Promoting digital payments

(MainsGS3:Inclusive growth and issues arising from it.)

Context:

• The Union Cabinet’s recent decision to earmark ₹2,600 crore for providing banks with an incentive to promote digital payments has focused attention on India’s welcome push to broaden and deepen alternatives to the most widely accepted method of payment worldwide, cash.

Supporting financial inclusion:

• The Reserve Bank of India’s ‘Payments Vision 2025’ document observes that ‘payment systems foster economic development and financial stability’ while supporting financial inclusion. 
• There can be no two views that the rapid and widespread adoption of digital payment methods, coupled with steps to bring more people into the banking system’s fold, has significantly helped cut the reliance on cash for low-value transactions, especially in metros and cities.

Unified Payments Interface (UPI):

• At the heart of this payments revolution has been the National Payments Corporation of India and its Unified Payments Interface (UPI). 
• The UPI’s function as a lynchpin transaction enabler has been key in undergirding this transformation. 
• In December 2022, the total monthly volume of UPI-facilitated transactions aggregated almost 783 crore with the value exceeding ₹12.8 lakh crore. 
• While this was a 71% jump in volume and a 55% increase in value from a year earlier, the UPI volume last month was close to 54 times the transactions in December 2017, and a staggering 98.6-fold of the value seen five years earlier.

Working of UPI:

• The UPI was launched in 2016 and is operated by the National Payments Corporation of India (NPCI). 
• The NPCI was formed in 2009 as an initiative of the Reserve Bank of India (RBI) and the Indian Banks’ Association (IBA) with the goal to create a robust payment and settlement infrastructure. 
• UPI operates on top of the Immediate Payment Service (IMPS) which was created by the NPCI for immediate fund transfers.
• UPI based payments function broadly through three steps i.e.  First, one’s bank account is mapped to a Virtual Payment Address (VPA). 
• A VPA eliminates the risk of mentioning account details in every transaction. It can be created in a couple of minutes using a UPI app. The only prerequisite is that your bank account be linked to a mobile number. 
• Secondly, a Payment Service Provider (typically a bank) takes care of the to-and-fro transactions to this VPA (and hence to the underlying bank account).
• And finally, the UPI software orchestrates the fund movement from a customer’s VPA to a target VPA and completes the transaction.

 Major enablers:

• The adoption of digital payment methods, while accelerated by the COVID-19 pandemic, has also been enabled by the widening number of banks which have backed the UPI system, as well as the indigenous RuPay credit and debit cards. 
• A welter of private financial technology or fintech firms that offer tailor-made digital applications, and big technology and social media companies that have added payments with a view to enhancing stickiness with their core offerings have also been major enablers.
• The banking sector, however, has been at a relative disadvantage in leveraging the payments ecosystem for its core business growth as the spending on infrastructure to support and secure such payments has been disproportionately higher than for fintech and big tech rivals. 

Conclusion:

• The Government’s new incentive aims to level the field by offering payments in lieu of the commissions foregone by lenders in waiving the merchant discount rate they would otherwise have levied.
• Policymakers need to urgently ring-fence the wealth of individual spending data being generated and constantly enhance security to safeguard the payments system from cyberthreats.