Social Equalizer: On promoting Digital Payments : Daily Current Affairs

Date: 18/01/2023

Relevance: GS-3: Indian Economy and related Issues; RBI and its functions.

Key Phrases: Digital Payment, Payment Systems, Merchant Discount Rate, UPI, Reserve Bank of India, RTGS, NEFT, Governor of RBI, Regulation, Fund Transfer Payment System, Merchant Payment System, Operational Cost, Card Network, PPIs, Payments Vision 2025.

Context:

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

Key Highlights:

The Reserve Bank of India’s ‘Payments Vision 2025’ document observes that ‘payment systems foster economic development and financial stability’ while supporting financial inclusion.
Widespread internet penetration, a slew of government reforms and sustained investor interest in payment space has led to a surge in digital payment adoption by consumers and merchants.

Status of Digital Payments in India:

In December 2022, the total monthly volume of UPI-facilitated transactions aggregated almost 783 crores with a 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.
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 clutter 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.

Advantages of Digital Payments:

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.
- National Payments Corporation of India (NPCI) and its Unified Payments Interface (UPI) have played an important role in this payments revolution.
Digital payment methods have the advantage of being faster, safer, easier to collect, and less expensive to the business.
Electronic payments are much more efficient and safe than their traditional, paper-based counterparts.
- ePayment methods and systems offer multiple ways of securing your payments, such as payment tokenization, encryption, SSL, and more.

Issues with Digital Payments:

The banking sector 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.
Online frauds including ID thefts, database exploits, phishing attacks, and card payment-related scams are common in India, and the number has only increased during the pandemic.
- Hence while being cautious of the data, it is also essential for e-commerce merchants to use a secure payment system that assures the least possibility of any data leak.

UPI

Unified Payments Interface (UPI) is a very popular funds transfer system, which is quite convenient and fast.
IMPS, RuPay, UPI, etc., are owned and operated by the National Payments Corporation of India (NPCI), which is a not-for-profit entity promoted by banks.

Types of Payment Systems

A payment system settles financial transactions between payers and beneficiaries.
Flow of funds in a payment system in general involves either movement of funds from one account to another or loading of cash to an account or withdrawal of cash from an account.
Payment systems in India are categorized into two types –
- Funds Transfer Payment Systems – System facilitating transfer from one account to another account identified by the originator customer.
  - Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT) and Immediate Payment Service (IMPS) are the main exclusive funds transfer payment systems in the country.
  - In a funds transfer payment system, the charges are generally recovered from the originator of the payment instruction.
- Merchant Payment Systems – System facilitating payments for availing goods or services.
  - Card networks and PPI issuers provide important merchant payment systems in the country.
  - In the case of a merchant payment system, the charges are generally recovered from the final recipient of money.
Card networks: They facilitate the issuance of card-based products like credit cards, debit cards and prepaid cards.
- Card network payment systems can be a three-party or a four-party settlement system.
- The card payment system can also facilitate funds transfer from one card to another.
PPIs: These are issued both by banks and non-banks.
- Banks issue them as one of the business segments in their bouquet of products.
- Non-bank PPI issuers are standalone operators of this product.

Way Forward:

As far as the challenges of online payments are concerned, a robust payment gateway is needed that can potentially minimize most of the issues and significantly improve the customer experience.
Several structural and technological challenges such as cyber-frauds, transaction costs, communication infrastructure, awareness and adoption need to be overcome to bring about the true realization of the potential of digital payments.
Effective strategies to address digital literacy will require public and private investments in digital infrastructure, policy and governance frameworks, and training in the use of digital technologies.
Fees and charges in payment systems should be affordable as well as economically remunerative for the entities involved.
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.

Conclusion:

Accessing technologies and the proper digital skills will be critical for countries’ development, security, and inclusion and sustainable development goal 9 (Industry, innovation and infrastructure; target:universal and affordable access to the internet by 2020) and goal 5 (Gender equality; target: enabling technology to promote women empowerment).

Source: The Hindu

Mains Question:

Q. What are the advantages of digital payments? Also, mention associated issues and suggest measures to address these issues. (250 Words)