Full Steam Ahead On E-Cash: Special Regulator For Payments Is Way To Go

Everything, it seems, is moving at jet speed when it comes to digitising payments and moving towards a less-cash economy. This much is evident from the Prime Minister Narendra Modi hard-selling the smart phone as a bank, the Reserve Bank of India (RBI) putting out daily stats on non-cash transactions and the Finance Ministry announcing discounts for the use of non-cash modes of payment.

The missing piece in this digital jigsaw so far has been regulation: when November saw over 94 lakh crore of non-cash transactions, whether through cards, the internet, e-wallets, mobile banking or old-fashioned cheques, it was clear that such large increases in non-cash modes will need a rule-based framework to ensure that nothing goes wrong.

The missing piece is now being put in place with the Ratan Watal Committee submitting its report on going cashless. Its main recommendations include the following:

• An “independent regulator” for payments operating under the overall structure of the RBI. Systemically important payment service providers will be regulated by the RBI.
• 24x7 operation of the RTGS (real-time gross settlements) and NEFT (national electronic funds transfer) with the inclusion of non-banks into the system as direct participants.
• Payment of most government obligations digitally, with transaction fees being waived.
• Special charges for those who still want cash, to be levied by government and merchants.
• Inter-operability between banks and other payments service providers based on Aadhaar identification.
• Changes in the Payments and Settlements Act to insure customers against financial fraud, and to ensure data protection and privacy.

One can expect some movement on these by early next year, probably even at the time of the budget presentation on 1 February, where the Reserve Bank Act changes can be put through.

The most important recommendation – to provide for an independent regulator within the RBI – is vital, for the reality is that a stodgy regulator like the RBI is simply not geared for the fast-paced world of digital transactions, when crores may be transacted at the blink of an eye. More so when millions of Indians will be joining the digital bandwagon, driven currently by the cash shortage, and later by the sheer convenience of it all.

The RBI already has too much to do – from handling monetary policy to supervising banks of every kind, including payments, wholesale, small and custodial banks that will come up in future.

We need a nimble payments regulator, who can ensure that money is safely transacted, and also that the charges are not extortionate. Once the temporary abolition of digital transaction charges and incentives for such payments are ended early next year, the tendency of most operators will be to earn higher fees from transaction charges. This is fine, but without a regulator looking over their shoulders, payments service providers would have a tendency to fleece users. We have seen this with banks, which impose all kinds of charges on unwary customers in an oligopolistic market. There is no point is allowing this to happen again in payments.

It is not clear whether Watal recommended an insurance fund against frauds, but it may be a useful addition to the regulator’s bid to protect the customer against non-authorised transactions.

The disincentivisation of cash should ideally be done at the budgetary level, probably with the reintroduction of the Banking Cash Transaction Tax (BCTT), and not restricted to government or merchant transactions alone. We need to disincentivise cash holdings beyond certain limits. Once the current cash crunch is over – maybe by February – cash withdrawal limits can be enhanced, but BCTT should be levied beyond those limits.

India is on course for the use of less cash. We have demonetisation to thank for this sudden opportunity.