Expansion of digital payment infrastructure in non-metro cities, including the likes of north-eastern states in India has been a challenge. This is primarily on account of the costs entailed in setting-up of such infrastructure, ensuring ongoing compliance requirements in terms of maintaining and ensuring the payment facilities remain optimum in output. There is the additional consideration for such payment system providers that to recover such expenditure, there must be a high-volume of transactions occurring on a regular basis. With a view to address this concern and moving towards a cashless society, the Reserve Bank of India (“RBI”) has come up with a series of proposals in the recent past. These propositions aim at achieving the government’s goal of holistic ‘financial inclusion’. Through this article, we analyze the recent developments in the digital infrastructure space.
TIME-LAPSE OF RECENT PROPOSALS
In March 2016, the RBI had published a concept paper titled ‘Card Acceptance Infrastructure’ (“Concept Paper”). The Concept Paper highlighted establishment of an Acceptance Development Fund (“ADF”) as one of the strategies to facilitate expansion of the acceptance infrastructure with an aim to boost card payments in the country[i]. Thereafter, in May 2019, RBI released its vision document on ‘Payment and Settlement Systems in India’ for 2019-2021 (“2019-2021 Vision Document”)[ii]. Through the 2019-2021 Vision Document, RBI identified that acceptance infrastructure, including point of sale (“PoS”) terminals, mobile PoS, asset light terminals etc., was lacking in the country and it declared its intention to create an ADF for subsidized deployment of PoS acceptance infrastructure in tier-3 to tier-6 centres.
On 8th January 2019, a high-level committee on ‘Deepening of Digital Payments’ (under the chairmanship of Shri. Nandan Nilekani) was constituted by the RBI (the “Committee”). The Committee made the following recommendations to the RBI:
- To consider setting up an ADF which would be funded by market participants; and
- The ADF’s specific focus should be on developing new merchants in regions where there is lower penetration of payment acceptance infrastructure such as the rural to semi-urban regions.
In line with the recommendations of the Committee, the RBI through its ‘Statement on Developmental and Regulatory Policies’ issued in October 2019, announced the creation of ADF[iii]. Consequently, RBI, through its press release dated 5th June 2020 also announced the creation of the Payments Infrastructure Development Fund (“PIDF”)[iv]. Recently, the framework for PIDF (“PIDF Framework”) was notified by the RBI vide its notification dated 5th January 2021[v].
RECAPITULATION OF THE PIDF FRAMEWORK
Under the PIDF Framework, RBI envisions to expand the payment acceptance infrastructure in India, by adding 3 million new touch points yearly. The initial validity of the PIDF shall be for a period of 3 years, commencing 1st January 2021. This may further be extended for a period of 2 years, if necessary. Some of the key features of the PIDF Framework are as follows:
- The PIDF shall be governed by a 9-member ex-officio Advisory Council (“AC”). The AC comprises, inter alia of RBI officials and representatives from the card networks.
- The PIDF Framework aims at targeting those merchants that provide essential services such as transport, hospitality, fuel pumps, public distribution shops etc. in tier-3 to tier-6 centres and north-eastern states in India.
- The subsidy offered shall depend on the type of payment acceptance device deployed. Accordingly, a higher subsidy (50% to 75% of the cost) for digital PoS is contemplated as against for physical PoS (30% to 50% of the cost).
- Besides the initial contribution from the RBI, card networks shall contribute a total of INR 1 billion to the PIDF. As an initial contribution, each individual card issuing bank shall mandatorily contribute to the corpus based on the number of cards issued, at the rate of INR 1 and INR 3 per issued debit card and credit card, respectively.
- Apart from the initial corpus, the card networks and card issuing banks shall also make recurring annual contributions to the PIDF while the RBI shall contribute to yearly shortfalls, if any.
- The scheme under the PIDF Framework is on a reimbursement basis and the claim shall be submitted, in the formats prescribed under the PIDF Framework, post making payment to the vendors.
- The grant of subsidy shall be on a half yearly basis, of which 75% shall be released upon achievement of the performance parameters as laid down by the AC. The said parameters also include the ‘active status’ (minimum usage for 10 days over a 90-day period) and ‘minimum usage’ (minimum 50 transactions over a 90-day period) of the acceptance device. The balance 25% of the subsidy shall be released subject to the status of the acceptance device being active in 3 out of the 4 quarters of the succeeding year.
CONCLUDING REMARKS – MOVING TOWARDS A ‘CASH-LITE’ SOCIETY!
To quote John Rampton, “The way that customers pay businesses is constantly evolving. Instead of paying with paper, like cash and checks, businesses are expected to accept a variety of payment methods ranging from credit cards to digital payments.”
Having a huge card base is of hardly any significance if it is not coupled with adequate payment acceptance infrastructure. The PIDF is positively intended to correct this imbalance by addressing the identified economic constraints on the road to digitisation. Setting up of ADFs has been one of the successful strategies adopted globally to provide the required economic boost to the market players. Poland, Indonesia, Malaysia etc. are some of the leading examples wherein ADFs have been successfully used to expand the payment acceptance infrastructure.
Increase in digital transactions, reduction of transaction costs of merchants, reduction in payback period of investment for acquirers, etc. are some of the foreseeable impact of the PIDF[vi]. Accordingly, the PIDF has been hailed by the Indian market participants as a landmark move towards transforming the shape of digital payments industry in India. This is a step in the right direction and would ultimately provide a platform for companies (including FinTech companies) in reaching out to tier-3 to tier-6 centres by increasing the customer base and thereby enabling the country to realize its vision of ‘financial inclusion’.