The Reserve Bank of India’s recent discussion paper on charges for payment services as well as the latest caution against rushing headlong into privatisation of public sector bank, contained in the latest edition of the RBI Bulletin, reveal a doddering hesitancy over exploring fast expanding technological possibilities. This must change.
A question the RBI poses in the discussion paper on payments is whether users should be charged for fund transfer services such as RBI-run Real Time Gross Settlement (RTGS), the National Electronic Funds Transfer (NEFT) mechanisms, and the Immediate Payment Service (IMPS) operated by the National Payments Corporation of India (NPCI), and for merchant payment services such as cards and Unified Payment Interface (UPI). The straightforward answer is no, do not charge either those who transfer the funds or those who receive the funds anything for the service. But the more relevant question is: why continue with RTGS and NEFT, when IMPS can do the job instantaneously?
There are broadly two kinds of payment services: person-to-person transfer of funds, and merchant payment services. The essential difference is that in the merchant payment services, apart from the banks in which the payer and the payee hold accounts and the payment service providers, additional layers of intermediation can come in. This could be such as card networks, payment aggregators, payment gateways, as well as additional payment layers, such as surcharge or a convenience fee.
Huge Savings
Electronic payments have the great advantage of minimising the use of cash. When electronic payments grow large enough to seriously dent the use of cash, banks and the RBI make huge savings. The RBI has to print, manage, and destroy currency in huge quantities, and that entails a significant cost. Banks have to ferry truckloads of cash under high security to its vaults from the RBI, from its vaults to ATMs across the land, to and from branches. People have to be employed to receive and pay out cash, to count the money and keep ledgers. When cash moves electronically, accounts are kept automatically, and there is no need to physically transport currency or count notes. The saving is huge.
Payment by cheque is also tedious. Cheques have to be cleared. In these days of cheque truncation, scanned images of cheques are sent for clearing, rather than the physical cheques themselves, but the process still takes time, and money. Electronic transfers do away with all this. Then, there is the problem of bounced cheques, which infects the courts, and the legal system as well.
The government is another big beneficiary of digital payments. Electronic transfers make for transparency, and make tax evasion more difficult. Hence, tax collections improve.
It is simple logic that the banks, the RBI and the government should together foot the cost of electronic transfer of funds, and spare those making or receiving payments any of the cost.
Everyone’s Compensated
Payment by cards entails multiple agents. The payer’s bank has issued the payer their card. Funds move from that cardholder’s account to the payee’s account maintained with the card acquiring bank — the bank that deploys the card swipe machines at the merchant premises. A card network — MasterCard, Visa, Rupay, Amex — connects the card issuing bank with the card acquiring bank, and takes a sliver of charge for the service. The card issuing bank, the card acquiring bank, and the card network all need to be compensated for their effort.
If the payment is through UPI, the NPCI should be compensated. Additionally, the third party app providers, who spend a lot of time and effort to onboard merchants and provide QR codes that payers can scan and pay, should also be paid. Payment gateways that merchants can plug into their websites are another set of players who need to be paid.
All participants in the payment ecosystem should be compensated for their contribution to the payment process. Many of them receive their payment directly from the merchant. That can stay intact. The payment system provider should be the one to receive funds from the RBI/bank designated by the RBI. They should retain their share, and pass on the rest to merchants/other payment ecosystem participants. The payment can be determined for each category of player in the payment ecosystem, by inviting bids from would-be participants.
Credit card issuing banks might want to be compensated for the credit risk they take on, when they offer their cardholders up to 30 days of free credit. This expectation should be dismissed. A credit card is an invitation to make deferred payments, taking credit from the card issuing bank, which charges a rate of interest much higher than on normal loans for the credit provided on the card. These days, credit card issuing banks enter into deals with brands that want to offer discounts on their products disguised as interest-free, buy now-pay later offerings, in which those who provide the financing get the amount of the interest that the consumer is spared. In other words, banks that offer credit cards should treat the credit risk and the cost of 30-day credit they bear on card payments as marketing cost for a growing deferred payment business, and not expect to be compensated by the merchant or the payment service providers.
A Different Structure For Bank Accounts
While this much is straightforward enough, the question as to why persist with a pure fund transfer mechanism other than IMPS entails some less obvious detail.
The RTGS is real-time settlement of large payments. Both NEFT and IMPS do not do real-time settlement. They carry out deferred net settlement, payments are done between banks, for the net amount payable after deducting the payment receivable from the bank concerned. The bank then allocates the funds among its accounts later.
Why should this be the case? Can we think of a different structure for bank accounts, on the lines of demat accounts or pension accounts with the National Pension System? In the NPS, every subscriber has a primary account and, if they choose, a second tier account. The subscriber can choose their asset manager form among half a dozen on offer, who would manage the funds in the subscriber’s account(s), as per their risk preference.
The NSDL maintains the NPS accounts. The subscriber can choose which AMC should access their account, take money out of it for investment, generate returns, and credit it back to the account. Why should all bank accounts not be like these NPS accounts? Banking accounts can be provided by a common accounts provider or two, to offer some competition in the account providing business. One or more accounts can belong to an account-holder, who can decide which bank/banks should assume fiduciary responsibility for the deposits in those accounts. When funds are transferred, it should be from one account to another, not from one bank to another bank. Settlement would be real-time, and minus any settlement risk. The current IMPS switch should be able to perform the task, seamlessly, for any volume.
Does this entail any risk to the bank that assumes fiduciary responsibility for the account? Since electronic transfers carry an audit trail, this should not be a problem. It is not as if, under deferred net settlement, a bank would stop an inward remittance to an account.
Banks would, of course, be free to deploy software to manage the accounts entrusted to them by depositors, offer any scheme to attract depositors, and open new accounts for new account holders.
Banks have to bear in mind that they will have to compete with the superior time, cost and transparency efficiency of blockchain transactions, as and when the RBI comes out with its central bank digital currency.