Highlights of the High Level Committee report on Deepening Digital Payments
In January, the RBI had constituted a high-level committee headed by Aadhaar architect Nandan Nilekani to set up a robust digital payments ecosystem in the country. The expert panel, which was asked to recommend a medium-term strategy for deepening digital payments, and measures to strengthen safety and security, submitted its suggestions to RBI Governor Shaktikanta Das last month.
“Pivoting the ecosystem from issuance to acceptance is the key to deepening digital payments in the country. The committee approached this pivot from the perspective of the user to reach the outcome of continuous voluntary use of digital payments,” said the expert panel in its report to RBI.
The RBI will examine the recommendations of the committee and will dovetail the action points, wherever necessary, in its Payment Systems Vision 2021 for implementation.
During the consultation stage, NASSCOM had also made a presentation to the committee and made specific recommendations pertaining to issues such as creation of a conducive e-KYC framework, increasing points of acceptance, promoting fintech and open banking, improving consumer trust and customer reliability, and conducting robust consultation process for regulation making.
Besides former UIDAI chairman Nilekani, the other members of the panel are former RBI deputy governor H.R. Khan, former managing director and CEO of Vijaya Bank Kishore Sansi, former secretary in the ministry of IT Aruna Sharma and chief innovation officer at the Centre for Innovation, Incubation and Entrepreneurship, IIM Ahmedabad, Sanjay Jain.
Key recommendations of the committee
- Create KYC data sharing mechanisms with user consent
The committee has noted the number of suggestions received from the industry related to the KYC and customer on-boarding process. To ease the difficulties faced by the industry the committee recommends a multi-pronged strategy to meet legal and regulatory requirements. This includes encouraging innovation in the process, creating industry wide mechanisms to share data with customer consent, and using a KYC compliant account to open another.
- Merchant Discount Rate (MDR) and interchange fee to be revised
Ideally, MDR and interchange fees should be determined by the market. However, that does not appear to be working, and there are fewer acquirers. To correct this situation, the committee has recommended:
- The interchange on card payments be reduced by 15 basis points (0.15%). This will increase the incentive for acquirers to sign up merchants.
- The RBI should setup a standing committee to review the MDR and interchange on a periodic basis to ensure equitable growth of the market for digital payments. The committee must include a balance of stakeholders – issuers, acquirers, merchants, and academics.
- The committee recommends that there should be no charges should be levied on the consumer for digital transactions and such transaction should be part of serving the customers.
- Ensure fast dispute resolution
The committee recommends that payment systems use machine driven, online dispute resolution systems to handle complaints. To allow payment systems to scale, and to meet users’ heightened expectations of speedier response to complaints, all payment systems operators, including NPCI, to implement an online dispute resolution system that is fast and fair.
- Create a centralized fraud registry for real-time rating of transaction risk
- The committee recommends the creation of shared fraud registry that must be created and used to grade each payment transaction for risk. This registry should be accessible to all payment system participants on a near real-time basis, who may use it to evaluate the fraud risk for all users, and transactions (dynamically). This risk rating may be used to provide additional protections to the user.
- The committee has already recommended the creation of a dispute resolution system at the Payment System Operator. This system may be enhanced to keep track of fraud reports, and coordinate with the fraud registry, and regulatory reporting.
- Monitor transaction failures
- In order to maintain continuous improvement in the payment systems, and to increase customer confidence, the committee has recommended that the regulator must monitor failed transactions, and in particular, the technical decline rates and the business decline rates. Further, the regulator must ensure that the operators present a plan to bring down these failure rates by 25% every year.
- With a view to minimise networking issues and to enhance customer experience, it is recommended that POS machines should have inbuilt features to monitor network issues to minimise transactions decline on account of poor connectivity. The Committee has recommended that the SLBC / DLCC may be used to coordinate with the state level representative of the DoT to solve these issues and ensure a reliable telecom infrastructure for payments. BharatNet may be made operational at the earliest.
- Enable a robust Cash In Cash Out (CICO) network
With a view to increase digital transaction, and provide a safety net of a robust Cash In Cash Out network, especially at Tier III, IV, V and VI (semi urban to rural) centres, the committee recommends strengthening of business correspondents infrastructure, besides empowering small merchants to provide cash at POS to the customers to meet their immediate requirements.
- Ensure no user charges for digital transactions
Keeping in mind that digital transactions result in larger balances with the bank, the committee is of the view that customers must be allowed to initiate and accept a reasonable number of digital payment transactions with no charges.
- Incentivize users to make digital payments
Keeping in view the fact that large number of cards and other digital options already available with customers are inactive, the committee has suggested that issuers should have ongoing campaigns to incentivise users to make merchant payments digitally. Many customers have recently opened bank accounts, and debit cards have been issued to allow customers the convenience of banking through an ATM. These same cards can be used for digital payments. Similarly, many customers have a mobile number associated with their account. Activating these customers will allow banks to keep these customers and ensure that they leave larger balances in the bank.
- Promote BHIM Aadhaar Pay to serve customers without phones
- With a view to allowing users without a mobile phone to make digital payments from their Aadhaar enabled bank accounts, the committee has recommended that BHIM Aadhaar Pay may be promoted.
- With a view to streamlining usage of accounts that receive DBT transfers through business correspondents, banks who receive DBT payments may be required to support Off Us transactions through AEPS. The interchange for these transactions may be set at 1%, with a maximum of Rs 15 per transaction.
- Encourage innovation for use of feature phones in digital payments
With a view to including feature phone users into digital payments, the committee has recommended that the regulator may encourage innovation through the regulatory sandbox on priority to develop new enabling solutions for this user to make, and receive digital payments, interoperable with the rest of the ecosystem. For instance, QR codes have become a popular light weight acceptance infrastructure, and it may be possible to enable feature phone users to use this facility. Solutions are also required for situations where the phone may be a shared device for the family.
- Promote acceptance of digital payments
In order to ensure that a willing customer is able to do financial transactions digitally, the committee has recommended that each merchant support at least one digital mode viz BharatQR, BHIM UPI QR, or Cards. Accepting payments through QR code allows a merchant to accept payments with very low fixed costs, and this can serve the basis for a large growth in acceptance.
- Review limits on BSBD Accounts and small accounts
Taking into account the difficulties faced by customers who are new to the financial system, the committee has recommended that all limits for Basic Savings Bank Account (BSBD) and small accounts be modified so that Government, insurance and other statutory payments are not included in these limits. Also, considering the need to promote digital payments, the committee recommends that BSBD accounts be allowed a reasonable number of free digital payment transactions.
- Increase digital payments
The government should plan for digital transactions volume to grow by a factor of 10 in 3 years. This would result in per capita digital transactions to reach 220 in 3 years from current level of 22. The number of users of digital transactions should increase by a factor of three, from approximately 100 million to 300 million.
- RBI to be the single source of digital payments data
The RBI should be the single source of accurate and complete information for India’s digital payments data for better tracking. The RBI may rationalize ‘digital payments’ definition for better tracking and include all information that can be captured accurately. It may include unregulated sources where possible. The Central Bank should start publishing data on mobile banking and internet banking along with the split of interbank and intra-bank transactions, as these services are provided by banks to facilitate payments.
- Encourage non-banks to participate in payment systems
With a view to expand the usage of digital payments, the committee has recommended that non-banking entities should be included as an associate member of payment systems and become an active player in enhancing acceptance infrastructure in the country. The committee has also suggested that payment schemes should be allowed to induct non-banks as associate members to encourage acceptance.
- Setup an Acceptance Development Fund
It has been recommended to setup an ‘Acceptance Development Fund ‘to be used for improving acquiring infrastructure at tier IV, V and VI areas which will ensure optimum utilisation of millions of cards issued to customers, resulting in increased digitisation in these deficit centres. Issuers must contribute to this fund from the interchange fees, matched by funds from the RBI.
- Build capacity for digital transformation in the banking industry
Keeping in mind the need for building capacity within the banking system to manage the digital transformation, and to lead customers through the digitization journey, the committee has recommended that the IDRBT take the lead on building training programs, and capacity in the financial services industry.
- Ensure business continuity planning for digital transactions
To provide business continuity for digital payment services, particularly in sensitive/coastal areas , national and state level disaster strategies should monitor availability of well-oiled disaster recovery mechanism; e.g. availability of mobile cell phone towers and sharing of such infrastructures among all the service providers during crisis period. Preventive measures like ensuring through an audit and accountability framework installation of robust and resilient infrastructure in sensitive areas and their proper upkeep should also be part of such disaster recovery plans. Similar backup plans for cash out should also be ensured to alleviate suffering of the affected people.
- Activate FIN-CERT
With a view to improving security of the financial system, the committee recommends the operationalization of the FIN-CERT for oversight, and monitoring security of the digital payment systems. A Computer Emergency Response Team for finance (FIN- CERT) had been proposed earlier. The committee suggested an early operationalizing of this, so that it can systematically help improve the security posture of the financial ecosystem, thus protecting users from harm.
- Educate Users
To ensure that users are aware of the risks, and the steps that they can take to protect themselves, the committee has recommended that RBI publish aggregated fraud data periodically, and educate users on the emerging risks.
- Prevent the use of insecure devices for payments
To ensure the continued security of payment applications, the committee recommends that payment applications must be prevented from running on insecure devices – including rooted phones.
- Identify obsolete phone numbers in financial databases
To ensure the continued security of payment systems, the committee recommends that the telecom operators publish a monthly list of telephone numbers, which have become inactive, and may be issued to a new customers.
- Spread best practices
In order to improve customer confidence, and to borrow a good feature from BHIM UPI, various payment systems operators may make the necessary changes to allow for auto-reversal of failed transactions.
- Make B2B payments more software friendly
As many benefits can arise from better linkages between accounting systems and payment transactions, the committee has recommended that the banks enable software driven transactions that carry invoice information, so that books can be reconciled. The relevant payment metadata schemes may be updated.
- Revisit Micro ATM and APBS Architecture
- As micro ATMs have gained popularity and has become an integral part of the financial inclusion infrastructure, the committee has suggested Indian Banks’ Association (IBA) to revisit the technical architecture of micro ATMs, and improve it to support other banking services beyond dispensing cash.
- The committee has also recommended the IDRBT, NPCI and the DBT cell to revisit the architecture of the APBS, and DBT delivery, so that beneficiaries have a greater visibility and control into the funds flow, and that they are able to on-board themselves into various schemes.
- Promote digital transactions at rural farmers markets
The Committee has suggested that efforts should be enhanced to ensure that adequate digital infrastructure is available on priority at all wholesale grain mandis, village haats, etc. so as to introduce digital transactions, and their benefits to the rural customers. Across the country, there are local farmers markets, where farmers from the neighbourhood sell local goods. These are ideal places to promote the use of digital transactions, and to educate users on the benefits of digital transactions across all dimensions – convenience, safety and security.
- Bring in RRBs into the digital payments ecosystem
With a view to cover customers in villages and semi urban centres also, who are banking with RRBs, the committee has recommended that all RRBs should be brought under the ambit of UPI at the earliest. The committee has recognized that while the scheduled commercial banks have enabled digital payments for their customers, many of the Regional Rural Banks, and cooperative banks have been left behind. Customer on-boarding on mobile banking platform should be made simpler & process driven. Since RRBs are serving rural population, hence on-boarding RRBs on BHIM UPI platform would further encourage digital payments transactions.
- Remove barriers for language and accessibility
The Committee has recommended that digital infrastructure should be accessible to citizens of all genders and people with special needs, to make it an inclusive right for each citizen. Further, the committee has also suggested that technology should be made available in vernacular languages, to the extent possible, for ease in acceptance by citizens of the country. This should include support for all technology interfaces – mobile, web, applications, POS, ATM, etc.
- Convert business correspondents into digital assistants
The Committee has noted that BCs are an important interface in successful implementation of financial inclusion in the country. Keeping in view the fact that BCs inter alia rely largely on digital infrastructure in performing their tasks, the committee has recommended that they may be converted into digital assistants. Further, in order to ensure they perform their duties strictly as per place and timings allotted to them, and meet banking requirements of allotted area, their operations be monitored by IBA through respective Banks and SLBCs.
- Promote financial literacy through front line staff and agents
- Noting the need for digital financial literacy, the committee has recommended that the National Centre For Financial Education (NCFE) must create standard materials to educate customers on digital payments and services.
- Keeping in mind the number of new users, and their diverse needs, the committee has recommended that the regulator conduct focused user awareness and education programs in the field, to support the SLBC staff with their immediate requirements. The Financial Education Fund may be utilised for this purpose.
- Enable Kisan Credit Cards for digital payments
Looking into the difficulties being faced by farmers, the committee has recommended that efforts being made to convert KCCs issued by banks into RuPay cards should be completed on priority basis (say, within 1 year) and adequate acceptance infrastructure should be put in place where KCC holders can make purchases digitally for their agriculture procurements using KCC Cards.
- Ease digital purchase of train tickets
With the objective of making life easier for the common man, and digitizing unreserved train bookings in India, the committee has recommended that Unreserved Ticketing system (UTS) be made interoperable with all other online payment systems such as wallets, BHIM UPI, etc. The facility must be available at no additional cost.
- Recommendations for high frequency use cases
- Enable recurring payments in all digital payment systems
With an increase in the popularity of digital payments, the committee has recommended that cashless payments products should become feature rich, and should support recurring payments besides other contemporary features, to improve customer experience with adequate customer protection. There are many use cases for recurring payments, such as EMIs, Systematic Investment Plans (SIPs), magazine subscriptions, etc. The committee recommends that BHIM UPI be upgraded to allow recurring payments use cases, through e-Mandates. Users must have the option to cancel the mandate, with a notification to the other party.
- Promote interoperable standards for transit payments
The Committee has also recommended large scale usage of common and interoperable mobility cards by public across different transit options for which it is necessary to adopt common technical standards and a time bound road map to migrate existing systems also to common new standardised platform such as the NCMC. Further such mobility cards would be with low stored value without any KYC requirements. Since these are stored value cards, the RBI must provide guidelines on the liabilities in case of lost and stolen cards.
- Enable wider use of NCMC
The Committee has recommended that the NCMC card usage be extended beyond mobility use cases, and it should be accepted at POS devices. A roadmap for migration of POS devices to accept the NCMC card may be put in place.
- Regulatory Changes
- Review all high-volume payment systems every 6 months
Keeping in mind the dynamic nature of the payments markets, and the high growth experienced, the committee has recommended that the BPSS conduct a half-yearly comprehensive review of all high-volume payment systems, including market dynamics, customer complaints, frauds, decline rates, and any other issues that may affect customers.
- Facilitate First Level Regulators / Self-Regulatory Organizations
Keeping in mind, the continuous evolution of technology, and for the need to build regulatory capacity to regulate in this environment, the committee has recommended that the regulator facilitate the creation of an Self-Regulatory Organization (SRO) for the recently licensed NBFC Account Aggregators. This can serve as a blueprint for more SROs that may be created later in the area of digital payments. In order to effectively regulate the payment ecosystem, and build more regulatory capacity, the RBI must help create first level regulators, or SRO. SROs are industry organizations, with membership from the industry, but have an independent governance board.
- Promote use of regulatory sandbox
With a view to encouraging innovation and developing solutions for customers who might otherwise be hard to serve, the committee has commended the RBI initiative to setup a regulatory sandbox, and recommended that mass market use cases be tested on a priority basis.
- Consider investment in digital payment infrastructure for priority sector lending
With the objective of removing hurdles to the creation of digital payments infrastructure, the committee has recommended that lending for capital expenses towards digital payments infrastructure be allowed under priority sector lending.
- Simplify know-your-customer (KYC) / customer due diligence (CDD) processes
Noting the fact that there are various use cases, where the industry could comply with PMLA requirements without friction, the committee has encouraged the industry to innovate on the processes in the interest of the customer.
- Consider re-activating dormant wallets and small accounts
Keeping in mind that many wallets and small accounts may have become dormant due to KYC compliance deadlines, and that these wallets and small accounts may have been loaded only from KYC compliant accounts, the committee has recommended that these wallets and small accounts be considered for re-activation.
- International expansion
With a view to easing remittances into India, and to help Indian travellers make payments abroad, the committee has recommended that NPCI put together an internationalization plan for Indian payment systems such as RuPay and BHIM UPI. This will further demonstrate that the technology is world class.
- Create a standing committee on digital payments at the SLBC
With a view to assess ground level situation and to provide immediate solutions of issues relating to financial Inclusion, the committee has recommended that each state level bankers’ committee (SLBC) should set up a standing committee on digital payments to further improve digitisation, especially at semi urban and rural centres. This standing committee under the leadership of the RBI representative may also investigate and provide quick solutions relating to aadhaar seeding in customer accounts.