Digital payment system in India

What is the role of RBI in the evolution of digital payment in India?

1. RTGS- This system enables the transfer of money from one bank account to another on a “real-time” and on “gross” basis.

• Settlement happens in real-time.
• The large value payments on stock trading, government bond trading and other customer payments were covered under the RTGS, providing finality of settlement, thereby reducing huge risks.

2. NEFT- NEFT facilitates funds transfer across all computerized branches of banks (member / sub-member of NEFT) across the country.

• Settlement happens in batches, and the system is available around the clock and RTGS will follow from December 2020.

3. SEBI T+1 settlement– The market regulator SEBI is considering lowering the settlement cycle for completion of share transactions to T+1 (trade plus one day) to boost liquidity, improve efficiency and reduce payment-related risks to brokers and the system.

NPCI: National Payments Corporation of India (NPCI), an “Not for Profit” umbrella organization for operating retail payments and settlement systems in India, is an initiative of RBI and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for creating a robust Payment & Settlement Infrastructure in India. It aims in bringing innovations in the retail payment systems through the use of technology for achieving greater efficiency in operations and widening the reach of payment systems.

What steps taken by government to promote digital payment?

1. Zero merchant discount rate– In a bid to promote digital transactions, the government exempted merchants from paying merchant discount rate (MDR) cost for payments made through RuPay and UPI platforms.

Issues in Zero MDR –

1. Discriminatory approach– For now, MasterCard and Visa cards are permitted to charge MDR. This has led the banks to switch to Visa and Master cards for monetary gains.
2. The European Central Bank imposed a ceiling on MDR for all to protect consumer interest.
   2. NPCI must supply retail fee providers at a discounted value. This will result in a fee system community and infrastructure in rural and semi-urban areas in partnership with Fin-Tech firms and banks.

Way forward: Government needs to take corrective action in the next Budget to ensure a level playing field and to relieve the NPCI from such policy-induced market imperfection.