Background :- 

The Payment and Settlement Act, 2007 defines Digital Payments/electronic funds transfer as any transfer of funds which is initiated by a person by way of instruction, authorization or order to a bank to debit or credit an account maintained with that bank through electronic means and includes point of sale transfers; automated teller machine transactions, direct deposits or withdrawal of funds, transfers initiated by telephone, internet and, card payment.

The payment system can be bifurcated into two main segments:

• The first segment consists of instruments which are covered under Systemically Important Financial Market Infrastructure (SIFMIs) and the second segment consist of Retail Payments.
• Financial Market Infrastructure (FMI) is defined as a multilateral system among participating institutions, including the operator of the system, used for the purposes of clearing, settling, or recording payments, securities, derivatives, or other financial transactions. Under this segment there are four instruments of payments: Real Time Gross Settlement, Collateralized Borrowing and Lending Obligation, Forex Clearing and Government Securities.
• Under the Retail Payments segment which has a large user base, there are three broad categories of instruments. They are Paper Clearing, Retail Electronic Clearing and Card Payments which includes Cheque Truncation System, National Electronic Funds Transfer, Unified Payments Interface, Immediate Payment Service etc
• India’s payment system - particularly, its digital payments system - has been evolving robustly over the past many years, spurred by developments in information and communication technology.
• Digital payment is a primary tool to move to a 'less cash' economy since the cash to GDP ratio in India is one of the highest in the world at about 12%.
• The user base for digital transactions in India is currently close to 90 million and could triple to 300 million by 2020 as new users from rural and semi-urban areas enter the market.
• The year-on-year growth of digital payments in 2017-18 was 44.6% which was nearly double the growth in volume for the period 2011-2016.
• Transactions relating to IMPS, PPI and Debit card had exhibited growth rates in triple digits in the year 2016-17.

Benefits :-

• Digital payment is faster, easier, more convenient than cash transactions.
• It enables increased levels of financial participation and inclusion.
• It promotes more transparency and accountability and decreases the size of the grey or informal economy.
• It stores digital record of transactions which customers can track.
• It helps to keep black money under control and also increases tax compliance.
• It reduces cost of transactions. No additional cost of printing cash is involved with digital payments. A 0.4% reduction in cost of cash can also boost savings by 4 trillion by 2025.
• Economic growth is increased by increasing the level of spending in the economy due to digital payment.
• It hinders the terror financing network and circulation of counterfeit notes.

Challenges :

• Unbanked population: about 19 percent of the Indian population is still outside the banking net which is a major hurdle to digital payments.
• Low internet penetration: Internet penetration in urban India was 64.84% in December 2017 and rural internet penetration was just 20.26%.
• Low levels of digital literacy: Approx. 40% population is living below poverty line, illiteracy rate is more than 25-30% and digital literacy is almost no-existent among more than 90% of India’s population.
• Lack of resources: Small Service providers don’t have enough resources to invest in electronic payment infrastructure. (e.g. Point-of-sale terminals).
• Cyber threats: Cyberattacks can cause personal and commercial data to be lost or compromised causing financial institutions financial loss. Based on estimates, cyberattacks cost the global economy 1% of annual GDP.
• Regulatory hurdles: The majority of the mobile payment service providers are non-compliant with the strict provisions for dealing with sensitive personal data including financial data as mandated by IT Act, 2000 and rules under it. Also IT Act is not comprehensive. India lacks laws to protect consumers if they lose money.
• Cash dependent economy: 92% of the Indian economy is made up of informal workers, who contribute around 50% of the GDP; 80-90% of these workers are paid in cash. Mediums like smartphones and internet connectivity are still unaffordable to a sizeable population thus denying them access to digital forms of transaction.

Initiatives taken to promote digital payments:

• The National Payments Corporation of India (NPCI) was established in 2008 to spearheading the development of the retail payments system.
• Various important milestones attained in the development of the payments system include the introduction of MICR clearing in the early 1980s, Electronic Clearing Service and Electronic Funds Transfer in the 1990s, issuance of credit and debit cards by banks in the 1990s, the National Financial Switch in 2003 that brought about interconnectivity of ATMs across the country, the RTGS and NEFT in 2004, the Cheque Truncation System (CTS) in 2008, the second factor authentication for the ‘card not present’ transaction in 2009 and the new RTGS with enhanced features in 2013.
• These measures have been complemented by significant initiatives by the NPCI including the launching of grid-wise operations of CTS, RuPay (a domestic card payment network), Aadhaar Payments Bridge System and Aadhaar Enabled Payment System, National Unified USSD Platform (NUUP), UPI and the BHIM application.
• For promotion of the BHIM app, the Government had approved schemes namely ‘Referral Bonus scheme for individuals’ and ‘Cashback scheme for merchants’ for a period of 6 months
• Settlement at half-hourly intervals was introduced in the National Electronic Funds Transfer (NEFT) system.
• Rationalisation of Merchant Discount Rate was undertaken to provide a boost to digital payments.
• The digital infrastructure called the “JAM” trinity by interlinking of Jan Dhan, Aadhaar and mobile numbers was a major landmark. Furthermore, non-bank entities have been introduced in the issuance of pre-paid instruments (PPI), including mobile and digital wallets.
• Reserve Bank of India has also decided that all system providers shall ensure that the entire data relating to payment systems operated by them are stored in a system only in India to ensure better monitoring.
• DigiShala: Free Doordarshan DTH educational channel for creating awareness regarding various forms of electronic payment.
• Vittiya Saksharta Abhiyan of Ministry of Human Resource Development aims to actively engage the youth/ students of Higher Education Institutions to encourage and motivate all payers and payees to use a digitally enabled cashless economic system for transfer of funds.
• A Committee on Digital Payments was constituted in 2016 under Ratan Watal to recommend measures for promotion of Digital Payments Ecosystem in the country.

Recommendations of Ratan Watal Committee :

• It recommends for creation an independent payments regulator within the framework of the Reserve Bank of India (RBI) or give independent status for the RBI’s Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) to be called the Payments Regulatory Board (PRB).
• It had also suggested interoperability between banks and non-bank digital payment gateways/entities as well as within non-banks.
• Other major suggestions have been creation of a fund for promotion of digital transactions, withdrawal of all charges on digital-based transactions by the government, with special emphasis on low-value transactions (that are mainly financed by cash).
• It had also asked RBI to upgrade the existing real-time gross settlement system (RTGS) and National Electronic Funds Transfer (NEFT) systems so that they operate on a 24/7 basis.
• It also called for mandating government departments and agencies to provide options to consumers to pay digitally as well as incentivize consumers to make payments (including payment of fines and penalties) to the government electronically by giving a discount or cashback.

Way forward :- 

For smooth implementation of cash less system in India, a wide variety of measures are needed by the Government. It will have to bring transparency and efficiency in e-payment system, strategies licensing payment banks, promoting mobile wallets and withdrawing service charge on digital payments, etc.

• Reducing the digital divide and increasing the awareness in the rural public.
• Ease the complexities and enable end-of-day settlement process for the merchants (As small retailers and merchants need rotation of cashflow in quick turnaround time for their business operations).
• Reduce the transaction charges over the digital payments and discourage cash transactions.
• ICT infrastructure plays a vital role in successful adaptation of digital payments and hence there is intrinsic need to improve and offer requisite infrastructure for digital payments.
• Emphasis on integrated system of digital payments that can reduce the existing challenges and support in quality outcome (For instance, ensuring more stringent laws for security breach, IT ACT for digital payment transactions etc.)