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Committee on Digital Payments December 2016

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Committee on Digital Payments December 2016 Committee on Digital Payments Medium Term Recommendations to Strengthen Digital Payments Ecosystem Report December 2016 Constituted by MINISTRY OF FINANCE, GOVERNMENT OF INDIA This page has been intentionally left blank. page 2 This page has been intentionally left blank. page 3 This page has been intentionally left blank. page 4 Committee to review the framework related to Digital Payments New Delhi 09 December 2016 Shri Arun Jaitley Finance Minister Government of India New Delhi 110001 Dear Finance Minister, The Committee to review the framework related to Digital Payments presents its Report to the Government of India. The recommendations aim to strengthen the ecosystem to promote digital payments with a focus on reaching financially and socially excluded groups. Yours sincerely This page has been intentionally left blank. page 6 Contents 1. Acknowledgement 11 Acronyms . 14 2. Executive Summary 19 3. Why Digital? 27 3.1. High Cost of Cash . 29 3.2. Emergence of Technology Led Payments Solutions . 31 3.3. Fostering Economic Growth, Social Inclusion and International e-Commerce . 32 3.4. Recent Reforms and Policy Recommendations . 33 4. Role of State 35 4.0.1. Market failure . 35 4.0.1.1. Market failures and payments systems . 36 4.0.2. State intervention to address market failure . 38 5. Vision 41 6. Policy Analysis 43 6.1. Competition and Innovation . 43 6.1.1. Introduction . 43 6.1.1.1. Overview of the Payments Ecosystem . 44 6.1.2. Domestic scenario . 45 6.1.2.1. Payments Ecosystem in India . 45 6.1.2.2. Policy Backdrop . 46 6.1.2.3. Changing Nature of the Payments Industry . 49 6.1.2.4. Legal Framework . 52 6.1.3. Global best practices and emerging direction . 54 6.1.4. Options before the Committee . 62 6.1.4.1. Analysis of Key Issues . 62 6.1.4.2. Options for Consideration . 82 6.2. Safety and Resilience . 88 6.2.1. Introduction . 88 6.2.1.1. Oversight of payment and settlement systems . 88 6.2.1.2. Consumer protection for users . 89 7 6.2.2. Domestic scenario . 90 6.2.2.1. Oversight of Payment and settlement systems 91 6.2.2.2. Consumer Protection for users . 93 6.2.3. Global best practices and emerging direction . 96 6.2.3.1. Oversight of payment and settlement systems . 96 6.2.3.2. Consumer Protection for users . 102 6.2.4. Options before the Committee . 105 6.2.4.1. Oversight of the payment and settlement systems106 6.2.4.2. Consumer protection for users . 109 6.3. Access, Adoption and Usage . 111 6.3.1. Introduction . 111 6.3.2. Domestic scenario . 112 6.3.2.1. The current status of payments in India . 112 6.3.2.2. Issues in the existing framework . 115 6.3.3. Global best practices and emerging direction . 118 6.3.4. Options before the Committee . 122 7. Recommendations 153 7.1. Measures involving changes to primary legislation . 153 7.2. Measures involving regulatory changes or executive decisions . 158 7.3. Drafting instructions: Payments and Settlement Systems Act . 170 7.4. Timelines for Implementation of Recommendations . 176 Annexures 179 A. Government order establishing the Committee 179 Acronyms . 187 List of Tables 4.1. Ranking of models . 38 6.1. Major Payment Systems - Operations and Membership . 46 6.2. National Payments Corporation of India (NPCI) Shareholding Pattern as on 22 January 2016 . 70 6.3. Growth in Card Issuance* . 113 6.4. Debit Card Usage* . 113 6.5. Credit card usage* . 114 6.6. No. of Cards, ATMs and PoS terminals per million of population*114 6.7. ATMs/PoS terminals per million population* . 115 6.8. Growth in Card Acceptance Infrastructure* . 115 6.9. Traditional and Non-Traditional Data . 143 6.10. Breakup of acquirer gross margins* . 145 6.11. Illustration for service tax payable on the card transaction . 150 7.1. Implementation Roadmap . 176 9 List of Figures 3.1. Hierarchy of Demand of Financial Products (Source: Payments Council of India) . 28 6.1. Payments Ecosystem . 44 6.2. Payments Regulation in Australia . 55 6.3. Options for Institutional Arrangement . 85 10 1.Acknowledgement The remit of the Committee was comprehensive and included suggesting leg- islative as well as regulatory changes with a view to promote digital payments over medium term (See: Government order establishing the Committee on Page 180). The task at hand was equally challenging. The business models around digital payments are yet to clearly emerge. Should State encourage pricing models to develop for payments or mandate/ encourage it to be a free utility? What should be done to enable the common man to access, adopt and use digital payments in a meaningful manner? How can the pace of growth of digital payments be accelerated? What should be the role of State in enabling that vision? The answers to these questions can change as fast as changes in technologies. In this backdrop, the Committee approached the mandate based on sound economic principles. It greatly benefited from the fact that all the major stakeholders were members of the Committee. These comprised of H.R. Khan, former Deputy Governor, Reserve Bank of India (RBI); Chandan Sinha, Executive Director, RBI; Neeraj Kumar Gupta, Secretary, Department of Investment and Public Asset Management (DIPAM); R. Chandrashekhar, President, National Association of Software and Services Companies (NASSCOM); A.B. Pandey, CEO, Unique Identification Authority of India (UIDAI); Ashwini Kumar and later Rajeev Rishi as Chairman, Indian Banks Association (IBA); Rani Singh Nair and later Sushil Chandra as Chairman, Central Board of Direct Taxation (CBDT); Naveen Surya, President, Payments Council of India (PCI); Subho Ray, President, Internet and Mobile Association of India (IAMAI); and Dr. Saurabh Garg, Joint Secretary, Department of Economic Affairs (DEA). The Committee also benefited from inputs from NPCI which graciously offered to participate in the meeting of the Committee. Input from NPCI was provided by A.P. Hota, Chairman; Dilip Abse, COO and S.K. Gupta, Chief Project Officer. Various experts gave their valuable insights and submissions which translated into rich input for the Committee. Some of the important discussions which benefited the Committee came from B.N. Satpathy, Deepika Shrivasatava, Ajay 11 Kaushal, Nanda Sameer Dave, Udai Mehta, Amol Kulkarni, David Katz, Sanjay Jain, Mathew Homer, Badal Malick, Rohit Kumar, Varad Pande, Arun Sharma, Anu Tiwari, Vipul Jain, Rajesh Bhoot, Ravi Agarwal, Harshala Chandorkar, Susan Thomas, Chetna Batra and Ashish Gupta. The Committee received may useful submissions from various stakeholders. These are acknowledged separately in the Annexures. It is possible that some names might not have figured in the list above as Committee members have individually benefited from many consultations. The Committee met five times during its three month tenure. In addition, it held three meetings involving consultations involving industry and government agencies. It invited written submissions from a wider audience from Niti Aayog's website. The Committee's research secretariat independently met and interacted with a variety of stakeholders including banks, non bank Payment Service Providers (PSPs), card schemes, regulator, payment system operators, Aadhaar, web aggregators and Fintech companies. It interacted with firms who were globally active in payments but were sitting on the fence on their Indian business. It interacted with academics and think tanks. The Committee studied the domestic scenario and drew on the best practices in the developed world in understanding the trajectory of development in payments industry and various interventions undertaken to promote digital payments. The task of putting together the key issues, researching the problems, suggesting policy options, developing the rationale for the final recommendation would not have been possible without the efforts of the members of the Committee and all those who enriched the discussion. The Committee was ably supported by the research work of the Macro Finance Policy team at National Institute of Public Finance and Policy (NIPFP) comprising Ashish Aggarwal, Pratik Datta, Indrajeet Sircar and Aditya Singh Rajput. I appreciate and acknowledge their contribution to this report. 09 December 2016 New Delhi Ratan P. Watal page 12 This page has been intentionally left blank. page 13 Acronyms ACCC Australian Competition and Consumer Commis- sion AD Authorised Dealer AEPS Aadhaar Enabled Payment System AISP Account Information Service Provider APC Australian Payments Council APCA Australian Payments Clearing Association API Application Programming Interface APRA Australian Prudential Regulation Authority APTEL Appellate Authority for Electricity ASBA Applications Supported by Blocked Amount ASIC Australian Securities & Investments Commis- sion ASPSP Account Servicing Payment Services Provider ATM Automated Teller Machine BoC Bank of Canada BoE Bank of England BPSS Board for Regulation and Supervision of Pay- ment and Settlement Systems BSE Bombay Stock Exchange CASA Current Account, Savings Account CAT Competition Appellate Tribunal CBDT Central Board of Direct Taxation CBEC Central Board of Excise and Customs CEA Central Electricity Authority CIC Credit Information Company CKYCR Central KYC Registry CMA Competition and Market Authority COMPAT Competition Appellate Tribunal CPA Canadian Payment Association CPIC Critical Payment Infrastructure Company CPMI Committee on Payments and Market Infrastruc- ture CPSS Committee on Payment and Settlement Systems Cr Crore Acronyms page 14 DCB Direct Carrier Billing DEA Department of Economic Affairs DGS&D Directorate General of Supplies and
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