Home / Opinion / Online-views /  Opinion | No reason for a payments board

The draft Payment and Settlement System Bill, 2018, seeks to foster competition, consumer protection, systemic stability and resilience in payments sector by providing a level playing field to non-bank players like fintech companies. It proposes an independent payments regulatory board for this. The assumption appears to be that banks, even if they use cutting edge technology, cannot meet escalating demand and the Reserve Bank of India (RBI) is not flexible enough. Is it possible that in the name of such regulatory reforms, public interest will be compromised?

Payments services affect all citizens and have far-reaching implications for the economy. Currency and bank deposits are the backbone of money and payments. Currency issue is a government monopoly. It is initially issued through banks, and unlike digital payments, there are no implicit or explicit costs for payments in cash. Cash has a public good character, but digital payments are more convenient, saving printing and handling costs. Like cash, they also need to be easy to use, safe and secure.

With digitization of payments and use of point of sale systems for debit and credit cards, banks have compelled customers to incur additional costs for such payments. They state that there are significant costs to produce these services, which make customers’ lives easier. However, when asked to reveal costing figures to compare such costs with the costs for servicing customers at their branches for cash dispensation, they are not transparent, because such additional charges cannot be justified. Account holders implicitly sacrifice 3% (difference between risk free rate and savings accounts rate) for enjoying such services, which is substantial income for banks. But non-banks can pose a threat by popularizing the unified payments interface (UPI) for money transfer.

International brands have succeeded in imposing costly models, including influential indirect cartels. The merchant discount rate (MDR), levied on merchants mainly by the issuers and acquirers of cards (banks and their agents), is as high as 2.5% for credit cards, which affects consumers most. Irrespective of whether a customer uses a card, merchants mark up prices by around 2% to recover this cost, which is huge for the economy. MDR on credit cards can be reduced to the debit card level, which is 0.9%, through facilities such as overdraft taking care of the additional costs for float a user enjoys. Then, cards may gain popularity even with kirana shops.

RBI is well-known for its steps to promote digital payments. Initially, the RTGS fee per transaction for high values could exceed 1,000. This was capped. Until 2007, the ATM charge per transaction could go up to 35. The interchange fee was reduced and unified, freeing customers. These steps had salutary effects.

The National Payments Corporation of India (NPCI) was conceived by RBI as umbrella organization for innovative retail payments services. It introduced immediate payment service, UPI, RuPay and Bharat Bill Payment for frictionless, interoperable payments. The very character of NPCI, with it ploughing back internally generated surplus, checks monopoly profits. It provides benefits of economies of scale, reducing transaction fees and works as extended arm of the government and RBI for spurring growth of digital payments. This benefits banks, merchants and customers.

Given this, it’s just as well lawmakers were assured of public sector ownership and profit restrictions while passing the Payment and Settlement Systems Act, 2007. With this history in mind, the inter-ministerial committee on payment systems should have endorsed the department of financial services’ proposal on NPCI ownership, maintaining its well established institutional character.

The RBI allowed non-banks to operate white label ATMs, payments banks and prepaid instruments. These non-banks also find the prospect of providing interfaces for e-commerce attractive; this earns money through aggregation, float and commissions. However, established players are now under threat given thin margins and innovative products changing business dynamics. Free market arguments for a separate regulator are a ploy for them to maintain brand value and market position.

How many countries have reduced bank dominance in payments space by bringing in non-banks? Banks are springboards for payments. This gives them natural advantages that fintech companies can’t match. Let’s not forget, after all, that the then Planning Commission did not favour telcos providing payments services like Kenya’s M-pesa because the contexts and governance principles of the sectors are different. Prudential regulations cannot be relaxed for non-banks. Hence, another independent regulator in place of RBI could be dilatory, setting up conflict and various stumbling blocks.

While the objectives set out in the report are laudable, the committee’s prescriptions are contestable. There is a fair chance that regulatory coordination will be quite messy. There must be transparency about how the proposed independent board, imposing additional regulatory and cost burdens on existing systems, will be an improvement over the RBI when it comes to spurring the spread of digital payments while simultaneously doing better on consumer interest, monetary policy concerns and strategic sovereign interest.

R. B. Barman is advisor to the National Payments Corporation of India and former executive director, RBI.

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