RBI vision document on payments: An evaluation
Author :
Ajay Shah
Blog :Ajay Shah's blog
Date: 7/5/2012 4:34:00 PM
by Madhavi Pundit and Suyash Rai
On June 27, RBI published its
Payment System Vision Document (2012-15).
The document shows RBI's vision and mission for the
payment system, and specifies the objectives, approaches and courses of
action emanating from the same. It is a laudable step taken by RBI
to discuss its plans for payments in India. All regulatory activities,
such as banking and capital account liberalisation should have vision
documents to similarly show the road map. They bring clarity to
market participants, and helps everyone plan better.
A vision document is
an opportunity to think from first principles, and to dream about the
payments landscape. The document does not do this sufficiently.
Going by the ideas of the vision document, it is difficult to hold RBI
accountable to it or to evaluate its role as a regulator, because it is not
clear what we should expect the payment system to achieve, say,
five years from now. Though the vision itself may be a general,
aspirational statement, it should be accompanied by quantifiable goals that
can be achieved by Indian payments system (regulator + industry).
For example, the regulator can set objectives that by 2015, cash will be x%
of transactions, or that cheques will be phased out by 2020. RBI can then,
as a regulator, take steps to facilitate the achievement of such goals, with
the expectation that other participants will play their part. Such
sharp statements are absent in the document.
Once a suitably ambitious, but quantifiable, vision for payments
has been stated, achieving it requires looking beyond incremental
modifications. This brings us to the kind of steps RBI has proposed in
the document; the things that it will do to achieve the vision over
the next three years. For a vision document, the proposed steps are
rather tactical and operational. From this document, it seems RBI is
running all payment systems, with incidental cooperation from the
private sector. It is difficult to imagine how industry participants
should work towards the vision. For an example of how this can be
done, contrast the RBI document with the Strategic
Review of Innovation in the Payments System, recently released
by the Reserve Bank of Australia. Unlike RBI's document, the focus of
this document is purely strategic, and on removing barriers that
prevent market participants from innovating.
The document should clearly state what RBI sees as its role in payment
systems - which is above all, that of a regulator -
and what it sees as the role of market participants. While the document
focuses on the development of certain types of electronic payment systems,
certain standards, authorisation methods etc., there are a host of
other ways the market could innovate. The document's approach precludes other
means by which the same goal of higher electronic payments can be achieved.
All regulation must be rooted in market failures that damage the
interests of consumers or threaten systemic crises. A specific
regulation must address a specific market failure and thus tangibly
further consumer protection or systemic stability:
- In payment systems,
consumer protection would entail measures that ensure transparency and
disclosure by payment providers, so that consumers receive what they
are promised.
- In addition, providers must be subjected to micro-prudential
regulations, such as capital requirements, risk management and
investment restrictions that ensure their safety and soundness, based
on the risks they take. The risk based approach means that small value
systems with real-time payments need less regulation than large value
systems that hold clients' funds for a certain amount of time.
- For systemic stability, enhanced regulation and supervision of
systemically important payment systems, especially back-end
infrastructure, such as RTGS, is required.
RBI ought to focus on these regulatory objectives, where it would
deliver public goods, rather than take on `private goods' functions
that can be handled ably by the market. Systems such as NEFT and ECS,
which essentially require capabilities that go beyond a regulator's
core competence, can be run well by the private sector, under RBI's
regulations. In such systems, competition is of essence.
From this perspective, the vision document starts looking less
impressive. It is tied to the existing ways of doing things, and
intent on incrementally improving them, rather than questioning the
existing paradigm. This is unsatisfactory, for a paradigm shift is
what India most requires.
Perhaps that is why there seems to be a lack of clarity of
purpose. For example, RBI talks about investing in cheque systems and
electronic systems at the same time. Developing a grid system to
replace clearing houses as suggested is expensive. If the objective is
to phase out cheques and promote electronic payments, the revamp of
the cheque clearing system has no place in the vision document for
electronic payments.
The emphasis on electronic payments is welcome. It is time for
India to become a less-cash society, and ultimately a cash-less
society. Myriad inexpensive, safe and useful electronic technologies
are available, and more are being developed as we write. Hence the
extensive use of cash and other paper-based instruments is not
acceptable. They are expensive and inconvenient, and cost the most to
those with the least - who pay for using these instruments and also
face value erosion due to inflation. More needs to be done to move to
electronic payments, and soon.
Competition and innovation are both important for this goal. The
document talks about the dilemma the regulator faces with regard to
pricing. To us, there is no such dilemma. To a large extent, the
regulator should not intervene in business decisions such as
pricing. In terms of market structure, there are two types of charges
in payments - by retail payment providers and by infrastructure
providers in the system. At the front end, innovative and cost
effective payments products and gateways can develop if there is
competition and there is no case for regulatory intervention here. It
is a serious issue, and as experience from credit markets would
suggest, a cap on pricing usually leads to more exclusion than
inclusion.
Anti-competitive actions by players can be taken up to the
Competition Commission. At the same time, it is important to note that
in industries that are network based, there may be a need for
monopolies or duopolies in infrastructure provision which require
modification of the standard approaches of competition law (example).
Under these circumstances, if there is evidence of supernormal
profits, there may be role for regulating prices. But even here,
price determination should be done transparently, based on a full
analysis of costs and reasonable returns, and in consultation with
industry participants. For example, in the recent announcement of
a cap on merchant discount rate on debit cards, there is no
explanation from the regulator for how the amount 0.75 per cent was
decided, and what are its costs and benefits to the system.
The role for non-banks is conspicuous by its absence in the vision
statement. Currently, regulations tie the hands of non-bank payment
providers. Take the example of Airtel money, which is a semi-closed
mobile wallet. This means money can be transferred to other Airtel
customers and transactions can take place with certain merchants,
but there is no possibility for cashing out. Vodafone has partnered
with a bank, and hence allows cash out from retail points; but these
registered points have to be within 30 km of the bank partner.
A key insight that should guide the way forward is that payments is
a separate business from banking, and should have its own regulation.
Decoupling them could help achieve the twin goals of innovation and
inclusion. An electronic payments revolution can take place when small
value transactions are done electronically, i.e., customers in every
nook and corner of the country can access secure, efficient and low
cost retail payments services that can be considered cash
substitutes. E-money in many countries has exploded on the backs of
non-bank led payments systems such as telecom companies and retail
chains, and their reach has been impressive. Easing restrictions on
non-bank payments systems in India is required to really take
advantage of their vast networks that have already penetrated unbanked
areas. There are risks, but nothing that a forward thinking regulator
who recognises the immense potential cannot creatively address. (See
How
to achieve safety in payments for an example.)
Finally, for large value electronic payments systems, RBI's vision
should be to bring them up to world standards and integrated with
global systems. Cross-border payments are an important facet of
international trade and integration, and this can lead
to settlement/ Herstatt risks. RBI should address operational and regulatory
issues to minimise these risks. For example, RTGS should be brought
as close as possible to a 24 by 7 settlement system to ensure
overlaps with corresponding systems in other countries and time
zones. Additionally, in light of recent data that shows that the
INR is the third most traded emerging market currency,
these and other steps should be taken so that the INR becomes an
eligible currency for settlement in the Continuous Linked Settlement
(CLS) system, alongside the other international currencies already on CLS.
In conclusion, it is commendable that RBI has released a payments vision
document. Such a document gives an opportunity for us to understand
the mind of a government agency, and discuss and debate its priorities
and actions. But writing a vision statement is a chance to step away from
the familiarity of set ways and ask the big questions. RBI should not
squander this opportunity.