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Vision 2025: What is RBI planning for the next three years?

Global expansion of UPI, RTGS, and NEFT, higher debit over credit card usage among 3 year goals in ‘Vision 2025’ report by Reserve Bank of India (RBI)

The Reserve Bank of India (RBI), on June 17, released its Payments Vision 2025, with a key focus on “strengthening the e-payments ecosystem” in India. 

Continuing from the targets set earlier in the Payments Vision 2019-21 document, the primary objective of this new project looks to achieve an over three-fold increase in digital transactions and gain more control over the various sectors of e-commerce.

The proposals on the ‘Vision 25’ document include regulations for fintech and Big Tech firms in payments; guidelines on payments involving “Buy-Now-Pay-Later” (BNPL) services; introducing a central bank digital currency (CBDC); and linking credit cards and credit components of banking products to the Unified Payments Interface (UPI).

To achieve these goals, the RBI has planned 47 initiatives through which it aims to achieve 10 outcomes, including the UPI registering 50% annualised growth, Immediate Payment Service (IMPS) and National Electronic Fund Transfer (NEFT) registering 20% growth and debit card usage surpassing credit card usage.

The central bank expects an increase in the payment transactions turnover vis-à-vis GDP to 8%; an increase in debit card transactions at point-of-sale terminals (PoS) by 20%; an increase in prepaid instruments (PPI) transactions by 150%, etc.

Why does it matter? Considering the vast increases in the number of digital transactions that the country has seen since the RBI had last come out with a roadmap document, it is imperative to note the plans that the central bank has for the upcoming years to get a better idea of what aspects of their policies, e-payments enablers should be focusing their energies on. Most importantly, the paper gives us an inkling of which verticals the bank’s governance wishes to extend to.

Below we have classified RBI Vision 2025’s contents into two broad objectives and one major outcome.

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Objective 1: Providing affordable and secure e-payments

Electronic payment systems in India have grown more and more popular over the years. However, till 2022 they haven’t been of particular regulatory interest to the central bank. With ‘Vision 25’ the RBI seeks to push the envelope further in terms of rules and guidelines, in the name of user affordability, convenience and access.

“Resilience to operational and security concerns would continue to be at the heart to withstand and recover from the evolving threat landscape,” the document notes as part of its “core themes”. Not only does the RBI seem to be not only seeking more governance over the security of transactions but also covering data security and means of cover to defrauded customers.   

Some of the more prominent security initiatives are discussed below:

  • Leverage the ODR system for fraud monitoring and reporting: The RBI had previously mandated Regulated Entities (REs) to provide a mechanism on their mobile and internet banking application for customers to identify a transaction as fraudulent for seamless and immediate notification to the issuer RE. It is building the capacity for the instant reporting of frauds to the corresponding beneficiary’s RE. “Implementation of this instruction requires a central agency to facilitate such routing of messages to the beneficiary REs,” the ‘Vision’ paper notes, “Till the time this feature is built in as part of CPFIR, the feasibility of leveraging ODR system for the same shall be examined”
  • Enhancements to CPFIR: The Central Payment Fraud Information Registry (CPFIR) was set up by the RBI in 2020 to analyse trends, release periodic reports and ensure robust measures against fraud. However, the central bank believes that urban co-operative banks and regional rural banks have issues accessing the tool and aims to work on the issue. Additionally, to leverage on the payment frauds reported in CPFIR, the RBI is moving towards real and near real-time reporting of payment frauds and put in place an integrated platform for all stakeholders (payment system operators and participants – banks and non-banks, law enforcement agencies, etc.) to share information and initiate necessary corrective action to prevent frauds.
  • Emphasis on building authentication mechanisms: Additional factor authentication (AFA) and two-factor authentication (2FA) are prescribed by Reserve Bank for all payment transactions. Though the central bank doesn’t specify the form factor of AFA, SMS-based OTP has emerged as the go-to AFA. Considering emerging concerns with OTP-based authentication in terms of increasing cases of phishing and social engineering cyber attacks, the RBI is considering alternate risk-based authentication mechanisms that use behavioural biometrics, location, historical payments, digital tokens, and in-app notifications, etc.

The roadmap document notes that there is a change in customer behaviour in embracing digital and touchless modes of payments, with the COVID-19 pandemic playing a role in this change. There is an estimated 50% increase in mobile banking users with many of them being first-time users. One of the key challenges that this vision document envisages addressing is making this an irreversible shift.

Objective 2: Increase the scope of current initiatives

Apart from listing the expected outcomes for ‘Payments Vision 2025’, the RBI laid out the plan for various initiatives which could contribute to achieving the outcomes. These are represented by the 5 Is i.e. “Integrity, Inclusion, Innovation, Institutionalisation and Internationalisation.” There are, in total, 47 specific initiatives outlined under the five broad goals.

Some of the highlights of these initiatives include:

  • Regulation of payment intermediaries and payment aggregators: While intermediaries in payment processing have eliminated many issues and provided value-added services, the RBI finds uniformity in the implementation of user onboarding processes and transparency in the operations of such intermediaries to be wanting. At present, the banking regulator has issued instructions for regulating the activities of online payment aggregators (PA) and gateways. The RBI feels there is a need to bring all significant payment intermediaries, including offline PAs, under direct regulation.
  • Evaluate the costs of providing digital payment services to ensure that they do not impact mass adoption: Providing digital payment services entails costs, which are borne by one or more of the payment system participants (switching fees, interchange fees) or are passed on to the merchant (merchant discount rate) or the customer (customer charges). While collecting charges from the merchants or customers may be required for the viability of digital payments, the RBI points out that these changes need to be reasonable and not deter digital payments adoption. “Higher adoption of digital payments and the associated less-cash outcome is expected to reduce costs associated with usage of cash or near-cash substitutes. This would enhance the share of digital payments to GDP and contribute towards improved transparency in transactions,” the paper notes.
  • Review the different types of PPIs and issue relevant guidelines to ensure transaction security: The RBI categorises PPIs as an evolving domain, with multiple players involved with a variety of business models that operate PPIs both within a closed group of merchants or open for wide usage. As the digital payment transactions using PPIs are growing, the RBI looks to develop a conducive framework for the “long term growth of PPIs with the enhanced security of transactions”. The central bank aims to launch a comprehensive review of the different types of PPIs including a timeline for full-KYC PPIs and the definition of closed system PPIs.
  • Link credit cards and credit components of banking products to UPI: UPI transactions have been growing by leaps and bounds at the cost of other retail payments, especially card transactions. One of the reasons for its popularity is the convenience and seamless experience it offers to users. Currently, a UPI user can only link the bank account (savings / current account) and the debit card to the UPI Virtual Payment Address (VPA). To offer more avenues and greater convenience to users in making payments through the UPI platform, the feasibility of linkage of credit cards and credit components of banking products to UPI shall be explored
  • The global expansion of UPI, RTGS and NEFT: “The potential of UPI has been recognised world over by numerous authorities,” the document notes and the Reserve Bank plans to double down on the global outreach initiatives to expand the footprint of domestic payment systems. The RTGS and NEFT systems presently settle domestic fund transfer transactions on a gross basis. The RBI plans to streamline these modules to fit with the internationally accepted standard for cross-border fund transfers. It is working to settle transactions in major trade currencies such as USD, Pound, Euro, etc.
  • Internationalise a central bank currency: Central bank currencies are essentially digital currencies issued by a national bank but these are considered different from balances in traditional reserve or settlement accounts. The Reserve Bank is considering creating a CBDC as it is a G20 area of interest and can ease both cross-border and domestic payments and settlements.

Outcome: Increase digital transactions and reduce cash usage

The Reserve Bank’s three-year plan is geared to achieve 10 expected outcomes which could act as measurables for the various initiatives that are proposed in line with the five goals mentioned earlier. But all ten points can be summed up into one idea: “increase digital transactions and reduce cash dependency”.

These expected outcomes can be broadly classified as achieving two purposes – to reduce the usage of cash around the country and to increase the usage of various modes of digital payments including UPI, digital wallets and prepaid payment instruments (PPI).

  • As highlighted earlier, the key expected outcome is to increase the number of digital payment transactions by more than three times. In 2021-22, there were a total of 8.2 thousand crores digital payment transactions, compared to 5.55 thousand crores in 2020-21, or an increase of around 60%.
  • Considering the increase in the number of new users for digital payments over the past couple of years, one of the primary intended outcomes is to increase the registered customer base for mobile-based transactions by a 50% compound annual growth rate (CAGR).
  • Another expected outcome for UPI payments is to increase at an annualised growth of 50%, while in the case of IMPS/NEFT transactions, it is 20%. The ‘Vision’ paper also lists expected outcomes for other payment options like PPIs, debit and credit cards. Efforts to increase debit card transactions compared to credit card transactions could diminish the risk of bad debts, the bank notes. The expected outcome is to increase the debit card transaction usage at the PoS by 20%.
  • Two of these expected outcomes are related to a reduction in reliance on traditional payment options. It is targeted to have the volume of cheque-based payments be less than 0.25% of the total retail payments. Another outcome is to reduce the Cash in Circulation (CIC) as a percentage of GDP.
  • Among the various initiatives outlined in the ‘Vision’ document, one particular objective is geared to increase the volume of digital payment options in feature phones.

The RBI looks to involve Big Tech companies and “encourage innovation” to pave way for solutions to meet these targets.

What has changed since 2019?

The RBI has been coming out with these ‘Vision’ documents since 2001. The previous iteration of this roadmap was published in 2019 titled ‘Vision 2019-21’. 

The adoption of digital modes for payments was one of the important outcomes for the initiatives envisaged in the 2021 document. The Indian banking regulator has stated that there is a 500% increase in the number of merchants accepting digital modes of payment by the end of September 2021, compared to the half-year ending March 2019. During the same period, the number of unique users of mobile banking increased by 99% and that of internet banking by 18%.

On the other hand, there was also a drop in the usage of paper instruments for retail transactions from 3.83% to 0.8% in terms of volume. However, one expected outcome which was not met by end of 2021, was the increase in the usage of debit cards for payment transactions, especially at PoS. The RBI speculates that lockdown measures due to the COVID-19 pandemic could be a major reason for the same. In 2019-20, 512 crores transactions were done through debit cards, while in the ensuing two years, it was 411 crores and 394 crores respectively. Meanwhile, there is an increase in credit card transactions in 2021-22 after a measured drop in 2020-21.

In its statement alongside the ‘Payment Vision 2025’ document, the RBI highlighted the current regulations which were listed in ‘Vision 2021’. These include – a waiver of charges for online transactions, full-day, all-year-round availability of NEFT, RTGS and National Automated Clearing House (NACH), frameworks for regulating payment aggregators, setting up of a Centralised Payments Fraud Information Registry (CPIFR), etc. among others.

What is the RBI currently doing in the e-payments space?

Even as the Reserve Bank goes on to elaborate its 2025 objectives, here we take a look at what it is doing right now across various verticals of the e-payments space. All of these moves can be found in the roadmap. The section also briefly covers the banking regulator’s current stance on crypto since a central digital currency is also mentioned in ‘Vision 25’. 

  • Payment aggregator license: Payments and banking platforms for merchants, Razorpay, 1Pay, Stripe and Pine Labs recently announced that they have received the Reserve Bank of India’s (RBI) in-principle approval for Payment Aggregator licenses. Getting the Reserve Bank’s nod for the payment aggregator’s licenses means that Razorpay and the other entities will now be directly under the purview of the central bank. Previously, this was something of a blind spot in the banking regulator’s policies. Now looking at the important functions, these companies play in the online payments space and their role in handling funds, the RBI decided to regulate these entities.
  • Card storage rules: Starting September, online merchants (like Amazon and Swiggy) and payment aggregators (like Razorpay and BillDesk) will not be allowed to store credit and debit card details of their customers owing to guidelines issued by the Reserve Bank of India (RBI) in March 2020. This means either the customer will have to enter their card details every time they make an online purchase or merchants and payment aggregators adopt an alternative technology that allows them to store tokenised versions of the card details. But, both these options face a mountain of challenges, and as it stands today, any kind of online card transaction is most likely to fail once the new regulation kicks in next month.
  • RBI on crypto: “Most cryptocurrencies have an equilibrium value of exactly zero, but they are still priced, sometimes, at fantastical levels,” read a statement by the Reserve Bank of India (RBI) Deputy Governor T Rabi Shankar. The RBI has been one of the most staunch opponents of cryptocurrencies in India and its opinion carries a lot of heft within the ministry of finance which is currently deliberating upon how to regulate crypto assets. Shankar said that the RBI believes that Central Bank Digital Currencies (CBDC) would be able to “kill whatever little case there could be for private cryptocurrencies”.
  • More BNPL rules? After imposing a series of curbs on non-bank buy-now-pay-later companies in June that forced major players to almost giving up the credit line business, the Reserve Bank of India (RBI) is set to release more guidelines for the BNPL domain in the upcoming weeks. The ideas for these regulations were first introduced in the ‘Payments Vision 2025’ document. In Q1 2022, India’s BNPL segment was estimated to touch the $43 billion mark, at a CAGR of 80%, by 2025. However, the RBI’s recent regulations have significantly hurt the sector. With the Reserve Bank’s upcoming guidelines set to reshape the regulations of the BNPL sector, one can conclude that the vertical will be facing a tough time as companies adjust themselves to the new rules.

This post is released under a CC-BY-SA 4.0 license. Please feel free to republish on your site, with attribution and a link. Adaptation and rewriting, though allowed, should be true to the original.

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