Reserve Bank of India’s payment system gambit

While the world was engrossed in watching the LIBOR scandal unfold recently and banks across the world were reviewing every index with palpitation, an important development came up in India.

The Reserve Bank of India (RBI) released the second edition of the ‘Payment System Vision Document’ that defines the railroad for the electronic payments industry for the second-largest market in the world.

At the outset, such a document should cause a ripple of vigorous interest in the payments industry and get the various players to come up with their responses. However, no such thing has happened.

This lack of reaction is a reflection of the ‘under-performance’ of India in the last few years on a number of economic fronts – as well as the fact that India’s electronic payments and cards industry is not getting anywhere near the grandiose projections made a decade ago.

The most obvious comparison this ‘vision document’ will elicit is with China Union Pay (CUP); although one might think that Brazil’s recent moves in payments merits a closer comparison.

One could argue that CUP has gone so far ahead that it deserves to be compared with Visa and MasterCard and not belittled by comparison with this nascent payment infrastructure in India that has yet to take off.

But in all fairness, the release of a payment vision document by the RBI is a highly commendable step in the right direction.

Across the payments world, a positive push by the Central Bank is always a key growth accelerator. The Central Bank’s blessing gives any payments initiative the right amount of credibility for consumers to adopt and make it a part of their lives.

The Payment System Vision Document was immediately followed by a Circular on Merchant Discount Rates (MDR) that lays down the discount rate that merchants can be charged by acquirers for debit cards.

The Circular (dated June 28) caps the debit MDR at 0.75 percent of transaction amount for a value up to Rs. 2000 (about US$36) and 1 percent for transactions over Rs. 2000.

Unfortunately, due to the timing of the release of these two documents, the RBI’s vision document has been reported in the press as a debit interchange rules-fixing policy. This has diluted the effect and the intended purpose of outlining the RBI’s vision of -‘to proactively encourage electronic payment systems for ushering in a less-cash society in India.’

It is important to understand the significance of this endeavor in light of the fact that India has an abysmally low rate of electronic payments usage (excluding cheques). Analysts have pegged the share of electronic payments out of total consumer spending at less than 3 percent.