High compliance costs can trip digital payments

The draft of the Payment and Settlement System Bill (2018) has already attracted its share of controversy as evidenced by the differences over the composition of the ‘Payments Regulatory Board’ (PRB) and ‘Supervision Authority of Payment Systems’, both of which are currently under the control of the Reserve Bank of India (RBI). The solution to this lies in on-boarding the right people who understand payment systems and can take a completely unbiased view in favour of this industry’s growth and consumer benefits therein, without bias towards any specific type of player or segment. While it may take time to come to a workable solution between the Centre and the RBI on this issue, it is heartening to see that all key stakeholders seem to have come to a consensus over the remaining parts of the Bill. 
 
I would like to specifically highlight the parts of the Bill, which, if implemented, urgently can drive the digital payments industry to registering three-digit growth.
 
The Bill explicitly recognises the risk-based regulatory framework to have proportionate regulation based on systemically important payment systems, classification of designated payment systems, infrastructure payment systems and others where transactions below Rs 2,000 lay the foundation for a risk-proportionate regulatory framework. For example, our current commercial laws allow all transactions below Rs 50,000 to be done in cash without KYC. Similarly, compliance related to Anti-Money Laundering and other risks relating to terrorism financing are monitored if higher than a ticket-size of  Rs 200,000 in the aggregate. However, in most cases, the requirements are to be complied with even for lower transaction values that increases the cost of compliance and makes cash transactions  easier and more convenient as compared to digital payments.

Illustration: Binay Sinha

 
While the issue of composition of the PRB remains open for debate, the proposal to have full-time members, and payment and central bank experts, is a welcome one. Given that digital payments is a highly dynamic subject, it needs full-time attention from the top. Specifying clear objectives for the PRB in the form of consumer protection, systemic stability and resilience, competition and innovation is positive too;  so too stating key principles to achieve these like inter-operability, access and ownership neutral system. Principles like inter-operability ensures that all consumers using various digital payments can get maximum liquidity and usage of their payment options across the merchant eco-system akin to debit and credit cards. Currently some of these access options like inter-operability are available only to banks leaving unbanked or under-banked consumers with inferior payment products and options.
 
Identification of payment players as ‘transmitters of money’, which is more technical in nature than a balance sheet or asset-liability management related work, is very important. Rules related to making sure consumers’ funds are protected and kept secure is a very important continuity to the earlier Act. The existing Act provides for 100 per cent escrow of all consumer funds by all payment service providers and similar protection is appreciated going forward as well.
 
The high importance and provision for a regulatory sandbox to drive innovation and clearly laying that innovative ideas that may not be allowed under current regulation can be tried in such an environment is a very welcome and bold suggestion. These will go forward a long way to meet the needs of payments and fintech entities to test new ideas and new products.
 
An independent grievance and appellate body mechanism for payment players is very critical. This principle is very critical and much needed. As to which body is the right one – the Securities Appellate Tribunal or a new one with appropriate expertise in payment need to be further discussed.