In e-payment push, govt hobbles through policy

The regulatory framework for digital payments is a work in progress

Could Finance Minister Arun Jaitley announce tax breaks for those with income above Rs 2.5 lakh per year provided they deposit tax digitally? After all, the government has slashed presumptive tax on small businesses from 8 per cent to 6 per cent if they migrate to digital payments.
 
Tax experts like Rahul Garg, leader of the direct tax practice at PricewaterhouseCoopers, agree there is scope for more. “The finance minister could set up a limit on how much cash transactions a retail business undertakes.” The rest would have to be done digitally.
 
Migration to a digital economy has picked up speed after demonetisation. But to make it work, fiscal incentives would be necessary. The incentives would answer a question anyone who makes the choice between cash and digital money has on top of his mind: what’s in it for me?
 
The switch comes with a cost. “For all its inefficiency, cash offers the instant settlement, 24x7 up-time, familiarity and an illusion of zero transaction cost,” says Ratan Watal, former finance secretary and chairman of the committee to review the digital payment framework in India.
 
Are the various agents of digitisation going to offer similar services aimed at the same group of consumers? Aren’t SBI Buddy, Paytm or even Bhim targeting the same socio-economic demographic? That would not help the spread of digital cash.
 
Moreover, space is getting quickly crowded. Just as e-wallets like Paytm and Freecharge had begun to make their presence felt, payments banks started to snap at their heels. Airtel Payments Bank opened its doors last week.
 
Bharti Airtel Chairman Sunil Bharti Mittal said that Bharti Payments Bank aims to take digital banking services to the unbanked over their mobile phones in a quick and efficient way and that “millions of Indians in rural areas will get their first formal banking experience.”
 
While Paytm has the licence for a payments bank, which it has made operational, the other mobile wallets do not have this escape route to generate additional sources of revenue.
 
Just behind the payments banks are the universal banks which too want a share of the pie. However, one of the disincentives at present is the regulatory haze.
 
Too many issues to iron out
 
The Department of Payments and Settlements in the Reserve Bank of India released its Vision 2018 document only in June last year. Many schemes in the document that were to be test-run in this financial year were leapfrogged into full-scale operations post-November 8 — such is the urgency to put the country on the digital highway.
 
It is ten years since RBI got legislative backing for setting up a payments market in India, yet things have scarcely moved forward.
 
The other disincentive is that of interoperability. For instance, when a shop signs up for, say, Mobikwik, it cannot accept money from other wallets like Oxigen and Paytm. Yet when an ICICI Bank offers a card gateway to the same shop, the shop owner can move money around with say, an HDFC Bank card too. Credit cards are interoperable through the Visa, MasterCard or Rupay gateways, just as payments banks are. But e-wallets, whether provided by a bank or a fintech company, are not.
 
With the current RBI regulations, there are now two classes of digital money operators: the wallets and the banks.
 
It would not have meant a great deal, except as the first two months of demonetisation showed, the wallets from fintech companies are nimble players who need to be encouraged.
 
This interoperability issue requires an amendment to the Payment and Settlements Act — one can only guess the time this could take.
 
There is also an arbitrage issue. When a bank offers a savings deposit to its customers, it pays out an interest, but if the same bank can encourage the customers to hold money in its own e-wallet, the bank does not have to pay an interest on it. The costs come down. It again skews the competition against the pure-play e-wallet companies.
 
And finally, mobile wallets cannot settle transactions with each other without using the payment gateways of the banks. That’s because RBI has a comfort level with the banks which it does not have with the non-banking financial entities. As a result, as the Watal Committee points out, it creates an unequal playing field.
 
Yet even as mobile wallets cannot speak to each other, payments banks have a problem of their own. For onboarding customers they will need customers to clear another round of the KYC process — it can take long.
 
Sunil Kulkarni, deputy managing director of Oxigen, an e-wallet company, has a more mundane problem to sort out: of the 14 million shops in the country, less than a million have a point-of-sale (PoS) machine that can undertake digital transactions. These machines will take time to become ubiquitous, though the finance ministry agrees its use needs to be made more widespread.
 
Time is running out
 
The RBI Vision document says it will issue a “draft framework for testing the resilience of the PoS machine infrastructure” sometime this financial year. It also plans to set up a “Payment System Advisory Council with representatives from the fields of technology, telecommunication, security solutions, academia, etc…to approve new products and solutions by providing necessary insights”. There is little time left to do so.
 
Even as the regulatory framework is at a gestation stage, digital customers have invaded the shops in millions.
 
Despite the shortage of machines, in two months since November 16, PoS transactions have increased by close to 50 per cent by value, while mobile banking has increased 10 per cent. In the RBI pecking order, while the Department of Banking Supervision reports to a deputy governor directly, the Department of Payments does not. These differences do matter — more so in a period of rapid developments.
 
There are of course reasons for RBI to be careful. But digital money is here and waiting to build “capability to process transactions” is a luxury that RBI cannot afford.
 
There are obstacles in the government’s goal of providing “the necessary incentives to use digital financial transactions to replace the use of cash, either in government transactions or in regular commerce, over a period of time through policy intervention”, as a finance ministry note says.
 
Thus, in the short term then, the finance ministry may have to compensate for the delay by offering sops to make the public switch to  e-money. That will be costly.

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