Digital Banking

Digital Banking

This article deals with ‘Digital Banking / Cashless Economy.’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .

More Cash in Circulation

  • India uses too much cash for transactions . Ratio of Cash to GDP is one of the highest in the world
    • India = 12.4% (2014)
    • Whereas – China = 9.4% or Brazil =  4%

Pros and Cons of Cashless Economy

Pros of Cashless Economy

  • It will be very difficult to evade taxes as all transactions can be tracked in cashless economy . Money laundering, black money and terrorist financing can be easily controlled .
  • No fear of physical theft : In Sweden , where 50%  transactions have gone cashless robberies have fallen to 30 years low because people don’t have any cash with them .
  • Cash transactions in small denominations can happen easily  . One can pay even single paisa (or cent)  .
  • No issue of counterfeit currency and wearing and tearing of currency notes  .
  • Working fine in Sweden & Norway where 50% transactions have gone cashless.
  • Ratan Watal Committee (in December2016) quoted that the dependency on cash costs the country about ₹1 Lakh crore on account of cost of printing new currency, operating currency chests, maintaining supply to ATM networks etc.
  • If small vendors start to take payment via digital means in Bank Accounts, their credit history will develop and he can use this to get credit from institutional lenders .

Cons of Cashless Economy

  • Extreme Surveillance – every payment you make will be traceable. The power this would hand banks & governments is enormous and the potential scope for Orwellian levels of surveillance is terrifying.
  • It can lead to exclusion of segments of the population who are slow to embrace new technologies especially the elderly.
  • Problem of electronic frauds increases  and whole system can be hacked .
  • Cashlessness may produce a peculiar human problem as people are sentimental about coins and notes.
  • For payment to happen cashlessly , infrastructure is required at point of sale destinations which small business cant afford.
  • Costs of digital payment, ultimately, are borne by consumers even when they are charged from producers or vendors. Charges can range from 0.1 per cent to as much as 4 per cent of the value of the transaction.

International Examples

In Kenya, M-PESA in partnership with Vodafone’s local operator Safaricom has ushered Cashless Revolution.

Digital Banking

Problems in adoption of Digital Payment in India

As seen by Chandrababu Naidu Committee & Ratan Watal Committee , problems associated with Digital Payment in India are

1 . Lesser Points of Sale

  • India has 160 ATMs per million (UK = 1000 / million) .
  • India has 1000 Point of Sale (PoS) per million (UK = 30,000 / million) .

2. MDR Issue

  • MDR = Merchant Discount Rate
  • Banks charge  around 2% from Merchant for providing Cashless Payment Services. Due to this , profit margin of merchants decrease . This restrict adoption of digital payment by Merchants .

3. KYC norms for Point of Sale Devices

  • Vendors cant buy Point of Sale devices as they don’t have any permanent address .

4. Interoperability

  • There is no interoperability between different payment systems (Eg : PayTM to FreeCharge) and also between different Financial Institutions (Eg: SBI to PayTM) .

5. Regulatory Problems

  • Banking Ombudsman doesn’t have required powers  to deal with Internet Banking Frauds.
  • IT Act is not comprehensive enough to deal with such financial frauds.

6. Government doesn’t act as Role Model

  • Although government is promoting Cashless economy but one cant pay taxes via mobile wallets like PayTM and bidding fees for various e-Tenders is to be paid in Cash (only)  . Hence, government doesn’t act as role-model.

7. Low Digital Financial Literacy

  • People aren’t aware enough that they can handle cashless system of payment .

8. Behavioural Issue

  • Changing behaviour to use cashless transactions is a complex process .

Issue : Interoperability

  • Interoperability is the ability of customers to transact across commercially and technically independent payment platforms.
Interoperability
  • Due to Legal  complications under Payment & settlement system act 2007,  we don’t have full interoperability ie
    • we can’t transfer money between one wallet to another (cant transfer money from Paytm to Phonepe) .
    • can’t use wallet to pay all types of taxes, fees, insurance premiums etc  .
  • This is an obstacle to ‘cashless-economy’.

In 2018, RBI issued guidelines for interoperability with Know Your Customer check, customer grievances redressal  mechanism etc. so that transactions can be made between different platforms.

Issue analysis : Regulation over Payment Settlement

Digital Banking
  • 1998: Banking Reforms / Narsimham-II Committee suggested regulatory framework for e- banking, card payment etc.
  • 2007: Payment & Settlement Systems Act enacted in accordance with Narsimha, II under which  RBI supervises e-banking, card payment and other digital money related issues through Board for Regulation and Supervision of Payment and Settlement Systems (BPSS).
  • All Payment system providers have to register with RBI’s BPSS – Whether bank, non-bank, wallet-PPI etc.
  • 2016: Ratan Watal Committee on digital payment suggested replacing this BPSS with a Payments Regulatory Board (PRB) in RBI, to look after Interoperability, Consumer protection, Innovation, R&D in digital payments (as BPSS looks after only Payment and Settlement).
  • 2018: RBI opposed formation of Payments Regulatory Board due to differences with Government over issue of who should be Chairman, how many members should be from Government side etc.

RBI made Ombudsman Scheme for Digital Transactions (OSDT) in 2019 with following functions

  • To look into matters of Digital Payment like Consumer Protection  .
  • Consumer can make free complaint for matters upto Rs 20 lakh against Mobile Wallets, Payment Payment Instruments (PPI) and other digital transactions.
  • It can charge penalty of upto Rs 1 lakh to be paid to victim for his mental agony , loss of time etc.

Issue analysis  : Merchant Discount Rate

  • MDR is the fee that a merchant must pay to a bank for every credit / debit card transaction.
  • MDR hurts merchants’ profit margin, discourages them from adopting Point of Sale terminals, digital payment system.
  • 2017-18: RBI put ceilings on MDR fees to encourage digital economy.
  • WEF 1/1/18: Government of India started 100 % MDR-subsidy on payments made via Debit card, BHIM or Aadhar enabled payment system for bills upto Rs.2,000. Scheme was valid for 2 years. This will encourage digital payments ecosystem.
  • Budget 2019 : No MDR will be charged from firm whose annual turnover is less than Rs 50 crore . RBI and Bank will absorb this burden for not handling so much money.
Merchant Discount Rate

Developments Related to Cashless/Less Cash Economy

1 . Committees

1.1 Ratan Watal Committee

  • Formed in Dec 2016.
  • To suggest Medium Term Recommendations to strengthen digital payment eco-system in India .

Recommendations

  • Separate Regulator for Digital Payments under RBI known as Payments Regulatory Board .
  • Envisaged a prominent role for Aadhaar as the primary identification for (KYC) purposes  .
  • Government departments should levy a cash-handling charge to discourage cash transactions.
  • Give incentives like discounts to consumers to make cashless payments  .
  • It had also suggested interoperability between banks and non-bank digital payment gateways .
  • Rewards for government departments, state governments, districts and Panchayats for promoting  digital payments.
  • Create a fund proposed as DIPAYAN from savings generated from cash-less transactions to expand digital payments.
  • Reduce or eliminate  import duty on import of ATMs & Point of Sale machines  .

1.2 Chandra Babu Naidu Committee

  • Formed in Nov 2016 & submitted report in Jan 2017
  • Chief Minister’s Committee to promote Digital Payment in India  by NITI Aayog.

Recommendations

  • Tax incentives should be given for domestic production of Point of Sale machines & ATMs .
  • Banks should charge 0% MDR from Government Bodies like Railways, Electricity etc. .
  • Develop Common QR based payment system for Vendors (led to formation of BHARAT QR).

1.3 Nandan Nilekani Committee

  • Jan 2019 : RBI appointed Nandan Nilekani Committee for suggesting ‘how to deepen the digital payments.
  • It’s main recommendations were
    1. Government should extend MDR subsidy for two more years .
    2. Give tax incentives to companies using digital payments.
    3. Reduce the taxes on devices required for digital payments .
    4. Raise awareness about BHIM-UPI .
    5. Setup Computer Emergency Response Team for Finances (CERT-Fin).
    6. Prepare area-wise ‘Digital Financial Inclusion Index’ to monitor progress.

2. Schemes

2.1 Rupay Card

  • RuPay is the Payment Gateway started by National Payment Corporation of India (NPCI) .
  • It will help in financial inclusion indirectly by decreasing the operating cost of Banks to service their customers using Debit & Credit Cards .

How Payment Gateway system work ?

Case 1 : If there is no payment gateway

  • Each bank has to separately tie up with merchants .
  • It leads to duplication of effort . 
Digital Banking

Case 2 : In presence of payment gateways

  • Each bank can tie up with payment gateway & payment gateway will tie up with merchant.
  • Banks are paying ₹300 cr per year to payment gateways   (Banks charge them from Merchants as Merchant Discount Rate (MDR) per transaction)
Rupay

What Rupay will do ?

  • Rupay will  do the same work at 40% lower rates
  • Hence, User will have to pay lower Credit/ Debit card charges and Merchants will have to pay lower Merchant Discount rates to the banks.
Rupay
  • Rupay is the 7th payment gateway in world .
  • 3 channel payment can be done using this :ATM, PoS(point of sale) and Online
  • They can tie up with any organisation : prepaid card by milk/ grain procurement agencies in Punjab.
  • Under Jan Dhan Scheme, Rupay Debit Card is given to the customers.

2.2. FastTag

  • FASTags are prepaid rechargeable tags  for automatic toll collection at  toll collection booths using RFID technology.
  • It helps in faster mobility by solving the issue of Jams at toll booths. Along with that it is issue in the direction of cashless economy.
  • From 15th January 2020, it shall be mandatory for all vehicles passing through tolls to have FASTags. Otherwise , vehicles have to pay double the normal rates .
FAstTag

2.3 NEFT System

  • Using bank, person can settle amount with other person even if he/she is having bank account in other bank. To settle these payments, NEFT (National Electronic Funds Transfer) system is used in the backend .
  • NEFT settles the net amount between banks at the interval of 30 minutes . It means , after interval of 30 minutes , it will check the  lakhs of transactions which were made between particular two banks throughout the country and will settle the remaining amount between two banks.
  • This system is operated by RBI.
  • Using this system, transactions of upto ₹10 lakhs can be made .
NEFT System

2.4 White Label ATMs

  • White Label ATMs are operated by private non-banking companies that own & operate their own brand of ATMs .
  • All the other Bank ATMs can use these White Label ATMs & get service but on nominal charge .
  • It is step towards Financial inclusion . ATM penetration will increase because of this  (present = 160/1million compared to US=  1400/1Million)
  • Eg Tata have Indicash , Muthoot Finance , Srei Infra, Vakrangee Software ,  Prizm Payments

2.5 Schemes by NPCI

NPCI is a not for profit company , made by 10 promoter banks in 2008 to provide cost-effective payment solutions for banks

NPCI

NPCI is running various initiatives related to high end technology in Banking &  Payment Systems .

a. UPI

  • UPI = Unified Payment Interface
  • Started in 2016
  • It is  a technology for building digital payment apps (ie UPI is not an app but technology made by NPCI which is used by banks to make their apps) .
  • Features provided by UPI
    • Scan QR Code and pay directly to merchant’s account.
    • Link your bank account for direct transfer of money from your bank account without storing in e-wallet first. (unlike PayTM).
    • Facility of Push transaction (e.g. Sending Remittances to family).
    • Facility of Pull Transaction (e.g. Cable operator sending request for monthly bill within the app).
    • Bill sharing among friends.
  • Examples of UPI based app:  SBI Pay,  AxisPay and NPCi’s own BHIM.

b. UPI 2.0

  • Upgraded version launched in Oct 2018 with following additional features:
    1. Overdraft facility 
    2. Cash on Delivery
    3. User mandate for future date e.g. DTH 
    4. Invoice in the inbox.

c. BHIM

  • BHIM = Bharat Interface for Money
  • It is app for ios & Android based on UPI (this is app in which UPI technology is used).
  • Made by NPCI
  • Benefits
    • No need to install multiple apps for each bank account (SBI Pay, AxisPay etc) . Single BHIM app can be used for using all  bank accounts.
    • App has 3 factor authentication system.
    • Your money stays in bank account . It is not stored in e-wallet outside bank like PayTM.  Hence, person can earn interest on his money.
    • No cards involved . Hence, no MDR or such hidden charges need to be payed.

d. Bharat QR Code

  • Started in Feb 2017
  • Bharat QR code has been developed jointly by National Payments Corporation of India (NPCI), Visa, MasterCard and  American Express under instructions from Reserve Bank of India (RBI).
  • Note – QR is two dimensional machine readable matrix. QR Code can store up to 7089 digits as compared to conventional bar codes which can store max 20 digits. 

Advantages of Bharat QR Code

  • It eliminates the need of using card swiping machines for digital payments. There is no need to have ‘Swiping Machines’ on shops. Just have QR printed & payments can be easily done via that.
  • Interoperability- Using BharatQR code, the merchants will be required to display only one QR code instead of multiple ones.
  • For buyer, there is no need to carry Card. Payment can be done via mobile.

Bharat QR

TRANSACTlON

e. Aadhar Enabled Payment System  (AePS)

  • Customer simply has to tell  Aadhar number and name to the merchant or Bank Business Correspond who in return authenticate it using customer’s fingerprint .  Following this simple step, his transaction is completed.

f. Cheque Truncation System (CTS)

  • If somebody from Delhi gives Cheque of Delhi Bank Branch to person in say Chandigarh. Earlier that cheque was physically sent through post to Delhi Branch for settlement.
  • Under CTS, Scanned image of Cheque can be send to Delhi Branch and settlement can be done rapidly.

g. National Financial Switch (NFS)

  • ATM Card of one Bank can be used in other Bank too.  System that is working in the backend to make this possible is NFS .
  • NFS helps in re-routing transactions to Core Banking Solution Network of the Bank whose ATM card is being used.

h. NACH (National Automated Clearing House)

  • They help in Automated Payments which are to be paid periodically like each month or year like salaries, bills  etc. .
  • NACH is finding great attraction among Customers, Companies and Government Departments for payment of bills ,EMIs , salaries, pension etc.

i. IMPS

  • IMPS = Immediate Payment Settlement System
  • It is available 24X7 . 
  • It is used for realtime Settlement of all  the Online  Payments  from Rs 1 to 2 lakh .
  • It is not free .  Service fee is charged on the transactions.

Side Topic : ATM security features introduced to prevent frauds

1. ATM Card Technology changed

Technologies

Magnetic Technology 60s technology.
Data is stored on magnetic strip. Data can be duplicated, cloned, skimmed while swiping the card = increased chances of fraud.
So, RBI stopped such cards from 1/1/2019 using powers from Payment & Settlement Act.
EMV Technology Full form: Europay + Mastercard+ Visa 
Based on chip infrastructure with encryption.
RBI had ordered migration in 2013 => finally effective from 1/1/2019.
Two sub-types
1. EMV-Contact: cards must remain in Point of Sale (PoS) Terminal during transaction.
2. EMV-contactless cards: simply tap the card on terminal using RFID technology.
EMV Technology in ATM Cards

2. Card Tokenisation

  • When we do shopping on sites like Amazon, Flipkart etc. or pay bills using PayTM, they allow us to store our Debit or Credit Card information like Card Number, Expiry date etc. for future convenience. But this thing has security implications in case server of such company is hacked and user information is leaked.
  • To prevent such incidents, Card Tokenization has been introduced by RBI in Jan 2019
    • Tokenization = Token number is generated for a given credit/debit card.
    • Card customer gives the token number during any type of online / physical shop transaction  so that his original card number, its expiry date etc. remains hidden from the third party seller  .

Schemes for Digital Financial Literacy

1.Vitiya Shaksharta Abhiyan

  • Under MHRD
  • Encouraging students of University and Colleges to spread the message of moving towards digital payments going home to home.

2. Digishala TV Channel

  • MEITY has launched a TV channel named ‘DigiShala’
  • It is 24X7 Channel to increase Financial Literacy