Inter-operability of payments systems touted as key to success of digitisation

The success of digitisation will depend a lot on the inter-operability of the payments system, the Survey said, stressing the key role that banks need to play.

“The Unified Payments Interface (UPI) created by the National Payments Corporation of India (NPCI) is the technology platform that will be the basis for ensuring inter-operability. But to ensure this, individual banks should facilitate, not thwart inter-operability,” it said.

One way of quantifying the degree of inter-operability is to contrast the decline rate of transactions that involve the same issuing and remitting bank (on-US transactions), on the one hand, and transactions that involve different banks (off-US), it said.

Based on detailed data provided by NPCI, the decline rates have been calculated for Aadhaar-enabled payments. One plausible hypothesis for this differential is that the larger banks are declining transactions involving smaller remitting banks while ensuring that transactions involving themselves are honoured.

“There could be valid reasons for this. But, such problems will need to be addressed, since payments banks, telecommunications companies, and small banks are in the vanguard of financial inclusion,” the Survey said. So their access to the UPI platform will be critical for advancing digitalisation, especially for the poor, it said.

Digitalisation can broadly impact three sections of society — the poor, who are largely outside the digital economy; the less affluent, who are becoming part of the digital economy having acquired Jan Dhan accounts and RuPay cards, and the affluent, who are fully digitally integrated via credit cards.

One simple measure that illustrates the size of these three categories is cellphone ownership. There are around 350 million people without cellphones (the digitally excluded); 350 million with regular ‘feature’ phones, and 250 million with smartphones, the Survey said.

In the wake of demonetisation, the government has taken a number of steps to facilitate and incentivise the move to a digital economy. These include the launch of the BHIM (Bharat Interface For Money) app for smartphones, which is based on the new Unified Payments Interface (UPI) which has created inter-operability of digital transactions.

“As of January 10, there had been 10 million downloads, and over one million transactions had been conducted. The 250 million digital-haves can use their smartphone to make simple and quick payments,” the Survey said.

The government said launch of BHIM USSD 2.0 has allowed the 350 million feature phone users to take advantage of the UPI and the launch of Aadhaar Merchant Pay, aimed at the 350 million who do not have phones.

This enables anyone with just an Aadhaar number and a bank account to make a merchant payment using his biometric identification. Aadhaar Merchant Pay will soon be integrated into BHIM and the necessary POS devices will soon be rolled out, it said.

“That said, the security features of these e-payment systems will need to inspire trust, to ensure this trend continues,” the Survey said.

So far, facilities such as RuPay and payment wallets make up only a tiny proportion of digital transactions, much less the overall financial transaction.

For example, RBI survey data indicate that during December 2016 digital wallets accounted for just ₹9,500 crore in transactions and UPI only ₹700 crore, compared to ₹31,400 crore for debit (excluding RuPay and ATM transactions) and ₹27,000 crore for credit cards. Still, they are growing rapidly, the Economic Survey added.