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Is Covid-induced digital payments revolution overstated?

October 19 2021: Did the pandemic usher in a retail digital payments revolution? Not really – suggests the latest report from independent think tank, Vidhi Centre for Legal Policy.
The pandemic forced an inevitable shift to digital payments in India, and one saw vegetable sellers with Paytm boards outside. However, consumer surveys by RBI and the National Payments Corporation of India indicate that Indians continue to have a strong bias for cash payments. The full potential of retail digital payments remains to be tapped. 
The authors -- Shehnaz Ahmed , Senior Resident Fellow and Lead (Fintech and Aryan Babele, Research Fellow (Fintech), both nat the Vidhi – write that one of the biggest enablers for the adoption and sustained usage of digital payments is a conducive legal framework, which is the missing link
The report: “Modernising the Law for Payment Services in India: preparing for the Future of Retail Payments”  examines India's primary law for digital payments that was enacted more than a decade ago when the digital payments market was at a nascent stage. It, thus, fails to account for policy goals such as competition, innovation, and consumer protection that are the hallmarks of a modern payments law. 
The report recommends a renewed retail payment services law (Proposed Law) for India built on the principles of proportionate regulation. It promotes three primary policy objectives that underpin most modern payments law – (1) ensuring safety and soundness of payment systems, (2) promoting efficiency in the functioning of payment systems; and (3) the protection of consumer interests. 
Key Features of the Proposed Law include:

  • Inserting a definition of ‘Payment Services, covering new and emerging retail payment services to provide clarity to businesses, and to facilitate the design of effective regulatory interventions. 
  • Clarifying exemptions and relaxations provided under the law to provide certainty to emerging businesses. 
  • Introducing a risk-based approach to regulation along with a two-tiered regulatory structure consisting of: (a) authorisation framework for payment service providers (PSPs); and (b) a designation framework for systemically important payment systems. 
  • Incorporating principles to manage operational risks to provide legal certainty to regulated entities, and to inform subordinate legislation. 
  • Introducing consumer protection principles, related to disclosure of information, effective grievance redressal mechanisms, rights and liabilities of parties in case of unauthorised transactions, the confidentiality of data, etc.
  • Outlining a framework for ensuring open access to payments infrastructure with objective and non-discriminatory criteria.
  • Introducing interoperability requirements for PSPs and designated payment systems. 
  • Recognising third-party service providers and the liability of PSPs for appointing them. 

The summary and full report  can be accessed here