India must attain e-SWARAJ
Cashless transactions & cyber terrorism

Relevance and use of the article in UPSC prelims and mains examination: This article is About slowly growing industry of digital payments and making country a cashless economy. new technology is almost always adopted to make tasks easier and more efficient, and this applies to the financial sector as well. Advancements such as credit cards and ATMs have fundamentally changed the process of banking and finance. The ecommerce industry in India has seen unprecedented growth over the last few years, largely because of a higher level of internet penetration among the population. But at the same time risk associated with them also increases as the grow. So in order to provide safe electronic payments we must have to regularize this industry. Let’s have a deep look in the issue.


Online Payments in India

  • The National Payments Corporation of India was set up in 2009 as an umbrella organisation for all retail payment systems (under section 25 of the Companies Act) with the core objective of consolidating and integrating the multiple systems with varying service levels into a nation-wide, uniform, and standard business process for all retail systems.
  • In 2012, the RBI, in its Vision 2012-2015 document, recognised the development of new e-payment systems and the increasing proportion of transactions taking place through these systems. The introduction of technology such as cloud computing, mobile telephony, service oriented architecture, and an increasing popularity of the virtual world would, according to the RBI, lead to significant changes in the way payments would be processed in the future.
  • The document elucidated the possibility of the movement away from cash transactions to electronic transactions, leading to their goal of a ‘less-cash economy’. The RBI set the objective of innovating towards the convergence of products and services which should be available across all delivery channels to all, in a low-cost, safe, and efficient manner. The RBI held that its regulatory stance would be to promote innovation to achieve the goals of inclusion, accessibility, and affordability, while remaining technology neutral.

Recent issue:

  • The 8 November 2016 event in India (8/11) is closely linked to the 11 September 2001 event in the US (9/11). The terror attacks led to a large exodus of funds and failures of payment systems brought in the federal banks in the US to aid the system. Correspondingly, the demonetisation event in India has posed for our scrutiny the robustness of our payment systems infrastructure.

Rise of an era of digital payments:

  • India has seen a rapid disintermediation of the payments system that was once restricted to only banks and their traditional clearing facilities. Entrepreneurs abound in the recent digital payment interfaces such as prepaid instruments like mobile wallets.
  • These will replace the traditional clearing systems such as RTGS (real time gross settlement) as also online facilities provided by banks and telecom companies. Unified Payments Interface is in itself a game changer and only banks have been allowed by the Reserve Bank of India (RBI) to become payment service providers keeping wallets and other prepaid instruments out, thus giving a boost to banks in the race to secure a big slice of the payments pie.
  • Poised at a juncture when people are also transforming payment habits by embracing a particular payment mode, especially the unbanked segments of society, the digital transaction regulatory framework requires a comprehensive legal framework assessment.

Need of a regulatory framework:

  • A legal framework that can identify and set out the rights and obligations of each payment system participant in the ordinary course of business and in adverse conditions is a robust one. This will require predictability on how the regulator applies its rules and regulations (circulars and guidelines) and oversees its applicability to payment system operators.
  • This will enable participants in a payment system to move in their own orbits performing functions that when interwoven ensure that the country has an efficient, secure and reliable payment system that reduces the cost of exchanging goods and services. Although the regulator is at present vested with powers to call out a systemic risk posed by a participant in the payments space, it may also do well to identify certain payment systems as critical and afford them systemic important status similar to how it identified certain non-banking financial companies as systemically important. Such singling out will ensure that their failure in a nascent payment industry does not trigger further disruptions among system participants and stretch to larger financial markets.
  • The regulator must also in the days to come set up an end customer protection/guarantee fund so she is protected when the largest participant/debtor in the payment system fails. This allows for the deflection of liquidity crunch, so settlement system clearances are maintained without the participants knocking on the doors of clogged courts.

Suggestions and conclusion:

  • Further, in tune with the self-regulated entrepreneurship that the government is encouraging, the system participant should be encouraged to submit a self-certification assessing and disclosing the technical risks it faces at an enterprise level that can balloon into systemic risks.
  • The ability to grasp the intricacies of the payment systems have grown since the International Monetary Fund-World Bank Financial Sector Assessment Program in the 1990s, yet there are many issues beyond our collective immediate expertise.
  • The when and how of the pace of evolution of the payment systems are not known but the why of it is obvious.This will foster further innovation that is bound to occur from the disruption caused in the payment spaces, without the regulator having to play catch-up. The digital payment revolution is the best disruption demonetisation has unleashed. An aspiring economy like India should welcome this brave new world.

“The payments terrain should expand and be enabled by regulations to accommodate new kinds of participants in the system” may be this should need a strong regulator in digital payment industry to regularize it and ensure safeguards to various stakeholders. Discuss:

Suggestive points:

  • Discuss about the online payment industry.
  • Its effect in creating a cashless economy.
  • Infrastructure of digital payment. Pros and cons related to this.
  • Problem of forgery related to this.
  • How government can solve this by regularizing this.
  • Rules needed to be followed whine regularizing the industry.
  • Suggetions. Conclusion.

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