Monetary Inclusion and Digital Payments

A great Digital Payment Ecosystem: Characteristics and Recommendations

A good digital payment environment is one that enables financial inclusion, a good ecosystem that allows all citizens to participate in the growth and development trajectory of the economy.

The key stakeholders in the electronic payment scenario are numerous – web service providers, payment system operators, technology providers, mobile network operators, banking institutions and retailers form the actual gamers in the market. The digital transaction system allows banks to increase their consumer base with lower costs plus risks. According to Booz Allen estimates, banks can reduce cash logistics simply by 10% through use of cashless transaction transactions. Telecom and internet service providers gain by increasing customer preservation, higher revenues through value added services etc . Retailers and service providers benefit through fast access to a bigger base of customers, better payment series etc . There is a synergy between the digital world and the financial world that needs to be exploited successfully to give the final advantage to the consumer. However , at the same time the federal government and regulators of banking, telecoms, payment systems, competition issues, anti-money laundering, all form the environment where the digital payments business model functions.

Considering that the business of digital transactions is new and unfamiliar, governments and regulators tend to be cautious about allowing improvements that may disrupt financial stability from the economy. As has been emphasized in the previous sections of this paper, while on a singke hand financial inclusion is the stated objective of governments, and new technology has been widely accepted as a tool for financial inclusion, regulatory and supervisory concerns have inhibited the development of electronic payments in many countries, including Indian. For a new product market to develop, it is necessary that the enabling environment be one that blends legal and regulatory openness and certainty – openness will allow innovation to flourish while assurance will give confidence to entrepreneurs to create investments. Thus the markets which create fastest are those which are in environments that are moving towards greater openness and greater certainty. The most crucial problem here is to ensure that the market remains open up and competitive for entrepreneurs to take up new business models. The key characteristics have been mentioned and discussed in various points in the preceding areas. These are:

1 . Ensure entry simply by ensuring a high degree of inclusiveness in types of service providers, ensuring a level playing field, and also ensure that both huge and small players can enter the industry.

Inclusiveness: Both banking plus non-banking entities should be encouraged in order to enter the industry.

The basic concerns associated with regulators in the financial sphere tools meant to around (i) maintaining financial stability, (ii) raising economic efficiency, (iii) increasing access to financial services, (iv) making sure financial integrity, and (v) ensuring consumer protection, and (vi) make certain rapid accessibility of such solutions for the masses with heterogeneous specifications.

Given the focus of financial regulators to ensure financial stability, it is yet natural for them to have a bank concentrate. But , disruption to financial balance deals with systemically important payment systems, and not retail payment systems, specifically of micro-magnitude. This distinctiveness of retail and micro-amounts should be properly understood to avoid stifling innovation which has the potential to help the masses of the country. Consequently there is no need to limit this industry only to the banks.

According to the Bank of International Settlements, one of the primary objectives of payment regulation would be to address those legal and regulatory barriers to market development and creativity. It is for the RBI and other regulators to work towards this end, so the potential of technology can be used to the full in meeting the goal of economic inclusion.

Level playing field: The particular close links between the network providers and the consumer should not provide inordinate advantages to those companies at the cost of other players. For instance, currently the mobile phone is considered the most potent tool of economic inclusion. However the mobile industry will be characterized by only a handful of operators both in India and abroad. Given the particular close links between the consumer and the mobile service provider and the tie-in from the consumer to the service provider, a monopolistic digital transaction industry would be a likely outcome if a level playing industry is not created.

A digital-payment system set up by the service provider should be open to other account holders within a specific decided time period, and new entrants should be allowed to use existing payment infrastructures. Just as landline users can choose among different long distance providers, so too must regulation ensure that various financial service providers can access the user.

Large plus small: The digital transaction environmental system should involve, and not keep out, small firms.

Large firms should not derive undue advantage from regulatory prescriptions. This is important for many reasons. Take for instance Micro-finance initiatives and how they can leverage the intra-communities ties for decreasing cost of credit. Whether we have MFIs or bank correspondents, or personal money-lenders, or NGOs, or other entities operating in small distinctive communities, such entities need not be debarred from providing their solutions to their users through digital means.

Though certain prudential norms will be essential, they should not follow an one size fits all approach and, depending upon scale plus scope of their operations, their regulating requirements also need to be appropriately organized.

2 . Ensure low cost access for your masses that is integrated with the economic climate.

Know Your Customer Norms: In case digital transactions are to be truly life changing, it is important to bring unbanked customers to the fold of payment systems. KYC regulations put in to ensure financial sincerity can hamper the growth of this market and hence affect the aim of monetary inclusion.

According to RBI guidelines, mobile payment services to be offered by banking institutions are not only restricted only to their clients, but also to those customers who are KYC/AML compliant. Since subscription to a cell phone also involves identity checks, this is a duplication of effort and can given rise to inconsistencies in norms. Standardizing the system of compliance throughout digital and financial worlds will likely help sharing of data plus information. These may seem as small mistakes now, but can appear as roadblocks later on retarding the goal of integrating the latest digital technology with financial services. Discussion on evolving systems is important to keep abreast of technological and marketplace developments.

Integration: Facilitate a variety of services that are easy to integrate with all sectors of the economy.

In the digital deal market, there is a significant coordination issue that arises due to the overlapping part of multiple regulators of financial, telecom and payment system supervisors, competition and agencies involved in supervising activities of money laundering and fraud. The problem is compounded because of the dynamic character of the industry and continuously growing technology. This means that the regulators have to be flexible, be quick on the uptake to improve when needed and deliver appropriate regulatory orders in a coordinated and consistent fashion.

3. Ensure that the system can serve heterogeneous requirements

Inherent versatility: A one size fit all technique that is currently the practice in financial regulation needs to change to become a lot more flexible and adapt to the different needs of the consumers at the bottom of the pyramid, who are a highly heterogeneous group. The terms ‘masses’ and ‘under-privileged’ are a highly heterogeneous segment. They consist of self-employed and unemployed, cultivators plus land-less laborers, literate and illiterate, nuclear households and joint families, indeed the range is large. And so are the requirements.

Conclusion: Financial inclusion is known as a goal by all policy manufacturers as the economic growth and development story will remain incomplete without participation by the weakest of the poor. Evolving technology is promoting the landscape of the financial planet as digital payments bring with them significant efficiencies. Further, with the fast adoption of mobile phones and distribute of the networks, costs of making dealings have been significantly reduced. Experiences in other countries and modern technology shows that the future lies in involving non-bank institutions as intermediaries. While vigilance is justified when confronted with new, unfamiliar systems, stifling innovations and market developments via extreme caution will only retard the growth trajectory of the economy. The plan makers should therefore work towards offering an environment where all stakeholders is able to do the functions they do best. An extra problem in the digital payment space is that the overlapping roles of multiple regulators leads to coordination failure and this should be well understood by almost all policy makers. The need of the hour therefore is to work with clarity plus consistency and speed up the process of moving towards greater openness and higher certainty in the digital payment sphere
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