| Digital Payment Ecosystem: Characteristics and | | | | infrastructures. Just as landline users can choose |
| Recommendations | | | | between different long distance providers, so too must |
| A good digital payment ecosystem is one that enables | | | | regulation ensure that various financial service |
| financial inclusion, an ecosystem that allows all citizens | | | | providers can access the user. |
| to participate in the growth and development | | | | Large and small: The digital transaction eco system |
| trajectory of the economy. | | | | should involve, and not keep out, small firms. |
| The key stakeholders in the digital payment scenario | | | | Large firms should not derive undue advantage from |
| are numerous â internet service providers, | | | | regulatory prescriptions. This is important for many |
| payment system operators, technology providers, | | | | reasons. Take for example Micro-finance initiatives and |
| mobile network operators, banks and retailers form the | | | | how they can leverage the intra-communities ties for |
| actual players in the market. The digital transaction | | | | lowering cost of credit. Whether we have MFIs or |
| system allows banks to increase their customer base | | | | bank correspondents, or private money-lenders, or |
| with lower costs and risks. According to Booz Allen | | | | NGOs, or other entities operating in small distinct |
| estimates, banks can reduce cash logistics by 10% | | | | communities, such entities need not be debarred from |
| through use of cashless payment transactions. | | | | providing their services to their users through digital |
| Telecom and internet service providers gain by | | | | means. |
| increasing customer retention, higher revenues through | | | | Though certain prudential norms would be essential, |
| value added services etc. Retailers and service | | | | they should not follow a one size fits all approach and, |
| providers benefit through fast access to a larger base | | | | depending upon scale and scope of their operations, |
| of customers, better payment collections etc. There is | | | | their regulatory requirements also need to be |
| a synergy between the digital world and the financial | | | | appropriately structured. |
| world that needs to be exploited successfully to give | | | | 2. Ensure low cost access for the masses that is |
| the final benefit to the consumer. However, at the | | | | integrated with the economy. |
| same time the government and regulators of banking, | | | | Know Your Customer Norms: If digital transactions are |
| telecommunications, payment systems, competition | | | | to be truly transformational, it is important to bring |
| issues, anti-money laundering, all form the environment | | | | unbanked customers into the fold of payment |
| in which the digital payments business model functions. | | | | systems. KYC regulations put in to ensure financial |
| Given that the business of digital transactions is new | | | | integrity can hamper the growth of this market and |
| and unfamiliar, governments and regulators tend to be | | | | hence affect the aim of financial inclusion. |
| cautious about allowing innovations that may disrupt | | | | According to RBI guidelines, mobile payment services |
| financial stability of the economy. As has been | | | | to be offered by banks are not only restricted only to |
| emphasized in the previous sections of this paper, | | | | their customers, but also to those customers who are |
| while on one hand financial inclusion is the stated | | | | KYC/AML compliant. Since subscription to a mobile |
| objective of governments, and new technology has | | | | phone also involves identity checks, this is a duplication |
| been widely accepted as a tool for financial inclusion, | | | | of effort and can given rise to inconsistencies in norms. |
| regulatory and supervisory concerns have inhibited the | | | | Standardizing the system of compliance across digital |
| development of digital payments in many countries, | | | | and financial worlds will also help sharing of data and |
| including India. For a new product market to develop, it | | | | information. These may seem as small glitches now, |
| is important that the enabling environment be one | | | | but can appear as roadblocks later on retarding the |
| which blends legal and regulatory openness and | | | | goal of integrating the latest digital technology with |
| certainty â openness will allow innovation to | | | | financial services. Discussion on evolving systems is |
| flourish while certainty will give confidence to | | | | important to keep abreast of technological and market |
| entrepreneurs to make investments. Thus the markets | | | | developments. |
| which develop fastest are those which are in | | | | Integration: Facilitate a variety of services that are |
| environments that are moving towards greater | | | | easy to integrate with all sectors of the economy. |
| openness and greater certainty. The most crucial issue | | | | In the digital transaction market, there is a significant |
| here is to ensure that the market remains open and | | | | coordination problem that arises due to the overlapping |
| competitive for entrepreneurs to take up new business | | | | role of multiple regulators of banking, telecom and |
| models. The key characteristics have been mentioned | | | | payment system supervisors, competition and |
| and discussed at various points in the preceding | | | | agencies involved in monitoring activities of money |
| sections. These are: | | | | laundering and fraud. The problem is compounded |
| 1. Ensure entry by ensuring a high degree of | | | | because of the dynamic nature of the industry and |
| inclusiveness in types of service providers, ensuring a | | | | continuously evolving technology. This means that the |
| level playing field, and also ensure that both large and | | | | regulators have to be flexible, be quick on the uptake |
| small players can enter the industry. | | | | to change when needed and deliver appropriate |
| Inclusiveness: Both banking and non-banking entities | | | | regulatory orders in a coordinated and consistent |
| should be encouraged to enter the industry. | | | | fashion. |
| The basic concerns of regulators in the financial | | | | 3. Ensure that the system can serve heterogeneous |
| sphere revolve around (i) maintaining financial stability, (ii) | | | | requirements |
| raising economic efficiency, (iii) increasing access to | | | | Inherent flexibility: A one size fit all approach that is |
| financial services, (iv) ensuring financial integrity, and (v) | | | | currently the practice in banking regulation needs to |
| ensuring consumer protection, and (vi) ensure rapid | | | | change to become more flexible and adapt to the |
| accessibility of such services for the masses with | | | | different needs of the consumers at the bottom of the |
| heterogeneous requirements. | | | | pyramid, who are a highly heterogeneous group. The |
| Given the focus of financial regulators to ensure | | | | terms âmassesâ and |
| financial stability, it is but natural for them to have a | | | | âunder-privilegedâ are a highly |
| bank focus. But, disruption to financial stability deals | | | | heterogeneous segment. They include self-employed |
| with systemically important payment systems, and not | | | | and unemployed, cultivators and land-less laborers, |
| retail payment systems, especially of micro-magnitude. | | | | literate and illiterate, nuclear households and joint |
| This distinctiveness of retail and micro-amounts should | | | | families, indeed the range is large. And so are the |
| be well understood to avoid stifling innovation that has | | | | requirements. |
| the potential to help the masses of the country. | | | | Conclusion: Financial inclusion is recognized as a goal |
| Consequently there is no need to limit this industry only | | | | by all policy makers as the economic growth and |
| to the banks. | | | | development story will remain incomplete without |
| According to the Bank of International Settlements, one | | | | participation by the poorest of the poor. Evolving |
| of the main objectives of payment regulation is to | | | | technology has changed the landscape of the financial |
| address those legal and regulatory barriers to market | | | | world as digital payments bring with them significant |
| development and innovation. It is for the RBI and other | | | | efficiencies. Further, with the fast adoption of mobile |
| regulators to work towards this end, so that the | | | | phones and spread of the networks, costs of making |
| potential of technology can be exploited to the full in | | | | transactions have been significantly reduced. |
| meeting the goal of financial inclusion. | | | | Experiences in other countries and modern technology |
| Level playing field: The close links between the | | | | shows that the future lies in involving non-bank |
| network service providers and the consumer should | | | | institutions as intermediaries. While vigilance is justified |
| not provide inordinate advantages to those companies | | | | when confronted with new, unfamiliar systems, stifling |
| at the cost of other players. For instance, currently the | | | | innovations and market developments through |
| mobile phone is considered the most potent tool of | | | | extreme caution will only retard the growth trajectory |
| financial inclusion. However the mobile industry is | | | | of the economy. The policy makers should therefore |
| characterized by only a handful of operators both in | | | | work towards providing an environment where all |
| India and abroad. Given the close links between the | | | | stakeholders can perform the functions they do best. |
| consumer and the mobile service provider and the | | | | An added problem in the digital payment space is that |
| tie-in of the consumer to the service provider, a | | | | the overlapping roles of multiple regulators leads to |
| monopolistic digital transaction industry would be a likely | | | | coordination failure and this should be well understood |
| outcome if a level playing field is not created. | | | | by all policy makers. The need of the hour therefore is |
| A digital-payment platform set up by the service | | | | to work with clarity and consistency and speed up the |
| provider should be open to other account holders | | | | process of moving towards greater openness and |
| within a specific agreed time period, and new entrants | | | | greater certainty in the digital payment sphere. |
| should be allowed to use existing payment | | | | |