked areas.

Terms of reference

  • The committee will review the existing structures and patterns of costs, charges and interchange fees for ATM transactions.
  • It will also review the overall patterns of usage of ATMs by cardholders and assess the impact, if any, on charges and interchange fees.
  • It will assess the entire gamut of costs in respect of the ATM ecosystem and make recommendations on the optimal charge/interchange fee structure and pattern.

Why appoint such committee?

  • When a customer transacts at another bank’s ATM, his bank has to pay an interchange fee to the other bank.
  • The cost of operating ATMs has steadfastly increased.
  • Hence, Banks and white-label ATM operators (WLAOs) want the RBI to raise ATM interchange fee from ₹15 to ₹18 for cash withdrawals and card-to-card fund transfers, and from ₹5 to ₹8 for other non-financial transactions.

Back2Basics

White Label ATM

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?

Introduction

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.

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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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