How India Built a Robust Payments System
Twenty years ago, when a consumer purchased groceries or durable consumer goods in India, they paid in cash or handed a check or demand draft to the merchant. Today, it has multiple payment options. He can make the payment by scanning a QR (quick response) code or transfer money to the merchant using his phone number; he can swipe or wave a credit or debit card through the Point of Sale (PoS) machine with the merchant; it can also use prepaid instruments like e-wallets.
There are also other ways of transferring money. For repetitive payments such as salary payment, life insurance premium, systematic investment plan, and loan EMIs, individuals and businesses can use the clearinghouse’s credit or debit service National Automated (NACH). For high-value transactions above Rs 2 lakh, there is real-time gross settlement (RTGS). There are also the National Electronic Funds Transfer (NEFT) or Immediate Payment Service (IMPS) modes.
Also read: UPI payment crosses Rs 11 lakh crore milestone in September
In all these payment systems, the transfer of money from the remitter to the beneficiary is done in real time, and instantaneously. The payment system is growing at a breakneck pace, with thousands of transactions occurring every second and millions of new users joining the system every month. Digital transactions have grown in both volume and value over the past decade.
Speaking at the Global Fintech Fest 2022 recently, Finance Minister Nirmala Sitharaman, while praising the development of payment systems in India, said countries like Singapore, Bhutan, France and others had shown their interest in the Indian payment system. She said the UPI (Universal Payment Interface) recorded transactions worth $940 billion in 2021, or 30% of India’s GDP, and grew at an annual growth rate. compound (CAGR) of 160% in value, eclipsing all other payouts. shape since its launch five years ago.
Over the past decade, India has witnessed exponential growth in payment systems, leading to a paradigm shift in customer behavior from cash to digital payments. The pandemic-induced lockdown in 2020 accelerated this process. Today, a villager finds it easier and more convenient to transfer money via his phone than to write a check!
Today, banks not only accept deposits for the purpose of lending, but facilitate the payment and settlement system. Banks have moved from brick-and-mortar banks to branchless banks.
The Reserve Bank of India, while tracing the journey of the payment system in India from 2010 to 2020 in its brochure published in 2021, asserts that “the change in payment preference over the past 10 years is evidenced by the fact that the volume of paper clearing, which accounted for 60% of total retail payments in fiscal year 2010-11, fell to 3% in fiscal year 2019-20. Payment systems have always been considered a public good and an ancillary activity of banks that can be leveraged as a base to provide various other services”.
Along this journey, the Reserve Bank, recognizing that payment systems are the lifeline of an economy and a means to achieve financial inclusion, has acted as a catalyst and regulator in achieving its objective of developing and promoting a safe and secure environment. , affordable and efficient, as envisioned in the Payment and Settlement Systems Vision 2021 document. Institutions such as the Institute for Development and Research in Banking Technology (IDRBT) and the National Payments Corporation of India (NPCI, which was established in 2009 to integrate all payment mechanisms in India and who developed the UPI) have been instrumental in building a robust payment system. system. The move towards digital payment systems has also boosted direct government tax revenue in recent years.
The government abolished the merchant discount rate (MDR) on transactions using RuPay and UPI debit cards from January 2020. While around five million merchants accept digital payments through a point-of-sale machine , nearly 50 million merchants accept payments through UPI using the QR code. The government has promised to compensate the banks for the costs they incur in maintaining this infrastructure, which is estimated to cost more than Rs 5,000 crore.
Despite criticism from skeptics who will continue to talk about the vulnerability of gullible customers to cyber fraud in digital transactions, payment systems have come of age in India. However, the government needs to address the “convenience fee” consumers pay when making online payments to book a plane, train or cinema ticket or to pay utility bills. After all, the government wants to discourage cash payments and promote – not penalize – digital payments!
(The writer is a former banker and currently teaches at Manipal Academy of Global Education, Bengaluru)
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