Report of the Committe on Digital Payments, chaired by Shri Ratan P. Watal, Principal Advisor, NITI Ayog and Former Finance Secretary (Dated :27th December, 2016)

1 .Acknowledgement

The remit of the Committee was comprehensive and included suggesting leg­islative as well as regulatory changes with a view to promote digital payments over medium term (See: Government order establishing the Committee on Page 180).

The task at hand was equally challenging. The business models around digital payments are yet to clearly emerge. Should State encourage pricing models to develop for payments or mandate/ encourage it to be a free utility? What should be done to enable the common man to access, adopt and use digital payments in a meaningful manner? How can the pace of growth of digital payments be accelerated? What should be the role of State in enabling that vision?

The answers to these questions can change as fast as changes in technologies. In this backdrop, the Committee approached the mandate based on sound economic principles. It greatly benefited from the fact that all the major stakeholders were members of the Committee. These comprised of H.R. Khan, former Deputy Governor, Reserve Bank of India (RBI); Chandan Sinha, Executive Director, RBI; Neeraj Kumar Gupta, Secretary, Department of Investment and Public Asset Management (DIPAM); R. Chandrashekhar, President, National Association of Software and Services Companies (NASSCOM); A.B. Pandey, CEO, Unique Identification Authority of India (UIDAI); Ashwini Kumar and later Rajeev Rishi as Chairman, Indian Banks Association (IBA); Rani Singh Nair and later Sushil Chandra as Chairman, Central Board of Direct Taxation (CBDT); Naveen Surya, President, Payments Council of India (PCI); Subho Ray, President, Internet and Mobile Association of India (IAMAI); and Dr. Saurabh Garg, Joint Secretary, Department of Economic Affairs (DEA). The Committee also benefited from inputs from NPCI which graciously offered to participate in the meeting of the Committee. Input from NPCI was provided by A.P. Hota, Chairman; Dilip Abse, COO and S.K. Gupta, Chief Project Officer.

Various experts gave their valuable insights and submissions which translated into rich input for the Committee. Some of the important discussions which benefited the Committee came from B.N. Satpathy, Deepika Shrivasatava, Ajay Kaushal, Nanda Sameer Dave, Udai Mehta, Amol Kulkarni, David Katz, Sanjay Jain, Mathew Homer, Badal Malick, Rohit Kumar, Varad Pande, Arun Sharma, Anu Tiwari, Vipul Jain, Rajesh Bhoot, Ravi Agarwal, Harshala Chandorkar, Susan Thomas, Chetna Batra and Ashish Gupta. The Committee received may useful submissions from various stakeholders. These are acknowledged separately in the Annexures. It is possible that some names might not have figured in the list above as Committee members have individually benefited from many consultations.

The Committee met five times during its three month tenure. In addition, it held three meetings involving consultations involving industry and government agencies. It invited written submissions from a wider audience from Niti Aayog’s website. The Committee’s research secretariat independently met and interacted with a variety of stakeholders including banks, non bank Payment Service Providers (PSPs), card schemes, regulator, payment system operators, Aadhaar, web aggregators and Fintech companies. It interacted with firms who were globally active in payments but were sitting on the fence on their Indian business. It interacted with academics and think tanks.

The Committee studied the domestic scenario and drew on the best practices in the developed world in understanding the trajectory of development in payments industry and various interventions undertaken to promote digital payments.

The task of putting together the key issues, researching the problems, suggesting policy options, developing the rationale for the final recommendation would not have been possible without the efforts of the members of the Committee and all those who enriched the discussion. The Committee was ably supported by the research work of the Macro Finance Policy team at National Institute of Public Finance and Policy (NIPFP) comprising Ashish Aggarwal, Pratik Datta, Indrajeet Sircar and Aditya Singh Rajput. I appreciate and acknowledge their contribution to this report.

09 December 2016

New Delhi

Ratan P. Watal

2.Executive Summary

Digital payments is to nance what invention of wheel was to transport. It o ers an unprecedented opportunity to our people, most of whom live in rural India or are migrants in big cities. It promises access to formal nancial services and bene ts from e-commerce, specially for those who continue to be excluded. In addition to accelerating nancial inclusion, opening new business models and markets { digital payments can improve the State’s ability to curb tax leakages, funding of criminal activities and reduce cash related costs.

The phenomenal global growth in digital payments may be attributed to four factors – (i) digital and technology revolution, (ii) entry of several non banking PSPs into payments space, (iii) customers becoming more demanding and expecting instantaneous and one-touch payment solutions and (iv) progressive changes in the regulatory framework.igital payments is to finance what invention of wheel was to transport. It offers an unprecedented opportunity to our people, most of whom live in rural India or are migrants in big cities. It promises access to formal financial services and benefits from e-commerce, specially for those who continue to be excluded. In addition to accelerating financial inclusion, opening new business models and markets – digital payments can improve the State’s ability to curb tax leakages, funding of criminal activities and reduce cash related costs.

India is no exception to these changes. Over the past few years, the payment landscape in India, too, has mirrored these developments, with digital payments displaying a robust growth. However, India continues to have one of the lowest use of digital payments globally. The recent initiative to demonetise high denomination paper currency has highlighted the gaps in our digital payments ecosystem. The situation needs to be reviewed from the perspective of an ordinary Indian – Why Digital? For all its inefficiencies, cash offers instant settlement, 24×7 up-time, familiarity and an illusion of zero transaction cost.

In this backdrop, the Vision of the Committee is to set a roadmap for digital payments to grow substantially over the next three years from the current level of about five percent of personal consumption and twenty per cent of all transactions. India’s cash to Gross Domestic Product (GDP) ratio is among the highest in the world. Over the next three years, it is the vision of the Committee to reduce this ratio from about twelve percent to six percent.

Today, this is achievable as it is possible to build secure payment solutions suited to ordinary Indians which are as convenient as sending a message. About sixty-five percent of population have active mobile telephony. Ninety-nine percent have electronic identity in the form of Aadhaar. About thirty-five percent have already adopted use of technology in the form of internet and social messaging – a ten fold increase over ten years. This was made possible because telecom regulations mandated open access and inter-connectivity. The regulator defined common standards and required the incumbents to connect to new rivals thus preventing anti-competitive practices.

Likewise, in the payments market, the Government and the Regulator may lay down the ground rules for a competitive market so that markets constantly improve solutions, reduce prices, retain existing consumers and find new ones. This might also mitigate the need for Government to intervene regularly. Given the evolving nature of payments, what is a great solution today becomes an obsolete technology tomorrow. The Role of the State should be minimal and be driven towards creating an enabling ecosystem. It should focus on identifying and addressing market failures, situations when the competitive outcome of markets is not satisfactory from the point of view of society. The actions of the State should consider its capacity to intervene.

Banks perform both banking and payments services. Traditionally, the field of payments has been bank driven. Technology has led to payments emerging as a distinct industry: one that is increasingly dominated by Fintech companies. Payments is a business of transferring money. In contrast, banking is the business of giving assured returns on deposits and lending. India needs the combined effort of banks and non-banks to promote digital payments. The Policy Analysis needs to focus on strengthening the ecosystems and suggest ways to enable the markets to be competitive and innovative; safe and resilient; accessible and inclusive.

Banks, the incumbents, today face increasing competition from new Fintech PSPs. They earn revenues (i) by using low cost Current Account, Savings Account (CASA) deposits of consumers for onward lending at higher rates; (ii) when consumers undertake payments transactions, and (iii) from ‘the float’ when payments transactions move slowly. This business model is now increasingly under pressure, more so for those banks who are not geared to compete and innovate. Fintech companies that require to connect to banking systems to serve their customers tend to face restrictive practices. This anti-competitive setting is not conducive for innovation and consumer interest. Moreover, India stands to lose out on benefits from global innovation as international technology based PSPs do not find it attractive to grow in India and Indian banks are not challenged to become truly globally competitive.

Payments now need to be regulated independently. The approach of RBI has already been to regulate non-banks in payments lightly. This has enabled them to emerge as significant players in a relatively short time frame. This growth now needs to be nurtured so that banks have competitive pressure to innovate and non-banks have an equal opportunity to compete. Globally, this has been recognised and structural changes have been put in place to ensure that the consumers benefit the most from this technology led payments revolution. This is true for many progressive economies including countries in European Union (including UK), Australia and South Africa. The common themes across these jurisdiction is to promote increased participation of non-banks in payments, and promote access and competition in the payments industry.

India has a unique opportunity to leverage the Jan Dhan, Aadhaar and Mo­bile (JAM) trinity to rapidly enable ordinary Indians to participate in digital payments. In addition to the high Aadhaar and mobile penetration, sixty-five percent of our population is below thirty-five years of age. This population could find it easier to adopt to new ways of doing payments. However, this transformational phase is accompanied by heightened concerns around con­sumer protection, competition, safety and convenience. The anonymity of cash transaction is a non-trivial barrier to digital payments and is a constant battle between Government and those who steal taxes.

Following the demonetisation of high denomination paper currency notes, the Hon’ble Prime Minister urged small traders to embrace technology by using digital payment systems. In his address to the nation on 27 November 2016, the Prime Minister emphasised that by embracing technology, we can bring about a big transformation in the form of a cashless society.

It is in this context, that the Committee has evaluated the current digital payments landscape in India, and has calibrated its Recommendations to fast track the attainment of its Vision of significantly reducing cash usage in the economy, and facilitating the provision of ubiquitous digital payment services and infrastructure in the country.

Several initiatives such as the Committee of Officers constituted under the leadership of CEO, NITI Aayog, are taking steps to identify immediate steps to promote understanding and adoption of available digital payment options. More recently, a Committee of Chief Ministers has been constituted on 30 November 2016 under the Chairmanship of Chief Minister of Andhra Pradesh to accelerate digital payments. The present Report will be an important input to these Committees.

The recommendations may be put into implementation over the next thirty to ninety days. These include (i) placing the proposed legislative changes before the Parliament, (ii) regulatory changes by RBI within the current legislative framework and (iii) implementing the policy and executive steps by Ministry of Finance (MoF) and other nodal ministries.

Over the course of its deliberation, two recommendations of the Committee resulted in rich debate. The first related to upgrading the decade old Payment and Settlement Act, 2007 to enshrine certain key principles in it and the second, on making the regulation of payments independent from the task of regulating banking. RBI, being the regulator, adopted a progressive approach which led to a broad consensus on the recommendations. All except IBA agreed on the suggested course of action. Member H.R Khan had different points of view on some issues and some additional suggestions as mentioned in his mails attached as Annexure to the report on Page 182. The RBI provided an additional note to further detail their views. This too is attached as part of the Annexure on Page 186.

The Committee recommends that the Government and RBI shifts gears and undertake structural reforms. The major recommendations of the Committee are highlighted below (See: Recommendations on Page 153 and Implementation Roadmap on Page 176 for details):

  • The Government may consider the following recommendations:

R- 1 Make regulation of payments independent from the func‑ tion of central banking. The Committee weighed two options on how best this be implemented: (i) create an new payments regulator, or (ii) make the current Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) within RBI more indepen­dent. While both the options would serve the intended objective, the Committee recommends that the BPSS be given an independent status which it today lacks by being a sub-committee of the Central Board of RBI. The statutory status of the new Board, within the overall structure of RBI, called Payments Regulatory Board (PRB) should be enshrined in the Payments and Settlement Systems Act, 2007 – Implementation by MoF: Finalisation of structure of PRB may be done in 30 days.

R- 2 Update the current Payments and Settlement Systems Act, 2007 to include explicit mandate for (i) competition and innova­tion, (ii) open access and interoperability, (iii) consumer protection including penalties and independent appeal mechanism, (iv) regu­lations on systemic risks, (v) data protection and security and (v) a process of regulatory governance. The Committee has provided drafting instructions for the new Payments and Settlement Systems Act and this may be initiated at the earliest – Implementation by MoF: Finalisation of amendment bill and placing the same before the Union Cabinet may be done 30 days.

R- 3 Promote digital payments and receipts within Government by (i) adopting digital payments for all its needs, (ii) withdraw all charges levied by Government department and utilities on digital payments and bear the cost of such transactions, (iii) mandate gov­ernment departments and agencies to provide option to consumers to pay digitally, (iv) incentivise consumers to make payments (including payment of fines and penalties) to Government electronically by giv­ing a discount or cash back, (v) enable consumers to make payments (including taxes) to Government through suitable digital means like cards and wallets, (vi) special emphasis to promote digital payments for recurring low value transactions and (vii) reduce custom duties on payments acceptance equipment. – Implementation agencies listed in recommendation section. Steps may be initiated in 30 days and reviewed fortnightly.

R- 4 Create a fund proposed as DIPAYAN from savings gener­ated from cash-less transactions to expand digital payments. Build audit capability to measure savings – Implementation by MoF, Ministry of Social Justice, Ministry of tribal Affairs and Ministry of Development of North Eastern Region. A time period of 60 days may be considered for initiating implementation by user agencies.

R- 5 Create a ranking and reward framework to encourage and recognise government departments, State Governments, districts and panchayats and other market participants who lead the efforts on enabling digital payments – Implementation by NITI Aayog along with State Governments. Development of the framework maybe achieved in 60-90 days.

R- 6 Implement other measures to promote digital payments including (i) promoting Aadaar based eKYC and paperless authentication (including where Permanent Account Number (PAN) has not been obtained), (ii) providing disincentives for usage of cash and (iii)
creating awareness and transparency on cost of cash { Implementation by MoF, UIDAI, CBDT, Telecom Regulatory Authority of India (TRAI), Ministry of HRD, DoPT and RBI. May be initiated over 60-90 days.

  • The RBI may, within the existing regulatory framework of Payments and Settlement Act, 2007, immediately initiate steps to:

R- 7 Consider outsourcing the function of operation of payment systems like Real Time Gross Settlement (RTGS) and National Electronic Fund Transafer (NEFT). While moving RTGS to a sepa­rate operator is not envisaged for now – a cost benefit analysis may be initiated as an initial step. Overtime, multiple payment system operators should be encouraged and payment systems should be operated by market entities – Consultation paper may be released over 180 days.

R- 8 Upgrade payment systems like RTGS and NEFT to operate on 24×7 basis in due course of time. RBI should progressively increase their timings over due course – A consultation paper may be released over 90 days.

R- 9 Allow non-bank PSPs to directly access payment systems – Regulations may be released for consultation over 60 days.

R- 10 Require NPCI, to be payments centric in its ownership and objectives. Ownership of NPCI should be diversified widely to include more banks and include non-banks. Its Board should be represented by majority public interest directors and include share­holder directors. NPCI should be allowed to function independently – Regulations may be released for consultation over 60 days.

R- 11 Enable payments to be inter-operable between bank and non-banks as well as within non-banks. Mobile number and Aadhaar based fully inter-operable payments should be prioritised – NPCI may enable this on its platforms over 60 days.

R- 12 Create a formal mechanism to enable innovations and new business models – Consultation paper may be released over 90-120 days.

R- 13 Implement other measures to promote digital payments including issuing regulations on Systemically Important Payment System (SIPS) and Systemically Important Financial Institutions (SIFIs), growing acceptance network, enabling faster and cheaper credit and promoting cross border payments – Regulations may be released for consultation over 60-180 days. The RBI may within two weeks of releasing this Report, develop a comprehensive metric to quantitatively measure and monitor the enhancement of digital payment services in India.

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