Better regulation for a less-cash economy
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The express purpose of the surgical strike on high denomination notes is to check black money and counterfeit currency. Yet, the move can have additional big benefits—of moving Indians towards digital payments. While Paytm, Ola Money and others are pushing their wallets now with vigorous advertising, there is no obvious and smooth transition to this less-cash economy. There will be conversions to wallets, but there will be strident protests from those who want to keep their finances anonymous. There will also be many reports of genuine inconvenience and pain; the next few weeks could be chaotic in many parts of the country. Looking ahead, if India does not want to tread this path again, the government and the Reserve Bank of India (RBI) have to show much more vigour in pushing for a digital world. The bottom line is that, so far, when it comes to encouraging digital transactions, the entire regulatory and government machinery has been functioning in slow motion. This has to change.
Begin with the essential, access to bank accounts. Notwithstanding the heroic efforts by banks to open Pradhan Mantri Jan Dhan Yojana (PMJDY) accounts over the past two years, India is short of universal financial inclusion even by the simple metric of ownership of a basic bank account. The InterMedia Financial Inclusion Insights survey, carried out in December 2015, showed that while 75% of people living on more than $2.5 a day had bank accounts, the share dropped to 51% for the extreme poor living on less than $1.75 a day. These numbers would have increased over the year; however, the fact remains that bank access remains a greater challenge for the poor. While those with no bank accounts can go to post offices or any bank branch and change the notes they have right now, this move can still be an excellent opportunity to bring more people into the banking system.
Here, payments banks, which have been designed for small-value transactions for low-income customers, would have provided excellent support to the mission if they had started operations. Unfortunately, final operational guidelines were issued just last month, more than a year after in-principle approvals were issued, and these new banks are yet to get off the block. Going forward, the regulatory environment has to respond faster to innovations, especially technological ones.
A similar lack of urgency has been shown in measures to promote digital payments. While the finance ministry came out with general guidelines to promote payments through cards and digital means in February, the committee to review the framework for this was constituted only six months later, in August. There are many items on the committee’s agenda, and they have been given one year to submit their assessment. Some indications of the timeline and actionable points ahead will emerge, but not soon enough.
Another essential for digital transactions is acceptance infrastructure. We have a situation now where card issuance has increased dramatically in rural areas, thanks to the PMJDY RuPay card, but usage remains constrained by lack of accessible acceptance infrastructure. The RBI’s Concept Paper On Card Acceptance Infrastructure in March had noted the lack of the ecosystem of electronic payment mechanisms in smaller towns and rural India. While debit card usage for payments has gone up to 15%, this is concentrated in metros and large cities. Merchant establishments with point of sale (PoS) terminals reportedly number just over a million, and increasingly, debit cards are being used more for e-commerce. According to the RBI paper, there are many reasons for the low growth of acceptance infrastructure—the high costs of purchasing and maintaining a PoS machine, low transaction values in rural areas making the business unviable for banks, poor connectivity (power and telecom), transparency and audit trails associated with card payments, high transaction charges, etc. There are many factors from the consumer perspective as well—awareness, apprehension of using new modes of payment, the feeling of safety in the anonymity associated with cash payments, etc.
The mobile phone solves many of the problems associated with acceptance infrastructure. It is cheap and its high penetration even in rural areas complements high familiarity even in low-income users. Transactions through the cellphone are an obvious opportunity that is still not being utilized to its full potential. True, mobile banking and wallets have gained significant traction, and the Unified Payments Interface (UPI) has been introduced as a game-changer in mobile transactions. But the UPI and mobile banking apps are all for smartphones, which still have limited reach.
In fact, the mobile channel that was declared to be the most preferred channel for delivery of basic financial services to the poor way back in 2010, unstructured supplementary services data (USSD), remains unutilized to date. For the last six years, banks and telcos have wrestled over this channel, with claims and counterclaims. The Telecom Regulatory Authority of India (Trai) has been trying to adjudicate and tariffs were set in 2013, but there has been little impact on increasing usage. The Trai consultation paper on USSD in August 2016 notes, “In May 2016, only about 37 lakh mobile banking transaction attempts (over USSD channel) reached NPCI’s platform (*99#). Clearly, something is amiss.”
Juxtaposing the stories of the neglected USSD channel and the successful wallets epitomizes what is amiss with the digital transactions world. While the former needs regulatory help to resolve the imbroglio, the latter works within simple regulatory guidelines and has found its customers.
Today, looking at people who are digitally excluded, we can see that the slow pace of decisions, whether on payments banks or the digital payment ecosystem, has caused real inconvenience and pain. Regulatory intentions have always been good—to ensure financial stability, reduce risk and protect customers—but at the end of the day, the simpler the transaction, the faster the adoption. A light touch from the RBI and finance ministry and a speedy regulatory process will change the way Indians transact—moving us towards a less-cash economy.
Sumita Kale is with the Indicus Centre for Financial Inclusion.