Transferring money to another person will soon be possible without depending directly on a bank. Anyone will be able to send money online, or withdraw cash, using a mobile wallet or any non-bank entity through Real Time Gross settlement (RTGS) and the National Electronic Fund Transfer (NEFT), the centralised payment systems (CPSs) of the Reserve Bank of India. In short, non-banks are expanding their foothold in this traditional area of banking.
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What has the RBI done to facilitate this?
The RBI last week proposed to enable, in a phased manner, payment system operators like mobile wallets regulated by the central bank to take direct membership in RTGS and NEFT. This is expected to minimise settlement risk in the financial system and enhance the reach of digital financial services to all user segments. These entities will, however, not be eligible for any liquidity facility from RBI to facilitate settlement of their transactions in these CPSs. The facility — details of which are yet to be unveiled — will be subject to an overall limit of Rs 2 lakh for non-banks.
What are the implications?
Experts say that just as use of UPI increased over the last 4-5 years since it was opened to third-party aggregators, opening the payment system to non-banks would increase digital payments and transactions significantly. In a sense, it will prepare a digital trail of all individuals doing digital transactions on channels outside the banking system, which could help the overall financial system. Until now, an individual’s credit profile was available primarily with the banks. With this opening up, one’s credit profile can also be tracked while taking a loan from a financial technology (FinTech) company, investing through it or spending through it. A credit score will be built on the basis of all your financial touchpoints.
While banks conduct credit assessment on the basis of your assets, loan repayments, credit card payments etc, “FinTech companies are not just looking at your asset payments for credit decisioning. Youngsters using FinTech platforms have no or less financial assets and yet they are borrowing and spending. This will allow them to have a digital trail and build a credit profile. So one must be careful in the way (s)he borrows and repays even outside the normal banking channels,” said Srinath Sridharan, Governing Council member of FinTech Association for Consumer Empowerment.
Who can now undertake online transfers?
The RBI will now allow non-bank entities — Prepaid Payment Instrument (PPI) issuers, Card Networks, White Label ATM operators, Trade Receivables Discounting System (TReDS) platforms — to become members of CPS. Mobile wallets like Google Pay, Mobikwik, PayU, Ola Money, PhonePe and Amazon Pay can provide NEFT and RTGS facilities to their customers. Transfer will be allowed only to KYC (know your customer)-compliant entities.
CASH WITHDRAWAL: Another monopoly of banks too is set to go. The RBI has now proposed to allow the facility of cash withdrawal, subject to a limit, to non-bank entities — full-KYC PPIs of non-bank PPI issuers. Currently, cash withdrawal is allowed only for full-KYC PPIs issued by banks and this facility is available through ATMs and PoS terminals. Holders of such PPIs, given the comfort that they can withdraw cash, are less incentivised to carry cash and consequently more likely to perform digital transactions. With the RBI now allowing non-banks to withdraw cash (subject to the limit of Rs 2 lakh), dependence on banks is likely to come down. The fine print on cash withdrawal is yet to be announced.
What does the hike in cash limit mean?
The RBI has decided to increase the limit of outstanding balance in PPIs of non-banks from the current level of Rs 1 lakh to Rs 2 lakh. This will facilitate and incentivise online transfer and cash withdrawal from non-banks and enable them to go for full KYC compliance and interoperability. Migration towards full-KYC PPIs, and therefore interoperability, has not been significant, the RBI says. “Interoperability of the PPI wallet will expand the market size and will be beneficial to the end consumers. The RBI has also relaxed the norms for the membership of Central Payment Systems, which was earlier available to only banks and a few other institutions. This will open new opportunities for PPI issuers as they will be able to provide RTGS and NEFT services to the wallet users. Overall, this will take financial inclusion deeper in the country,” said Yogendra Kashyap, CEO, RapiPay FinTech.
Are non-banks a threat to banks?
The opening up of fund transfer and cash withdrawal through non-banks is certainly a sign of a changing banking horizon. Traditional brick-and-mortar banking is slowly disappearing with non-banks entering the space.
The RBI says India is on the way to becoming Asia’s top FinTech hub with an 87% FinTech adoption rate as against the global average of 64%. The FinTech market in India was valued at Rs 1.9 lakh crore in 2019 and is expected to reach Rs 6.2 lakh crore by 2025 across diversified fields such as digital payments, digital lending, peer-to-peer (P2P) lending, crowd funding, block chain technology, distributed ledgers technology, big data, RegTech and SupTech. In a world where FinTech companies are leading in terms of the volume of digital transactions and playing a more active role in the banking and finance industry, it is important that commercial banks adapt to the technological changes and work in tandem with these entities so that in future they are part of the ecosystem rather than competing with FinTech companies for business, RBI Governor Shaktikanta Das said last month.
How is digital payment taking shape?
Large-value credit transfers through RTGS dominate the overall digital payments landscape in 2019-20, accounting for over 80% of the total value of digital transactions. In terms of volume, however, credit transfers via multiple channels such as UPI, NEFT and Immediate Payment Service (IMPS) were the leaders. In the case of card payments, the value of debit card transactions registered a growth of 35.6% as against 21.1% for credit cards in March 2020.
Social distancing requirements during the pandemic led to the digital mode of transactions being preferred over cash, although the value and volume of the former were somewhat depressed on account of the slowdown in economic activity ahead of the outbreak. The trajectory of growth in UPI-based transactions, as well as overall retail digital transactions, has been impressive both in value and volume terms, according to the RBI’s Report on Trends and Progress of Banking in India.
The RBI has decided to increase the limit of outstanding balance in PPIs of non-banks from the current level of Rs 1 lakh to Rs 2 lakh.(Illustration: Suvajit Dey) 
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