The Watal Committee on Digital Payments submitted its report to the Finance Ministry on 9th December 2016. While the report called for comments from the public, the main recommendations included making payments regulation independent from the function of central banking by either creating a new payments regulator or making the current Board for Regulation and Supervision of Payment and Settlement Systems within the Reserve Bank of India more independent; updating the Payments and Settlement Systems Act, 2007 to include explicit mandate for competition and innovation, open access and interoperability, consumer protection including penalties and independent appeal mechanism, regulations on systemic risks, data protection and security and a process of regulatory governance; various measures to promote digital payments and receipts, upgrading payment systems like RTGS and NEFT to operate on 24x7 basis; allowing non-bank PSPs to directly access payment systems; diversifying ownership of the National Payments Corporation of India (NPCI); enabling interoperability between banks and non-banks as well as within non-banks etc.
The feedback submitted by Indicus Foundation to the Finance Ministry on this report is as follows:
COMMENTS ON THE REPORT OF THE COMMITTEE ON DIGITAL PAYMENTS,
CHAIRED BY SHRI RATAN P. WATAL
SUBMITTED BY INDICUS CENTRE FOR FINANCIAL INCLUSION
At the outset, we congratulate the Watal Committee for having made comprehensive recommendations towards raising usage of digital payments in India. Given the constraints of time and schedules of members on the panel, the recommendations made are precise and make for a clear focused roadmap for the year ahead.
Our comments on the main recommendations made in the Report have been listed in Table 1 below. There are however two issues we would like to flag that have not been addressed adequately in the Report:
Telecommunication connectivity: Even as the report states, at the outset, “Digital payments is to finance what invention of wheel was to transport.”, it does not go into the problem of the road on which the digital wheel has to run. Poor connectivity has been flagged by the CGAP survey of customers as the first concern raised against adoption of digital payments (Doing Digital Finance Right, June 2015). This concern was raised in a technical workshop organised by ICFI in November 2016, where participants from TRAI, RBI, COAI, banks and telcos gave their inputs on the road ahead – these takeaways are given below for consideration.
On the Services side, the fear of transaction failure limits adoption of digital payments – this needs to be resolved. A poor experience could be the result of many problems and it is difficult to identify the dominant causes of failure – connectivity, software, device, switch, interface, customer error etc. ‘Root Cause Analysis’ would help. However, such analysis is very resource intensive and therefore should be preceded by a sequence of pilot or dipstick studies of data from consumers, NPCI, banks and telcos. There are three broad categories under which pilot studies would help in designing an appropriate monitoring mechanism:
The first has to do with the quality of cellular instrument, that often is inadequate for the software or App that goes on top of it. This required the following by way of corrective mechanisms: (a) development of certain recommendatory minimum standards for all financial services, and (b) customer education by financial service providers on quality characteristics of individual cellular phones.
The second has to do with service downtime on the side of the mobile service provider; this will obviously require ongoing monitoring at the tower level. Currently there is little understanding of how issues such as signal strength, etc. may be impacting cellular financial transactions.
The third has to do with customer education in that many times they are not aware of the right method of undertaking a financial transaction, it was contended that many failed transactions were simply mistakes on the customer end. But in the absence of any study in this domain, any further discussion would be unproductive.
Many technology and transactional failures tend to occur at the interface level, and therefore any studies undertaken in this space should especially incorporate the study of how various interfaces are working.
On the Network side, India must move beyond mere tele-density numbers and begin to measure connectivity at a granular level, to identify the towns and villages where poor connectivity inhibits adoption of digital payments. The possibility of offline transactions must be provided to users. There must be sharing of data from different stakeholders, and a structure that could enable such sharing. A comprehensive monitoring within this space requires a framework that will enable different constituents such as individual operators, COAI, TRAI, and the Government to share and even combine data on connectivity at a granular level.
A coordinated approach could be through a ‘Thematic Map’ which would enable different stakeholders to build standardized data capturing mechanisms. While a detailed thematic map would be resource intensive and take a long time, as a first cut an approximate exercise could be conducted by an entity such as the TRAI, with active cooperation of other stakeholders like RBI, IBA, COAI etc.
COAI has developed an online Tarang Sanchar database on towers - http://184.108.40.206/EMFPortal While this website is for EMF signal compliance, the database can also be used by others, including the RBI to map onto the Business Correspondent network. RBI and COAI can coordinate on this as a first step. There is a need for open APIs for increased utility of the Tarang database, as well as other data that will become available with time. The API route will enable different entities to use data from different sources as per their specific requirements.
B: Customer Centricity: Whether it is financial inclusion or digital payments, the Indian way has been top-down, this should now be modified to ensure that processes and products are customer centric. To take just one example, the USSD channel could have taken off much earlier if attention had been paid to the customer interface. Options of offline payments, in local languages using easy to understand terms etc. along with greater outreach to customers would have made for easier adoption.
Linked to customer centric products and processes is the issue of customer grievance redressal. While this has found mention in the Committee report, there must be emphasis on monitoring the redressal system. To date, there has been little monitoring by, and of, customer service redressal mechanisms. The RBI has the ombudsman system; however, customers are unsure of the process. Guidelines must be set and followed stringently e.g. customer helplines must be answered within specified time, rather than keep customers waiting on hold. Mystery shopping exercises, commissioned surveys as well as complaint follow up as done by the Ministry of Railways successfully should be initiated by all service providers, and monitored by the RBI.
In the case of digital payments, customer consent architecture is another vital layer that has not been given sufficient attention by regulators and industry.
We now turn to our comments on the main recommendations made in the Report:
Table 1 Comments on Main Recommendations
R- 1 Make regulation of payments independent from the function of central banking. The Committee weighed two options on how best this be implemented: (i) create a new payments regulator, or (ii) make the current Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) within RBI more independent. While both the options would serve the intended objective, the Committee recommends that the BPSS be given an independent status which it today lacks by being a sub-committee of the Central Board of RBI. The statutory status of the new Board, within the overall structure of RBI, called Payments Regulatory Board (PRB) should be enshrined in the Payments and Settlement Systems Act, 2007 Implementation by MoF: Finalisation of structure of PRB may be done in 30 days.
Agree with (ii) making the current BPSS within the RBI more independent, but answering to the RBI Governor, to include non-RBI experts. Creating a separate payments regulator creates additional coordination issues.
R- 2 Update the current Payments and Settlement Systems Act, 2007 to include explicit mandate for (i) competition and innovation, (ii) open access and interoperability, (iii) consumer protection including penalties and independent appeal mechanism, (iv) regulations on systemic risks, (v) data protection and security and (v) a process of regulatory governance. The Committee has provided drafting instructions for the new Payments and Settlement Systems Act and this may be initiated at the earliest Implementation by MoF: Finalisation of amendment bill and placing the same before the Union Cabinet may be done 30 days
Agree, with special emphasis on strengthening customer protection, data protection and privacy concerns which will become more crucial with scale, evolving technology and inter-operability.
R- 3 Promote digital payments and receipts within Government by (i) adopting digital payments for all its needs, (ii) withdraw all charges levied by Government department and utilities on digital payments and bear the cost of such transactions, (iii) mandate government departments and agencies to provide option to consumers to pay digitally, (iv) incentivise consumers to make payments (including payment of fines and penalties) to Government electronically by giving a discount or cash back, (v) enable consumers to make payments (including taxes) to Government through suitable digital means like cards and wallets, (vi) special emphasis to promote digital payments for recurring low value transactions and (vii) reduce custom duties on payments acceptance equipment. Implementation agencies listed in recommendation section. Steps may be initiated in 30 days and reviewed fortnightly.
Agree. However, while customers should have the option of making digital payments must be given,(iv) is not needed - no special incentives should be given to digital payments in the form of cash back or discounts on the payments.
Further, Ministry of Finance must resolve issues of any financial burden that arise on government agencies that bear the cost of transactions - this will ensure viability and smooth rollout.
R- 4 Create a fund proposed as DIPAYAN from savings generated from cash-less transactions to expand digital payments. Build audit capability to measure savings. Implementation by MoF, Ministry of Social Justice, Ministry of tribal Affairs and Ministry of Development of North Eastern Region. A time period of 60 days may be considered for initiating implementation by user agencies
Audit capability is essential, however creating a separate fund will add to the complexities in the system, adding more to administrative costs.
R- 5 Create a ranking and reward framework to encourage and recognise government departments, State Governments, districts and panchayats and other market participants who lead the efforts on enabling digital payments Implementation by NITI Aayog along with State Governments. Development of the framework maybe achieved in 60-90 days.
Agree, a good initiative to improve transparency and recognise best practices.
R- 6 Implement other measures to promote digital payments including (i) promoting Aadhaar based eKYC and paperless authentication (including where Permanent Account Number (PAN) has not been obtained), (ii) providing disincentives for usage of cash and (iii) creating awareness and transparency on cost of cash Implementation by MoF, UIDAI, CBDT, Telecom Regulatory Authority of India (TRAI), Ministry of HRD, DoPT and RBI. May be initiated over 60-90 days
Disagree with (ii) providing disincentives for cash - people should not be or feel forced to go cash-less.
While promoting (i) the use of Aadhaar, it is important to ensure that usage is voluntary, and not mandated, in accordance with the Supreme Court ruling in this matter.
The RBI may, within the existing regulatory framework of Payments and Settlement Act, 2007, immediately initiate steps to: R- 7 Consider outsourcing the function of operation of payment systems like Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT). While moving RTGS to a separate operator is not envisaged for now: a cost benefit analysis may be initiated as an initial step. Overtime, multiple payment system operators should be encouraged and payment systems should be operated by market entities. Consultation paper may be released over 180 days.
Agree that retail transactions should have multiple platforms, interoperability will be essential in a multiple operator framework.
R- 8 Upgrade payment systems like RTGS and NEFT to operate on 24x7 basis in due course of time. RBI should progressively increase their timings over due course A consultation paper may be released over 90 days.
Agree, all systems should work 24X7.
R- 9 Allow non-bank PSPs to directly access payment systems Regulations may be released for consultation over 60 days
Agree, it is a positive measure to open systems to all operators. However, RBI should strengthen transaction monitoring and KYC rules to ensure customer protection and mitigate risk of fraud and laundering.
R- 10 Require NPCI, to be payments centric in its ownership and objectives. Ownership of NPCI should be diversified widely to include more banks and include non-banks. Its Board should be represented by majority public interest directors and include share- holder directors. NPCI should be allowed to function independently Regulations may be released for consultation over 60 days.
Agree, positive measure long overdue
R- 11 Enable payments to be inter-operable between bank and non-banks as well as within non-banks. Mobile number and Aadhaar based fully inter-operable payments should be prioritised NPCI may enable this on its platforms over 60 days.
Agree, positive measure. However, RBI should strengthen transaction monitoring and KYC rules to ensure customer protection and mitigate risk of fraud and laundering.
R- 12 Create a formal mechanism to enable innovations and new business models Consultation paper may be released over 90-120 days.
Good move to open discussion towards innovation and new business models.
R- 13 Implement other measures to promote digital payments including issuing regulations on Systemically Important Payment System (SIPS) and Systemically Important Financial Institutions (SIFIs), growing acceptance network, enabling faster and cheaper credit and promoting cross border payments Regulations may be released for consultation over 60-180 days. The RBI may within two weeks of releasing this Report, develop a comprehensive metric to quantitatively measure and monitor the enhancement of digital payment services in India.
Agree, however the deadline of two weeks is too tight to be practicable.
We would like the Ministry of Finance for giving us the opportunity to participate in the consultations for a smoother transition towards less-cash.