Demonetization triggers a tsunami of digital payment initiatives. There are tidal waves of launches and promotions for payment applications, Aadhaar based identification with finger print authentications, interfaces to bank accounts, and user incentive programs. This is positive news for 37 per cent of the population, who bank actively. But how about the remaining 63 per cent or those who do not want their bank accounts to be disturbed by every transaction?
The government, banks and fintech firms have put in tremendous efforts to make payments easy. With the layers of technologies and services such as Bharat Interface for Mobile (BHIM), Aadhaar Enabled Payment System (AePS), Aadhaar Pay, Unified Payment Interface (UPI), Immediate Payment Service (IMPS), National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement (RTGS), people are able to send and receive money with their bank accounts either online or offline without having to provide any further details like IFSC codes, net banking passwords, etc. It thrives on a key advantage of interoperability between all banks that have this feature and can be used on any phone not only on a smart phone as is the case for e-wallets. It gives the user the advantage of immediate payment benefit. Nandan Nilekani, the man behind Aadhar and now an advisor to NPCI, said: "UPI is a layer we have put on IMPS. It didn't really have the easy debit capability and that has been addressed by this platform. We think with UPI coming, it is going to be an important merchant platform. Once it is adopted by all banks, money can be transferred from a bank to any other bank using a mobile phone".
In addition to this, we have to consider the segment of the population that do not have bank accounts, and many of those who do, do not want every transaction to be linked to their bank accounts. That's why cash usage is still high in developed countries. For example, in 2012, 60 per cent of payments were cash centric in Germany. Moreover, banks are not comfortable giving non-bank payment service providers access to bank accounts, as has been recently reported about ICICI and Flipkart's PhonePe. The government and the various enterprises need to create a system for the existing e-wallets, online payment services, mobile money, and other services to work like cash and not like bank money.
Hence, for non-bank digital payment services to work like cash, there is a need for real cash, i.e. digital fiat currency - the India Rupee issued by the government. Monitored by RBI, digital Indian Rupee will be a centrally issued currency, which will be distributed just like notes and coins to the public at large through banks or directly from the government or employers to the recipients' e-wallets. Once it is in the e-wallets of the public, the digital rupee can be used to transact and settle debts directly and instantaneously between two parties. Like cash, a transaction between two e-wallets is final at the point of transaction without necessarily involving any bank accounts. For users with bank accounts, e-wallets can be linked to bank accounts for the convenience of deposit and withdrawal of digital cash. Bank account information stays guarded unlike the BHIM/UPI method, where bank account information is shared.
Digital Indian Rupee is the bearer instrument vested in e-wallets in different forms, be it basic phones, smart phones, smart cards, magnetic strip cards or other devices thereby garnering a better user experience. It is agnostic to the ownership of the payment service providers and to the payment system technologies chosen by the providers. It provides a levelled and non-discriminatory infrastructure for bank and non-bank payment service providers to compete and innovate.
We want to make payments through our bank accounts and sometimes without our bank accounts. Notes and coins enable us to do so in the physical world. We want the digital fiat currency, the rupee to enable us to do so in the digital world.
The writer is former head of Lehman Brothers India and Credit Suisse
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