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 

Pros of Cashless Economy

• Control Tax Evasion: 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 low because people don’t have any cash.
• Cash transactions in small denominations can happen easily. One can pay even a single paisa (or cent). 
• Curb the menace of Counterfeit Currency: No issue of counterfeit currency and wearing and tearing of currency notes.
• Positive Examples: The Cashless Currency is working fine in Sweden & Norway, where 50% of transactions have gone cashless. 
• Cash Currency is Expensive: Ratan Watal Committee (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.
• Building Credit History: 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. This hands over enormous power in the hands of the government, which can carry out Orwellian levels of surveillance. 
• Exclusion Issue: It can lead to the exclusion of segments of the population who are slow to embrace new technologies, especially the elderly.
• Vulnerability to Fraud: The problem of electronic fraud 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 Merchants for providing Cashless Payment Services. Due to this, the profit margin of merchants decreases. It restricts 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 PhonePe) 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. The Government doesn’t act as a Role Model

• Although the Government is promoting a Cashless economy, one can’t 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 payment system.

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 the recommendations of Narsimham Committee 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 for the victim for their 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

• Form a 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 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 the 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 to suggest ‘how to deepen the digital payments’. 
• Its main recommendations were
  1. Give tax incentives to companies using digital payments.
  2. Reduce the taxes on devices required for digital payments.
  3. Raise awareness about BHIM-UPI. 
  4. Setup Computer Emergency Response Team for Finance (CERT-Fin).
  5. Prepare area-wise ‘Digital Financial Inclusion Index’ to monitor progress. 

• 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 a step in the direction of a cashless economy.
• From 15th January 2020, it is 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 merchants, street vendors, artisans etc. for deploying digital payment systems like Point of Sale (PoS) terminals, a QR-based payment system, etc.
• The scheme was started on 1st January 2021 for 3 years. Subsequently, the government has extended it for another 2 years till 31 Dec 2025.

• 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.
• After the 2021 update, even Prepaid Payment Instruments such as AmazonPay, Mobikwick etc., can 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.
• 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. It was fully implemented on 1 October 2022.
  • 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.