Regulating payments systems: Is the trinity of Jan Dhan, Aadhaar and mobile banking being ignored?

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New Delhi | Published: November 7, 2018 12:24:16 AM

Across India, there are 12-15 lakh Ola/Uber drivers, who have taken loans amounting to Rs 32,000 crore and these small-ticket loans at risk, too, demand attention.

RBI is not in favour of a regulator for payment systems outside RBI.

The recent report of the Inter-Ministerial Committee for Finalisation of Amendments to the Payment and Settlement Systems Act, 2007, and the subsequent dissent note by the Reserve Bank of India (RBI) highlights the issue of who should regulate payment systems. As highlighted in the dissent note, RBI is not in favour of a regulator for payment systems outside RBI. In current times, payment systems are becoming complicated with the involvement of different types of banks, non-banks that are closer to banks, non-banks including telecommunications players that are distant from banks, and independent bodies such as the Unique Identification Authority of India (UIDAI).

Countries such as Kenya have pursued a telecom-driven model. India followed the bank-led model of business correspondent for financial inclusion based on earlier experience in Brazil. The Indian regulator followed a bank-led model with the evolving product participation of non-banks through prepaid instruments in the payment space. Regulatory directions have allowed non-banks to enter into payment space without being a comparable banking institute. There are expectations from newer and smaller non-banks that regulation does not pose administrative burden.

The existence of non-banks has offered opportunities as well as challenges. Opportunities exist with greater participation of general public as telecom service providers can leverage mobile for payment services. On the flip side, there are instances of telecom companies imposed with fines for violating operational and Know Your Customer (KYC) guidelines.

In the past, we have witnessed differences between banks and telecom companies. For example, the Unstructured Supplementary Service Data (USSD) payment service, which was meant for general public to use payment services irrespective of the fact whether they hold smartphones or not, took a longer time as differences were in the area of price to be charged for USSD services. Although USSD (*99#) allowed the use of financial services through mobile, the issue of regulation was handled by the Telecom Regulatory Authority of India (TRAI).

In India, payment system has evolved with a separate department created at RBI. The passing of the PSS Act and the creation of an umbrella organisation the National Payments Corporation of India (NPCI) has ushered in electronic retail payment system. The performance of Immediate Payment Service (IMPS), RuPay, Automated Clearing House (ACH), Unified Payments Interface (UPI), etc, signifies the success.

From a customer point of view, payment is integral to banking. Customer values bank account which facilitates better and convenient payment options. In the current context, customer continues to consider better and convenient payment while selecting an option which can be a bank, bank wallet, or mobile wallet. While existing banks can benefit from higher convenience and reduced cost through electronification of retail payments, at the same time digital tools, newer techniques and capabilities have opened the competition from new attackers that can threaten traditional banking relationships. Today, the scope of payment is not only linked to banking, but also to electronic shopping and receipt of government payments. There is a need to look into a level-playing field as existing banks cannot offer any extra-substantive benefits for digital payments and banking transactions, but digital wallets continue to offer incentives for shopping transactions.

The broader participation from the departments of electronics and information technology, economic affairs, legal affairs, financial services, RBI and UIDAI in formulating the report is indicative of multiple forces. While non-banks entered through payment space with a restriction cap on deposits and precluding lending, it is expected that non-banks will demand for more involvement in the banking space. In the drive towards universal payment solutions to the general public, the regulator needs to consider the objective of providing financial stability and maintaining public confidence. While the report has taken cognisance in the gap of availability of basic payment services for small business and low income households, as highlighted by the Nachiket Mor Committee 2013, it seems that recent developments in growing the access of basic bank account and payment services through the trinity of Jan-Dhan, Aadhaar and mobile banking are being ignored. It must be recognised that the growing role of non-banks is inevitable, but needs to be monitored carefully. RBI is expected to strengthen the function of payment system, and existing banks need to bolster electronic payment functions so that they can meet consumer expectations and stay relevant in the changing times.

The author is Assistant Professor, IIM Raipur. Views are personal

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