Digital EnterpriseNewsletter

RBI Announces New Index, SRO to Boost Digital Payments

To give a greater push to India's digital payment ecosystem, the RBI comes up with a new index to be made available from July 2020.

digital payments

Post demonetization since November 2016, the Narendra Modi-led government announced various measures to foster the growth of digital transactions in India. While becoming a cashless economy is the end-goal, the sudden push to ‘go digital’ has given rise to enormous security challenges and fraud related activities in recent years. In what appears to be a move to give a push to digital payments in the country, the Reserve Bank of India (RBI) has proposed to set up a self-regulatory organization (SRO) by April 2020 to improve security, customer protection and pricing in India’s digital payment system. The regulator has also announced establishing a Digital Payments Index (DPI) to capture the extent of digitization of payments effectively and will be made available from July 2020 onward.

Digital payments in India are witnessing consistent growth at a compound annual growth rate (CAGR) of 12.7%, while the mobile wallet market is expected to continuously grow at a CAGR of 52.2% by volume between 2019 and 2023, according to a recent report by KPMG. However the country’s status as a digital economy being nascent, increased use of digital payments have increased the chances of getting exposed to cybersecurity risks such as online fraud, information theft, and malware or virus attacks are also increasing.

Digital payment frauds account for about half of all bank frauds in India. The increasing number of frauds was also recently highlighted in the Rajya Sabha, where it was said that 1,367 frauds in FY 2016-17, 2,127 in FY 2017-18, and 1,477 frauds in FY 2018-19 were reported with regard to ATM/debit card, credit card and internet banking transactions of more than Rs.1 lakh. As the digital payments adoption will evolve and innovate drastically in the coming years, especially with the increased convergence of sectors such as financial services, IT and telecom, there is a need for a strong security framework to monitor, control and mitigate risks plaguing the digital payments ecosystem.

Read more: Security Concerns Stymie Online e-Payment Adoption

“With substantial growth in digital payments and maturity gained by entities in the payment ecosystem, it is desirable to have an SRO for orderly operations of the entities in the payment system,” as per an RBI statement.

An SRO is generally a non-governmental organization with the power to create and enforce standalone industry and professional regulations and standards. Currently, the National Payments Council of India (NPCI) is the largest industry body that fulfills this role in India’s digital payments industry. Additionally, RBI will also publish guidelines for setting up of the SRO with a mandate to enhance the communication mechanism between payment sector stakeholders, such as the service provider and banks, and regulatory and supervisory bodies.

The DPI will capture the extent of digitization of payments effectively. The DPI would be based on multiple parameters and will allow both consumers and stakeholders to better gauge local area developments in infrastructure, access, demographic and acceptance related growth with reference to broader domestic and global standards in digital payments.

“Digital payments in India have been growing rapidly. The Reserve Bank shall construct and periodically publish a composite DPI to capture the extent of digitization of payments effectively,” RBI Governor Shaktikanta Das said in a statement.

Both the RBI and government have been aggressively working on enabling the adoption of the cashless payment in the form of digital mobile wallets, debit and credit cards, internet banking and UPI for some time now.

In December 2019, Finance Minister Nirmala Sitharaman announced the exemption of Merchant Discount Rate (MDR) charges on the transactions done via UPI and RuPay modes. This was done to take the Indian economy towards a less-cash economy. MDR is basically the cost paid by a merchant to the bank for accepting payment from their customers via digital channels.

Earlier, RBI has also issued some guidelines as security and risk mitigation measures for digital payments. The central bank has taken steps for securing card transactions, internet banking, electronic payments, ATM transactions, and prepaid payment instruments (PPIs). It has also issued guidelines that limit the liability of customers on unauthorized electronic banking transactions.

Read more: Top 5 Digital Payments Trends in 2020

The financial industry has welcomed the move to form DPI. “This initiative will enable companies to gauge the ground-level effectiveness of the various programs running across the country. The index will also assist the financial payments ecosystem to identify areas of growth and improvement for widespread permeation of cashless payments,” said Anand Kumar Bajaj, MD & CEO, PayNearby.

“Banks and payment companies will get to know which channels are more popular among consumers. The mapping of digital payments will eventually help the end consumers evolve in the space,” said Mandar Agashe, founder and vice-chairman, Sarvatra Technologies, a technology service provider for Indian banks.

“The DPI will help us benchmark the quantum & quality of growth that we have witnessed in Digital Payments. Over time DPI will help in accurately assess if we are indeed accelerating our journey to become a cashless economy. As we continue our trajectory of massive growth, it is imperative to have a self-regulatory system in place that will ensure smooth operations for all stakeholders and more importantly ensure customer data and security is never compromised,” said Murali Nair, President-Banking, Zeta, a fintech start-up that provides digitized enterprise solutions for employee tax benefits, automated cafeterias and digital payments.

With substantial growth in digital payments and maturity gained by entities in the payment ecosystem, it is desirable to have an SRO for orderly operations of the entities in the payment system, believe experts.

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