By - Siddartha Karnani on August 8, 2022
In the last five years, India has experienced a substantial increase in the number of digital payments, making it one of the biggest markets for e-payments. According to a report, digital payments in India are set to rise in value from USD 3 trillion to USD 10 trillion by 2026, by which time, it is estimated that 2 out of every 3 payment transactions will be digital (non-cash) [1].
The Reserve Bank of India (RBI) has released a report titled ‘Payments Vision 2025’ to further this agenda and to give every user secure, accessible, and inexpensive choices of e-payment.
The main theme of the report emphasises making digital payments possible for everyone, everywhere and at all times. The Payments Vision 2025 puts forth four pillars centred around competition, cost, convenience, and confidence with 36 specific action items and 12 expected outcomes to empower every Indian with access to various e-payment solutions.
Specifically regarding the growth of digital payments, the document notes: “Total digital payments have increased by 216% and 10% in terms of volume and value, respectively, for March 2022 when compared to March 2019. On the other hand, usage of paper instruments has come down significantly during the same period, with its share in total retail payments registering a decline from 3.83% to 0.88% in terms of volume and from 19.62% to 11.47% in terms of value.
Of digital payment services, UPI, IMPS and PPI transactions registered a compound annual growth rate (CAGR) of 104%, 39% and 13% respectively during the vision period. However, debit card transactions at PoS decreased by CAGR of 3.7%, mainly due to the lockdown restrictions imposed during the pandemic...” [2].
The document also suggests revising the rules for prepaid payment instruments (PPIs), including closed system PPIs, permitting changes in digital payment infrastructure, transactions and geo-tagging. It also suggests a framework for connecting all-important payment ecosystem intermediaries, connected credit cards and credit-related banking products to UPI.
The major highlights of the document are listed below.
In the report, RBI has stated that it will assess the feasibility of settling payments in foreign currencies through Indian payment systems via various bilateral and multilateral agreements with different countries. Additionally, RBI must assess whether central banks from other nations might open INR accounts with the RBI and send payments via the Centralized Payment System (CPS). Similarly, it is to be analysed if the RBI may open accounts with other central banks. This step will directly increase the global outreach of Indian payment systems such as NEFT, RTGS, UPI, and RuPay cards.
Amidst this discussion, several Asian economies – including India, Indonesia, the UAE, Sri Lanka and Myanmar – are negotiating methods on how to settle trade in their national currencies [3]. RBIs' introduction of a different system of payments and settlements of export and import bills in domestic currencies is a possible path forward in this discussion. It might reduce Asian reliance on US dollar transactions which have been unfavourable to Asian economies as of late, primarily due to the Russia-Ukraine conflict and the sanctions and curbs imposed on Moscow by western countries. The Society for Worldwide Interbank Financial Telecommunications (SWIFT) also expelled many Russian banks. The financial blowback from such western-centric world events has been challenging to navigate.
CBDC is a new and growing trend of government-legitimised cyber currency; the fiat money of a nation is represented digitally as a central bank digital currency (CBDC). It is issued and governed by a country's central bank, which in India’s case is RBI. CBDCs are an attempt to encourage financial inclusion and facilitate the execution of national fiscal objectives [4].
The RBI plans to foster additional levels of effectiveness in payment processing agreements on the presentation of CBDC across domestic and cross-border levels.
CBDC is being implemented in India during the current fiscal year in phases, according to the most recent Union Budget. State-issued cryptocurrency is to be eased out in staggered phases gradually (as indicated by the governor of the RBI) to ensure compliance with India's monetary policies and financial ecosystem. Additionally, the RBI published a consultation document outlining the ideology behind the introduction of CBDC. As one of its main points of focus during India's G20 presidency, the RBI might concentrate on connecting the CBDC of various nations.
The document has put forth several points concerning diverse domains such as competition, local payments, global reach, policy framework, etc. Key points that the document proposes addressing are [5]:
To create a safer, more secure, and seamless payment infrastructure, RBIs' Payments Vision 2025 attempts to provide a cohesive visualisation of how the Indian payment ecosystem is being shaped over the coming years. RBI has democratized payments in India by implementing programs like UPI and paving the way for Indian payment systems to have worldwide reach.
This document will serve as a set of benchmark guidelines for the fintech sector, stakeholders, and payment industry actors, encouraging them to improve their service offerings by coordinating with RBIs' overarching goals. It is not a hidden fact that private entities in the market are greatly influencing ecosystems worldwide. The document acknowledges this and the higher prevalence of private companies in people's lives and that promoting trade across all population classes is crucial as India continues to evolve.
Contributed by Siddartha Karnani, Partner
