Resilience in Digital Payments Landscape in India in The Backdrop of COVID-19 Pandemic
Author is a research scholar specializing in electronic payments, digital banking infrastructure, and financial technology regulation.
He may be reached at sudiptamajumdar523@gmail.com and eboard@icai.in.
1. Introduction and Objective of the Study
Digital India Program, Jan Dhan Yojna, Demonetization and other government initiatives have propelled the growth trajectory for digital payments and also paved way for some innovative payment modes like United Payments Interface, Bharat Interface for Money and so on. The digital payments market is expected to experience CAGR of around 21.74 per cent during the FY 2020 -FY 2024 period (E-payment Solutions Market in India 2020 (Part-I), Netscribes, January 2020). But the market has witnessed a sharp decline of around 30 per cent due to COVID-19 pandemic involving lockdown and decline in economic activities. After relaxing lockdown, such journey towards “Less-cash” has observed rapid growth.
The department of Payment and Settlement Systems (DPSS), Reserve Bank of India (RBI) has undertaken various initiatives to ensure safety, efficiency, innovation, competition, customer protection and financial inclusion in payment landscape focusing more on digital penetration through greater infrastructure and innovation in payment options. RBI also campaigns for spreading awareness on digital payments and ensure redressal of customer grievance in a timebound manner.
“To bring the excluded section of the society and gain the trust of public on digital payment, RBI has facilitated digital payment from feature phone without internet connectivity, introduced Data Protection Bill, 2021 to ensure privacy of sensitive data and also made Interoperability of multiple apps to reduce complexity and boost digital payments.”
In this backdrop, the paper has attempted to analyse:
- Trends of digital payment statistics for FY 2018-19 to FY 2020-21;
- Digital payment from feature phone without internet connectivity in the backdrop of Data Protection Bill, 2021 and Interoperability;
- Impact of COVID-19 on payment categories with possible reasons; and
- RBI’s agenda to strengthen digital banking including FinTech-related activities.
2. Trends of Digital Payment Statistics in India
The nationwide lockdown triggered an initial contraction in digital payments, which subsequently experienced a V-shaped recovery with gradual relaxations. Table 1 details the volume and value trajectory across settlement systems, large-value transfers, retail credit transfers, debits, cards, PPIs, and paper instruments.
| Table 1: Digital Payment Statistics (Volume in Lakh; Value in ₹ Crore) | ||||||
|---|---|---|---|---|---|---|
| Payment Segment / Mode | FY 2018-19 | FY 2019-20 | FY 2020-21 | |||
| Volume | Value | Volume | Value | Volume | Value | |
| A. Settlement Systems | ||||||
| CCIL Operated Systems | 36 | 116551038 | 36 | 134150192 | 28 | 161943141 |
| B. Payment Systems | ||||||
| 1. Large Value Credit Transfers - RTGS | 1366 | 135688187 | 1507 | 131156475 | 1592 | 105599849 |
| Retail Segment | ||||||
| 2. Credit Transfers | 118481 | 26090471 | 206506 | 28562857 | 317852 | 33522150 |
| 2.1 AePS (Fund Transfers) | 11 | 501 | 10 | 469 | 11 | 623 |
| 2.2 APBS | 14949 | 86226 | 16766 | 99179 | 14373 | 112747 |
| 2.3 ECS Cr | 54 | 13235 | 18 | 5145 | - | - |
| 2.4 IMPS | 17529 | 1590257 | 25792 | 2337541 | 32783 | 2941500 |
| 2.5 NACH Cr | 8834 | 729673 | 11290 | 1043212 | 16450 | 1232714 |
| 2.6 NEFT | 23189 | 22793608 | 27445 | 22945580 | 30928 | 25130910 |
| 2.7 UPI | 53915 | 876971 | 125186 | 2131730 | 223307 | 4103658 |
| 3. Debit Transfers and Direct Debits | 4913 | 524556 | 7525 | 719708 | 10441 | 872399 |
| 3.1 BHIM Aadhaar Pay | 68 | 815 | 91 | 1303 | 161 | 2580 |
| 3.2 ECS Dr | 9 | 1260 | 1 | 39 | - | - |
| 3.3 NACH Dr | 4830 | 522461 | 7340 | 718166 | 9630 | 868906 |
| 3.4 NETC (linked to bank account) | 6 | 20 | 93 | 200 | 650 | 913 |
| 4. Card Payments | 61769 | 1196888 | 72384 | 1434813 | 57787 | 1291799 |
| 4.1 Credit Cards | 17626 | 603413 | 21773 | 730894 | 17641 | 630414 |
| 4.2 Debit Cards | 44143 | 593475 | 50611 | 703920 | 40146 | 661385 |
| 5. Prepaid Payment Instruments (PPIs) | 46072 | 213323 | 53318 | 215558 | 49392 | 197695 |
| 6. Paper-based Instruments | 11238 | 8246065 | 10414 | 7824822 | 6704 | 5627189 |
| Total - Retail Payments (2+3+4+5+6) | 242473 | 36271303 | 350147 | 38757759 | 442229 | 41512514 |
| Total Payments (1+2+3+4+5+6) | 243839 | 171959490 | 351654 | 169914234 | 443821 | 147112363 |
| Total Digital Payments (1+2+3+4+5) | 232601 | 163713425 | 341240 | 162089413 | 437118 | 141485173 |
Source: RBI (2021)
2.1 Macroeconomic Trends & Channel Dynamics
The effect of nationwide lockdown due to COVID-19 was initially prominent through decline in payments, but both the value and volume of payments subsequently improved with gradual relaxations in lockdown. During FY 2020-21, although the total payment experienced a robust growth (26.2%) in terms volume, but contractionary trend (-13.4% as against -1.2% in FY 2019-20) has been found in terms of value, due to declining trends in the value of Real Time Gross Settlement (RTGS), the large payment system and in transactions of paper-based instruments.
So far as digital or electronic payments modes are concerned, the declining tends of RTGS value (-19.5%, although 5.7% increase in volume) can largely be attributed to dampened economic activity caused by large reduction in corporate transactions on account of slowdown in economic activities due to COVID-19 pandemic, while the digital transactions in the non-cash retail payments (in volume) constitute 98.5% during 2020-21 as against 97% in FY 2019-20.
Transactions by National Electronic Funds Transfer (NEFT) system increased by 12.7% while transactions through Debit Card, Credit Card and Prepaid Payment Instruments (PPIs) have declined by 19%, 20.6% and 7.4% respectively. By the end of 2020-21, RTGS and NEFT facility was available in 175947 branches of 227 banks and 175283 branches of 225 banks respectively. In addition, ATM facility has also increased marginally from 2.34 lakh (in FY 2019-20) to 2.38 lakh at the end of FY 2020-21.
3. Digital Payment from Feature Phone & Data Protection Bill 2021
In order to bring the section of the society who are excluded from experiencing digital payment facility under the main umbrella, RBI along with the National Payment Corporation of India (NPCI) introduced two landmark initiatives on 9th March, 2022:
- (a) UPI 123Pay: Allows feature phones without internet connectivity to use UPI to facilitate payments;
- (b) DigiSaathi: A 24-7 helpline addressing the customers’ query on digital payments in two languages: Hindi and English.
Such initiatives will ensure the trust of customers and reliability of digital payments leading a step ahead towards cashless economy and financial inclusion.
Data Protection Bill 2021 will ensure the reliability of digital payment options, promote the growth and innovation of the digital economy and also protect the privacy of the personal data of citizens.
- Clause 1 (Implementation Horizon): Provides a timeline of approximately 24 months for implementation of the provision(s) of the Act in the concerned policies, infrastructures and processes.
- Clause 2 (Broadened Definition of Data): Broadens the scope of “data” by incorporating non-personal data under the same umbrella.
- Clause 34 (Cross-Border Data Restrictions): Prevents cross-border sharing of data without prior approval from the government.
- Clause 35 (Government Exemptions): Exempts the government agencies from the provisions of the law.
Despite having several drawbacks, the bill will strengthen India in the domain of data protection and privacy and due compliance with the provisions by the companies.
4. Role of Interoperability of Multiple Apps in Reducing Complexity
“Payment through UPI is expected to be convenient that will facilitate interoperability and lead to better adoption. Interoperability facilitates fund transfer between the wallets of the companies, individual bank accounts, etc.”
Payment through UPI is expected to be convenient that will facilitate interoperability and lead to better adoption. Interoperability facilitates fund transfer between the wallets of the companies, individual bank accounts, etc. RBI has made it mandatory on payment acceptance side along with QR codes in all payment modes w.e.f. 31st March, 2022. This facilitates fund transfer from one digital mobile wallet to another.
RBI also advised such digital wallets companies (officially known as Prepaid payment instruments) to implement a formal and publicly disclosed customer cell for redressal of their grievances in a time-bound manner.
5. Impact of COVID-19 on Payment Categories
The nation-wide lockdown caused by the COVID-19 pandemic has raised significant uncertainty in payment decision making of consumers with respect to the quantum and timing of spending. In addition, several sectors like E-commerce, Online Education, Online payment of Utility bills have experienced in a positive way, while Travel & Tourism, Hospitality, Hotels & Restaurants, Jewellery have faced negative impact as result of pandemic. In this backdrop, various payment modes have responded differently. Such responses are summarised in Table 2 along with probable reasons behind.
| Table 2: Impact of COVID-19 on Payment Categories | |||
|---|---|---|---|
| Payment Category | Payment Mode | Relative Impact | Possible Reasons |
| Issuance | Cards | Favourable | Surge in cards usage due to increased online transactions, health and safety concern. |
| Wallets | Favourable | Surge in the transaction volume (mainly P2P transfers and P2M payments) and users due to online payment, safety mode of payment and significant shift in consumer behaviour and habits owing to lockdown and restrictions. | |
| Bank Accounts | Favourable | Cash gets substituted with Digital transfers and more fund transfers. | |
| Acquiring | ATM | Moderate | ATM Transactions decrease due to fear of virus transmission through exchange of currency notes. |
| Point of Sale (PoS) | Adverse | Increase in stores dealing essential items, but major decline at other stores due to restricted access. | |
| Payment gateways | Favourable | Surge in online transactions and tie up with small stores selling essentials lead to increased usage of Payment gateways. | |
| Payment Infrastructure | UPI | Favourable | Massive increase in UPI transactions (driven by P2P and P2M payment transactions) including QR based payments due to less usage of cash and fear of virus transmission. |
| IMPS | Favourable | Increased transactions through IMPS due to shift to digital. | |
| BBPS | Favourable | Relatively high volume of transactions with more adoption rate without any physical connection. | |
| NETC | Adverse | Restrictions in travelling lead to decline in tourism and travel sector, adversely impact toll usage and subsequently NETC. | |
Source: Compiled by the Author (2022)
6. RBI’s Agenda and FinTech Activities to Strengthen Digital Banking
RBI has undertaken the following agendas under ‘Payment and Settlement Systems in India: Vision 2019-2021’ in FY 2020-21 and FY 2021-22 to boost digital payment eco-system by promoting financial innovation leveraging on technology to achieve operational excellence through better security, reliability, cost efficiency, resilience, and integrity.
| Table 3: RBI’s Strategic Agenda (Vision 2019-2021) | |
|---|---|
| Agenda for FY 2020-21 | Agenda for FY 2021-22 |
| A. Encouraging Healthy Competition | |
| Conducting Offline Payment Systems using mobile phone, cards or wallets to encourage digital payments and technological innovations. | Developing a Settlement Risk Management Framework to ensure more participation of non-bank organisations; Membership to Centralised Payment Systems is reviewed. |
| B. Improving Customer Convenience | |
| Implementing Online Dispute Resolution (ODR) system, for technologically resolving customer grievances and disputes. | Implementing Offline Payment Solutions in the country based on pilot project experience. |
| Self-Regulatory Organisation (SRO) to set and enforce rules and standards on the conduct of member entities in the industry, to protect the customer and promoting ethical and professional standards. | National Settlement Services for Card Schemes to explore the possibility of facilitating settlement of card transactions processed by various card payment networks. |
| Operationalising Pan-India Cheque Truncation System (CTS) and participation of all bank branches in image-based CTS to leverage the availability of CTS and provide uniform customer experience irrespective of bank branch location. | Augmentation and Modernisation of Infrastructure Security Layer by implementing secure remote access capability to access RBI’s applications from outside of office premises through multifactor and endpoint authentication. |
| C. Ensuring Affordable Cost | |
| Legal Entity Identifier (LEI) to facilitate unique identification of the parties involved in financial transactions worldwide, improving quality, accuracy and better risk management. | Review of Corridors and Charges for Inbound Cross-Border Remittances to examine the role of the payment services providers (PSPs) to ensure friction free remittances at lower cost. |
| D. Increasing Confidence | |
| In order to understand the present position of digitisation of payments in the country, Digital Payments Index (DPI) has been created and published. | Geo-tagging of Payment System Touch Points to capture the location and business details of commercial bank branches, ATMs and business correspondents. |
| Positive Pay System for Cheque Truncation System (CTS) to reduce instances of cheque related frauds by ensuring customer safety in cheque payments. | Third Party Risk Management and System-wide Security for examining the need to have distinct regulation dedicated for outsourcing arrangements service rendered by non-bank organisations. |
Source: Compiled by the Author (2022)
6.1 RBI’s FinTech-Related Activities
a. Reserve Bank Innovation Hub (RBIH)
This is set up for promoting innovation across financial sector with advanced technology and creating an eco-system facilitating idea generation, development and innovation through collaboration.
b. Regulatory Sandbox (RS) Cohorts
This is to foster retail payments, cross-border payments, MSME lending and to strengthen the fraud governance minimising the time-lag between the occurrence and detection of frauds.
c. RegTech Solutions for Effective and Focused Regulations
RBI is in cooperation agreement (CoA) with International Finance Corporation (IFC) to get knowledge or advisory related support on RegTech or SupTech from IFC. Also, RBI joined the Global Financial Innovation Network (GFIN), a network of over 50 organisations committed to support financial innovation to enhance the FinTech related activities in the countries.
d. Inter - Regulatory Technical Group on FinTech (IRTG on FinTech)
This has been constituted for coordination among financial sector regulators (like SEBI, IRDAI, IFSCA and PFRDA) and information sharing among members on innovation initiatives. During first meeting in March, 2021, members agreed on the above issues and suggested models on Inter-Operable RS mechanism for hybrid products/services to facilitate framing of standard operating procedure (SOP).
7. Conclusive Opinion and Scope for Further Research
COVID-19 pandemic has compelled businesses and individuals to reconsider their payment framework to include digital payment in lieu of physical cash transaction. Although, initially the pandemic affected the growth of digital payments, it, subsequently, displayed resilience and bounced back. For example, AePS mechanism has found unprecedented growth post lockdown.
“Amidst difficulties caused by COVID-19, RBI continues its efforts to ensure adequate data privacy, safety and smooth functioning while enhancing the digital payment experience.”
While the banking regulator has also undertaken several agenda and initiatives to enhance IT infrastructure contributing to efficiency, strengthening payment ecosystem and its data privacy, and enhancing awareness across the country, there are some sort of negative concerns for the payment gateways due to frequent changes in compliance procedure and stringent guidelines and implementing fees on transactions. These may directly hamper the profitability of payment gateways and customer base through shifting to card payments and direct banking.
In this backdrop, the banks and other agencies involved in payment activities should invest in data analytics and artificial intelligence for bringing efficiency in policy formulation, data privacy, improving profitability and customer base, and largely on detection and prevention of frauds. The study could have been further improved by analysing the payment statistics for FY 2021-22 and concerned policies of RBI to further strengthen the digital banking system in India, but not due to non-availability of necessary data.
References & Web-Links
Official Publications:
- RBI. (2021). “Payment and Settlement Systems and Information Technology”.
Web-Links (Lastly Visited on 06-05-2022):
- https://iapp.org/news/a/a-look-at-proposed-changes-to-indias-personal-data-protection-bill/
- https://www.livemint.com/money/personal-finance/upi-set-to-be-more-convenient-facilitate-more-interoperability/amp-11596987965418.html
- https://inc42.com/buzz/wallet-interoperability-to-be-enabled-via-upi-rbi/
- https://thepaypers.com/online-payments/rbi-launches-upi-for-feature-phones-and-digital-payments-helpline--1255192
- https://m.economictimes.com/wealth/save/rbi-launches-upi123pay-how-to-use-upi123pay-in-feature-phones/articleshow/90072479.cms