Building the Digital Payments Ecosystem in India

Author — Lokesh Dahiya

This week, the Prime Minister launched e-RUPI — a cashless & contactless instrument for digital payments. The one-time payment mechanism aims to stop leakages in government welfare schemes and ensure that the benefits reach those they are meant to be. The benefits are transferred on the mobile phones of beneficiaries in the form of a QR code or an SMS. It does not require any physical interface and is prepaid. It is one of the several products launched by NPCI (National Payments Corporation of India) in the past decade, including NFS, RuPay, UPI, IMPS, NACH, AePS, *99#, BHIM, CTS and NETC FASTag.

India has been enjoying a robust evolution of payment systems over the past three decades. During the last decade alone, the country has witnessed the introduction of innovative payment systems, the entry of non-bank players, and a gradual shift in customer behavior from cash to digital payments. The explosion of mobile phones, the ubiquity of the internet, growth of bank accounts (235 crore deposit accounts by Mar 2020), AADHAAR (127 crore individuals), debit and credit cards (30 crore RuPay cards by Mar 2020) have enabled the ecosystem. The ecosystem has led to electronic payment systems dominating the retail payment space with around 61% share in terms of volume and 75% share in terms of value during the FY 2019–20.

India has followed a “bank-led” model with banks at the forefront of payment systems operations, as being adequately regulated, banks were better placed to take the payment systems forward. The dual model followed in India combined the “trust” that the banks offered with the innovations of non-banks to upscale digital payments.

In India, the oversight of the payment systems is entrusted to RBI where the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), chaired by the Governor, RBI, spearheads this responsibility. RBI has been continuously setting goals and targets in the form of a Payment Systems Vision document every three years since 2001. The creation of a new department viz., Department of Payment and Settlement Systems (DPSS) by RBI in the year 2005 to focus exclusively on payment and settlement systems, and subsequent legislation of the Payment and Settlement Systems Act, 2007 set the stage for digital payment systems in the country.

The factors inhibiting the digital push are connectivity issues, inadequate acceptance infrastructure, lack of familiarity with newer, alternative payment methods, delay in getting complaints resolved and security and privacy concerns. RBI has acknowledged these factors and has put in place systems like consumer awareness programs and the ombudsman schemes. RBI has been placing discussion papers in the public domain and inviting feedback. An option of offline payments through mobile devices and stored value components on cards is expected to further the adoption of digital payments. In Feb 2020, the Statement on Developmental and Regulatory Policies announced that RBI would construct and periodically publish a composite Digital Payments Index (DPI) to effectively capture the extent of digitization of payments in the country.

Even though plenty of options already exist for digital payments in the country, regulatory efforts will continue to encourage innovation to include so far excluded geographies and societal cross-sections, promote healthy competition among system participants and enhance customer literacy and awareness.

An interest group at the Indian School of business, India. We write about technologies & their applications in businesses.