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Nandan Nilekani Committee Recommends Lowering Interchange To Boost Digital Payments

RBI committee recommends lowering interchange to boost digital payments.

Electronic payment terminals sit on a stool at a gas station in Bengaluru, India. (Photographer: Dhiraj Singh/Bloomberg)
Electronic payment terminals sit on a stool at a gas station in Bengaluru, India. (Photographer: Dhiraj Singh/Bloomberg)

A Reserve Bank of India-appointed committee on digital payments has recommended that the regulator consider reducing the interchange on card transactions by 15 basis points to boost electronic and digital payments in India.

The committee, as part of its recommendations, has also suggested that the government could consider subsidising the merchant discount rate or fee that merchants need to pay for card transactions at their outlets.

Interchange is the cost that a card issuing bank pays to the acquiring bank, which handles the payment at the merchant’s end. It is one part of the overall merchant discount rate or fee that a merchant pays to the payment processors.

According to the committee, the RBI should leave the merchant discount rate to market forces. This is contrary to the regulator’s current approach where it sets a range of MDR based on the size of the merchant.

The committee also recommends that the government bear some of the costs involved in digital payments, should they want to encourage these over cash.

“It is important for governments to recognise that there are associated costs with electronic payments, and they have to be willing to bear the same if they are to encourage customers to make payments using electronic payment options,” the committee, headed by Nandan Nilekani, said.

Currently, the government is bearing the MDR for transactions worth Rs 2,000 and below. The committee has recommended that it might consider bearing the cost for higher value transactions as well.

Develop Cash-In/Cash-Out Networks

To decrease the reliance on cash and increase the acceptance of digital payments, citizens need a robust ‘cash-in cash-out network’, the report said.

A CICO network essentially includes bank branches, ATMs, business correspondents, and point-of-sale devices, which are all inter-operable. In India, while bank branches and ATMs are used for cash-out facilities, attempts to kick-start cash-out facilities at PoS devices have not been successful so far.

The committee suggests that CICO points be made available within 500 meters and that every CICO point should be supported by a bank branch within a range of 3 kilometres for cash management needs and within 5 kilometres for banking needs.

To be made cost-effective, the CICO network needs to interoperable with all banks and payment systems. ATMs and business correspondents should also be allowed to offer value-added services, beyond just cash withdrawals and deposits to make them more viable.

Further, the committee recommended that a customer be charged a nominal amount for the cash-out at a PoS facility, which the committee hopes will increase the willingness of a merchant to purchase a PoS device.

As part of enhancing the CICO network, the committee also stated that the BHIM Aadhaar application must be made a part of the CICO network for customers without smartphones and cards.

Government Payments

Since the government and various public sector entities, together, are some of the largest spenders and acquirers of goods and services in the economy, the committee report said these institutions should drive the adoption of digital payments throughout their organisations.

The first step of which is to offer all citizens and businesses the option to pay taxes, services, or fees through digital means. This includes charges for all public procurement costs, public utilities and transportation services.

“Since electronic receipts will result in significant savings to the government by way of faster collection of funds, the government must lead by example, and pay the costs for these services, without passing them to the consumers in the form of convenience fees,” the report stated.

The report said all public sector utilities use the Bharat Bill Payments Systems and other means of digital payments, without adding any extra fees, or convenience charges.

The government should also use digital payment for all payouts such as salary payments, direct-benefit-transfer transactions and for procuring any goods and services. Further, the government should create digital accounts for all government agencies, which would also ensure transparency.

“While this is being done to a large extent in case of central civil ministries, the same needs to be addressed in case of non-civil ministries of the central government also. Similarly, even among the state governments, some of the SGs must increase the pace of their digitisation and all must ensure that backward and forward linkage of processes related to electronic payments and receipts are also digitised,” the report said.

These digitalisation efforts must be extended to urban local bodies and panchayati raj institutions for better governance, efficiency and transparency, it said.