Digital push needs caution

The RBI should take note of some critical lacunae

The Reserve Bank of India’s (RBI’s) Payment Vision 2025 document, read in conjunction with a recent letter clarifying rules for prepaid payment instruments (PPI), indicates both its policy targets and also its regulatory concern. The Vision is to enable rapid growth in digital payments and reduce cash use, with clearly defined targets. The regulator, the letter seems to suggest, is worried that the rapid growth of PPI, loaded through non-banking debt channels, could lead to a bubble, and is putting safeguards in place, even at the cost of adversely affecting the fintech model. 

The letter forbids the loading of balance on to PPI (cards and digital wallets) via loans from non-banking financial companies and fintechs. The ban on credit via non-banking channels will hit fintechs hard. The balance may continue to be loaded from credit cards and debit cards and so, this policy favours banks over fintechs.

PPIs (prepaid cards, virtual prepaid cards, and wallets) are popular. The balance is easily limited if, for example, a parent hands a PPI to dependent children. Loss via fraud is also limited. Personal data is protected if the PPI is not linked to a bank account.
 

PPIs are issued by banks in alliance with fintech players, as well as directly by fintechs. Over 10 million such PPI cards (and over three times that many wallets) are active, with fintechs like Slice, Uni, PayU’s LazyPay, KreditBee, EarlySalary, Transcorp, Ola Money, and Livquik issuing and processing cards alongside banks like ICICI Bank, RBL, and HDFC Bank.

In May 2022, at least Rs 3,500 crore worth of credit was processed through prepaid payment cards, and thrice that via wallets. The fintech industry body, The Payments Council of India, has asked for six months to comply, and appealed to the RBI to treat PPI instruments with full KYC on a par with conventional bank instruments.

In the document, the RBI says it wishes to enable Unified Payments Interface-led growth at 50 per cent per annum until 2025 and hopes to triple the volume of digital transactions with a digital payment transaction turnover of 8 per cent of GDP (up from the current 1 per cent). It assumes the debit card transactions volume will overtake the credit card volume at retail PoS. The RBI also envisages 150 per cent growth in PPI transactions, reducing cheque payments to less than 0.25 per cent of retail payments. This will entail a 250 per cent increase in card-related infrastructure, and 50 per cent CAGR (compound annual growth rate) in the registered customer base for mobile transactions.

These targets are laudable in many respects. Digital transactions drive financial inclusion, lower transaction costs, and improve tax compliance. But the RBI must note India’s continued lack of legislative protection for private personal data, which may be at risk in digital transactions.

Sweden uses the least amount of cash in the world and it is germane in this context to mention the Swedish Central Bank has recommended citizens hold physical cash for contingencies like wars, floods, and earthquakes. Digital payments cannot be processed in Assam during the current floods, for instance. Moreover, India has the highest number of internet shutdowns. The Agnipath agitation triggered shutdowns across multiple states, and they are endemic in Kashmir, Chhattisgarh, and Manipur. The RBI’s advocacy of digital transactions should be tempered by its awareness of these issues.