We had missed this earlier

On August 8, the government of India has made certain recommendations in a letter to the Indian Banks’ Association (IBA) regarding promotion of digital payments in the country. The letter mentions that the discussion between the government appointed Committee of Secretaries, with participation from the Reserve Bank of India (RBI), the National Payment Corporation of India (NPCI) and major banks, noted that “the cost to banks for servicing transactions was lower for digital transactions than for cash transactions.” With this in mind, the recommendations are:

(a) Banks may re-examine the charges levied by them on cash handling, withdrawal and deposits, with the objective of incentivising digital transactions over cash transactions.

(b) Banks should proactively promote digital transactions and take all necessary steps to make them cheaper for customers than cash transactions. If necessary, cross-subsidisation of low-value digital transactions by high value digital transactions or by cash transactions maybe be considered for this purpose.

(c) Banks maybe re-examine the current policy of allowing certain number of free cash transactions, while charging for every digital transaction.

(d) Except for the charges prescribed by RBI, banks not charge merchants and customers for debit card, UPI and USSD transactions.

(e) The cost of payment acceptance infrastructure not be passed onto merchants by banks and instead, be absorbed by cross-subsidisation with savings from reduction of cash transactions.

The government first wrote to IBA on July 5, 2017, and again on August 8, 2017 to find out if any progress had been made. It’s not clear if the IBA has written bank to the government or not. Read the letters here, here and here.

It’s worth noting that most of these recommendations are similar to what the Watal Committee had earlier recommended. Some of which are:

  • Create parity between cash and digital payments. This includes ensuring that transactions in cash that don’t require KYC to be allowed on digital without KYC, requiring all government agencies and merchants to provide at least one digital payment option to their consumers and vendors.
  • Implement disincentives for usage of cash. These include:
  1. Permit merchants including government agencies to levy a cash handling charge for payments in cash above a certain threshold. The cash handling charge so collected should be exclusively used to fund new infrastructure for acceptance of digital payments (like POS devices).
  2. Gradually reduce threshold for quoting of PAN for cash transaction in banking from Rs 50,000 and for similarly for merchant/other transactions where the current threshold is Rs 200,000. Include quoting of Aadhaar as an alternate (over other KYC) for natural persons not having PAN or who are not required to obtain PAN as per provisions of section 139A of the Income Tax Act, 1961. Deadline: 9th March 2017. Note this task is shared with MEITY and Department of Revenue.
  • Withdraw convenience fee/service charge/surcharge presently being levied by some departments/agencies (utility service providers, petrol pumps, railways, airlines, contributions to Relief Funds etc.) on customers for making electronic payments (C2G payments).

Digital payments will eventually replace cash transactions in India, but let’s refrain from force-fitting a hastily decided date to when that ‘eventually’ transpires. The introduction of fees for cash transactions (above a certain value or number) should be carried in a more organized manner and over a much prolonged period than the demonetization drive.

Related Read:

RBI deputy governor R Gandhi responds to the Watal panel report ; our take
Petrol Pumps vs Banks highlights the “who pays” problem for digital payments