Why digital payment is a public good

There has been a phenomenal growth in mobile-based digital payments. Unified Payments Interface (UPI), a retail digital-payments product of National Payments Corporation of India (NPCI), alone saw about 2,100 crore transactions during the past 12 months; a whopping increase of nearly 900 crore transactions, or a year-on-year growth of 75 per cent. On the contrary, the hitherto popular retail payment formats, based on platforms like ATM, micro-ATM, NEFT, IMPS, POS, RTGS and cheques, together accounted for about 1,500 crore transactions in the past 12 months.

A robust and secure payment infrastructure with continuous innovations is the key to push transaction volumes. The new umbrella entities (NUEs) envisioned by the RBI are expected to do just this. The scope of activities of the NUEs would be similar to that of NPCI, however with a distinct difference in intent — the potential of doing business ‘for profit’.

The rear-view mirror

Payment systems lay the tracks for easy movement of money. Though banks are primarily the front-end of the retail payment systems, let us look at the linkage of all banks through an exchange house (switch) that facilitates real time inter-bank movement of funds.

The RBI and the government own the currency printing presses and manage the supply chain of currency notes through RBI-owned currency chests. Cash services for retail customers were for long confined to bank counters until ATMs were introduced. Subsequently, came the interoperable ATMs and the RBI set up the National Financial Switch (NFS), networking them all. The NFS is currently run by NPCI. On the digital payments front, as early as 2004-05, the RBI created the RTGS and the NEFT systems, which are now available 24x7x365 for quick transfer of funds.

In a separate development, Mastercard/VISA brought credit cards to India and provided a switch for merchant payments with both debit and credit cards. The RBI’s 2005 vision document on payments system, inter alia , envisioned the need for being atmanirbharta (self-reliant) on lines of Mastercard/VISA.

This led to the birth of NPCI as a ‘not-for-profit’ self-reliant institution for public good. During the past 11 years, this institution has changed the landscape of payments in India with active support from the RBI, the government and the promoter banks, which include SBI, ICICI Bank, Axis Bank, HDFC Bank, Kotak Mahindra Bank, and IndusInd Bank.

More umbrella entities

NPCI has developed a broad-spectrum of digital payment products, unlike Mastercard/VISA that focussed primarily on card-based payments. NPCI came into global limelight with its flagship product — the UPI — which revolutionised digital payments, making them as easy as cash transactions leading to its exponential growth.

For such innovations to perpetuate, competition is the key. In this regard, with an objective to further strengthen the retail payments ecosystem in the country by building new products, enhance access, improve customer convenience and safety, the RBI has invited private players to create NUEs.

Though the country reaped the benefits of competition in telecommunications and banking, is it prudent to replicate this in the payments system? Should private entities be privy to sensitive payment information?

The financial information captured through digital payment systems can be exploited for undue business benefits, stunting competition and so on.

However, should private NUEs get licence, to eliminate conflict of interest, it is apposite to ensure that no promoter participates in more than one NUE. This would probably bind the banks, who promoters of NPCI, not to break away from it since it would not be the RBI’s intention to build new entities at the cost of an existing platform like NPCI.

The government and the RBI bear the cost for issuance of currency, which is a public good. Digital payments that substitute paper-based transactions are also public good for which both the RBI and NPCI have developed the infrastructure without any profit intent. So, should private NUEs for retail payments be allowed to run the same for profit?

Like NPCI, the NUE would primarily serve banks, which in turn would facilitate their customers to transact digitally in a seamless fashion. Thus, when the public is the ultimate beneficiary, are there pitfalls in allowing ‘for-profit’ NUEs in contrast to NPCI, which is a ‘not-for-profit’ entity? Bringing in the concept of profit for such umbrella entities providing essential payment services is likely to stifle decisions made towards public good.

Perhaps, the RBI can prompt NUEs to be ‘not-for-profit’, Section 8, companies.

Digital payments should remain a public good for more reasons than one.

First, it is good to have NUEs for digital payments to promote competition and spur innovation. However, there are risks involved in privatisation and in consumer financial transactions data being exposed to exploitation.

Second, like RTGS is with the RBI or UPI with NPCI, other retail digital payments services should remain under an umbrella not run by private entities for profit.

Third, NPCI as a ‘not-for-profit’ umbrella entity is already a role model.

Fourth, even if NUEs are licensed, it should be ensured that a single entity does not promote two NUEs.

The writer is Professor, Department of Mathematics, IIT Bombay

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