Digital Banking

India uses too much cash for transactions. The ratio of Cash to GDP in India is one of the highest in the world 

• India = 12.4% (2014)
• Whereas in China = 9.4% or Brazil = 4%

Pros of Cashless Economy

• It will be challenging to evade taxes as all transactions can be tracked in a cashless economy. Money laundering, black money and terrorist financing can be easily controlled.
• No fear of physical theft: In Sweden, where 50% of transactions have gone, cashless robberies have fallen to 30 years because people don’t have any cash.
• Cash transactions in small denominations can happen easily. One can pay even a single paisa (or cent). 
• No issue of counterfeit currency and wearing and tearing of currency notes.
• The Cashless Currency is working fine in Sweden & Norway, where 50% of transactions have gone cashless. 
• Ratan Watal Committee (in December 2016) quoted that the dependency on cash costs the country about ₹1 Lakh crore on account of the 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 they can use this to get credit from institutional lenders. 

Cons of Cashless Economy

• Extreme surveillance: Every payment is traceable. The power this hand over to banks & governments is enormous, and the potential scope for Orwellian levels of surveillance is terrifying.
• It can lead to the exclusion of segments of the population who are slow to embrace new technologies, especially the elderly.
• The problem of electronic frauds increases, and the 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 that small businesses can’t afford. 
• Ultimately, digital payment costs 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. 

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, the profit margin of merchants decrease. It restricts the the 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 between different Financial Institutions (Eg: SBI to PayTM).

5. Regulatory Problems

• The Banking Ombudsman doesn’t have the 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 the government is promoting a Cashless economy, one cant pay taxes via mobile wallets like PayTM and bidding fees for various e-Tenders are to be paid in cash (only). Hence, the government doesn’t act as a role model.

7. Low Digital Financial Literacy

• People aren’t aware enough to handle a cashless system of payment.

8. Behavioural Issue

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

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

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

1. To look into matters of Digital Payment like Consumer Protection.
2. The consumer can make a free complaint about matters up to Rs 20 lakh against Mobile Wallets, Payment Payment Instruments (PPI) and other digital transactions. 
3. It can charge a penalty of up to Rs 1 lakh to the victim for his mental agony, loss of time etc. 

1.1 Ratan Watal Committee

• Formed in December 2016. 
• To suggest Medium Term Recommendations to strengthen the digital payment ecosystem in India. 

Recommendations of Ratan Watal Committee

• Separate Regulator for Digital Payments under RBI known as Payments Regulatory Board. 
• The committee 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 to promote 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 a report in Jan 2017
• Name of Committee: 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 a Common QR based payment system for Vendors (led to the formation of BHARAT QR).

1.3 Nandan Nilekani Committee

• In Jan 2019, RBI appointed Nandan Nilekani Committee for suggesting ‘how to deepen the digital payments’. 
• Its main recommendations were 
  1. Government should extend the 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 Finance (CERT-Fin).
  6. Prepare area-wise ‘Digital Financial Inclusion Index’ to monitor progress. 

• RuPay is the Payment Gateway started by the 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 tie up with merchants separately.
• It leads to duplication of effort. 

Case 2: In presence of payment gateways

• Each bank can tie up with a payment gateway & the payment gateway will tie-up with the merchant.

Banks are paying ₹300 cr per year to payment gateways (Banks charge them from Merchants as Merchant Discount Rate (MDR) per transaction)

What Rupay will do?

• Rupay will do the same work at 40% lower rates. Hence, the user will have to pay lower Credit/ Debit card charges, and Merchants will have to pay lower Merchant Discount Rates to the banks. 

• Rupay is the 7th payment gateway in the world. 
• 3 channel payments can be made using this: ATM, PoS(point of sale) and Online. 
• They can tie up with any organization: prepaid cards by milk/ grain procurement agencies in Punjab.
• Under Jan Dhan Scheme, Rupay Debit Card is given to the customers. 

• 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. It is also an issue in the direction of a cashless economy.
• From 15th January 2020, it shall be mandatory for all vehicles passing through tolls to have FASTags.  

• PIDF aims to strengthen digital payment infrastructure across Tier-3 to Tier-6 cities, focusing on the North-Eastern States. 
• PIDF will subsidize banks and NBFCs for deploying digital payment systems like Point of Sale (PoS) terminals, a QR-based payment system, etc. The target is to create 30 lakh new touchpoints every year.
• The scheme will be operational for 3 years, starting from 1st January 2021.

• Using a bank, a person can settle the amount with another person even if they have a bank account in another bank. The NEFT (National Electronic Funds Transfer) system is used in the backend to settle these payments. 
• NEFT settles the net amount between banks at the interval of 30 minutes. After 30 minutes, it will check the lakhs of transactions made between particular two banks throughout the country and settle the remaining amount between two banks. 
• RBI operates this system. 
• Using this system, transactions of up to ₹10 lakhs can be made.
• According to the 2021 update, even Prepaid Payment Instruments such as AmazonPay, Mobikwick etc. can also use the NEFT system.

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

1. ATM Card Technology changed to EMV Technology

Magnetic Technology

• Magnetic Technology used in the ATMs has been used since the 1960s. 
• In this, data is stored on the magnetic strip. But it is insecure as the data can be duplicated, cloned, skimmed while swiping the card, which increases the chances of fraud.
• So, RBI stopped such cards from 1/1/2019 using the Payment & Settlement Act powers. 

EMV Technology

• Full form: Europay + Mastercard+ Visa  
• It is based on chip infrastructure with encryption. 
• RBI had ordered migration in 2013. It has become operational on 1/1/2019. 
• Two sub-types 
  • EMV-Contact: cards must remain in the Point of Sale (PoS) Terminal during the transaction. 
  • EMV-contactless cards: Tap the card on the terminal using RFID technology. 

2. Card Tokenisation

• When we shop 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 the server of such a company is hacked, and user information is leaked. 
• To prevent such incidents, Card Tokenization was 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. His original card number, expiry date, etc., remains hidden from the third party seller.