Comments on the Report of the Committee on Digital Payments (December 2016)

1. Preliminary

1.1. This submission presents comments by the Centre for Internet and Society (“CIS”) [1] in response to the report of the Committee on Digital Payments, chaired by Mr. Ratan P. Watal, Principal Advisor, NITI Aayog, and constituted by the Ministry of Finance, Government of India (“the report”) [2].

2. The Centre for Internet and Society

2.1. The Centre for Internet and Society, CIS, is a non-profit organisation that undertakes interdisciplinary research on internet and digital technologies from policy and academic perspectives. The areas of focus include digital accessibility for persons with diverse abilities, access to knowledge, intellectual property rights, openness (including open data, free and open source software, open standards, and open access), internet governance, telecommunication reform, digital privacy, and cyber-security.

2.2. CIS is not an expert organisation in the domain of banking in general and payments in particular. Our expertise is in matters of internet and communication governance, data privacy and security, and technology regulation. We deeply appreciate and are most inspired by the Ministry of Finance’s decision to invite entities from both the sectors of finance and information technology. This submission is consistent with CIS’ commitment to safeguarding general public interest, and the interests and rights of various stakeholders involved, especially the citizens and the users. CIS is thankful to the Ministry of Finance for this opportunity to provide a general response on the report.

3. Comments

3.1. CIS observes that the decision by the Government of India to withdraw the legal tender character of the old high denomination banknotes (that is, Rs. 500 Rs. 1,000 notes), declared on November 08, 2016 [3], have generated unprecedented data about the user base and transaction patterns of digital payments systems in India, when pushed to its extreme use due to the circumstances. The majority of this data is available with the National Payments Corporation of India and the Reserve Bank of India. CIS requests the authorities concerned to consider opening up this data for analysis and discussion by public at large and experts in particular, before any specific policy and regulatory decisions are taken towards advancing digital payments proliferation in India. This is a crucial opportunity for the Ministry of Finance to embrace (open) data-driven regulation and policy-making.

3.2. While the report makes a reference to the European General Data Protection Directive, it does not make a reference to any substantive provisions in the Directive which may be relevant to digital payments. Aside from the recommendation that privacy protections around the purpose limitation principle be relaxed to ensure that payment service providers be allowed to process data to improve fraud monitoring and anti-money laundering services, the report is silent on significant privacy and data protection concerns posed by digital payments services. CIS strongly warns that the existing data protection and security regulations under Information Technology (Reasonable security practices and procedures and sensitive personal data or information), Rules are woefully inadequate in their scope and application to effectively deal with potential privacy concerns posed by digital payments applications and services. Some key privacy issues that must be addressed either under a comprehensive data protection legislation or a sector specific financial regulation are listed below. The process of obtaining consent must be specific, informed and unambiguous and through a clear affirmative action by the data subject based upon a genuine choice provided along with an option to opt out at any stage. The data subjects should have clear and easily enforceable right to access and correct their data. Further, data subjects should have the right to restrict the usage of their data in circumstances such as inaccuracy of data, unlawful purpose and data no longer required in order to fulfill the original purpose.

3.3. The initial recommendation of the report is to “[m]ake regulation of payments independent from the function of central banking” (page 22). This involves a fundamental transformation of the payment and settlement system in India and its regulation. We submit that a decision regarding transformation of such scale and implications is taken after a more comprehensive policy discussion, especially involving a wider range of stakeholders. The report itself notes that “[d]igital payments also have the potential of becoming a gateway to other financial services such as credit facilities for small businesses and low-income households” (page 32). Thus, a clear functional, and hence regulatory, separation between the (digital) payments industry and the lending/borrowing industry may be either effective or desirable. Global experience tells us that digital transactions data, along with other alternative data, are fast becoming the basis of provision of financial and other services, by both banking and non-banking (payments) companies. We appeal to the Ministry of Finance to adopt a comprehensive and concerted approach to regulating, enabling competition, and upholding consumers’ rights in the banking sector at large.

3.4. The report recognises “banking as an activity is separate from payments, which is more of a technology business” (page 154). Contemporary banking and payment businesses are both are primarily technology businesses where information technology particularly is deployed intimately to extract, process, and drive asset management decisions using financial transaction data. Further, with payment businesses (such as, pre-paid instruments) offering return on deposited money via other means (such as, cashbacks), and potentially competing and/or collaborating with established banks to use financial transaction data to drive lending decisions, including but not limited to micro-loans, it appears unproductive to create a separation between banking as an activity and payments as an activity merely in terms of the respective technology intensity of these sectors. CIS firmly recommends that regulation of these financial services and activities be undertaken in a technology-agnostic manner, and similar regulatory regimes be deployed on those entities offering similar services irrespective of their technology intensity or choice.

3.5. The report highlights two major shortcomings of the current regulatory regime for payments. Firstly “the law does not impose any obligation on the regulator to promote competition and innovation in the payments market” (page 153). It appears to us that the regulator’s role should not be to promote market expansion and innovation but to ensure and oversee competition. We believe that the current regulator should focus on regulating the existing market, and the work of the expansion of the digital payments market in particular and the digital financial services market in general be carried out by another government agency, as it creates conflict of interest for the regulator otherwise. Secondly, the report mentions that Payment and Settlement Systems Act does not “focus the regulatory attention on the need for consumer protection in digital payments” and then it notes that a “provision was inserted to protect funds collected from customers” in 2015 (page 153). This indicates that the regulator already has the responsibility to ensure consumer protection in digital payments. The purview and modalities of how this function of course needs discussion and changes with the growth in digital payments.

3.6. The report identifies the high cost of cash as a key reason for the government’s policy push towards digital payments. Further, it mentions that a “sample survey conducted in 2014 across urban and rural neighbourhoods in Delhi and Meerut, shows that despite being keenly aware of the costs associated with transacting in cash, most consumers see three main benefits of cash, viz. freedom of negotiations, faster settlements, and ensuring exact payments” (page 30). It further notes that “[d]igital payments have significant dependencies upon power and telecommunications infrastructure. Therefore, the roll out of robust and user friendly digital payments solutions to unelectrified areas/areas without telecommunications network coverage, remains a challenge.” CIS much appreciates the discussion of the barriers to universal adoption and rollout of digital payments in the report, and appeals to the Ministry of Finance to undertake a more comprehensive study of the key investments required by the Government of India to ensure that digital payments become ubiquitously viable as well as satisfy the demands of a vast range of consumers that India has. The estimates about investment required to create a robust digital payment infrastructure, cited in the report, provide a great basis for undertaking studies such as these.

3.7. CIS is very encouraged to see the report highlighting that “[w]ith the rising number of users of digital payment services, it is absolutely necessary to develop consumer confidence on digital payments. Therefore, it is essential to have legislative safeguards to protect such consumers in-built into the primary law.” We second this recommendation and would like to add further that financial transaction data is governed under a common data protection and privacy regime, without making any differences between data collected by banking and non-banking entities.

3.8. We are, however, very discouraged to see the overtly incorrect use of the word “Open Access” in this report in the context of a payment system disallowing service when the client wants to transact money with a specific entity [4]. This is not an uncommon anti-competitive measure adopted by various platform players and services providers so as to disallow users from using competing products (such as, not allowing competing apps in the app store controlled by one software company). The term “Open Access” is not only the appropriate word to describe the negation of such anti-competitive behaviour, its usage in this context undermines its accepted meaning and creates confusion regarding the recommendation being proposed by the report. The closest analogy to the recommendation of the report would perhaps be with the principle of “network neutrality” that stands for the network provider not discriminating between data packets being processed by them, either in terms of price or speed.

3.9. A major recommendation by the report involves creation of “a fund from savings generated from cash-less transactions … by the Central Government,” which will use “the trinity of JAM (Jan Dhan, Adhaar, Mobile) [to] link financial inclusion with social protection, contributing to improved Social and Financial Security and Inclusion of vulnerable groups/ communities” (page 160-161). This amounts to making Aadhaar a mandatory ID for financial inclusion of citizens, especially the marginal and vulnerable ones, and is in direct contradiction to the government’s statements regarding the optional nature of the Aadhaar ID, as well as the orders by the Supreme Court on this topic.

3.10. The report recommends that “Aadhaar should be made the primary identification for KYC with the option of using other IDs for people who have not yet obtained Aadhaar” (page 163) and further that “Aadhaar eKYC and eSign should be a replacement for paper based, costly, and shared central KYC registries” (page 162). Not only these measures would imply making Aadhaar a mandatory ID for undertaking any legal activity in the country, they assume that the UIDAI has verified and audited the personal documents submitted by Aadhaar number holders during enrollment. A mandate for replacement of the paper-based central KYC agencies will only remove a much needed redundancy in the the identity verification infrastructure of the government.

3.11. The report suggests that “[t]ransactions which are permitted in cash without KYC should also be permitted on prepaid wallets without KYC” (page 164-165). This seems to negate the reality that physical verification of a person remains one of the most authoritative identity verification process for a natural person, apart from DNA testing perhaps. Thus, establishing full equivalency of procedure between a presence-less transaction and one involving a physically present person making the payment will only amount to removal of relatively greater security precautions for the former, and will lead to possibilities of fraud.

3.12. In continuation with the previous point, the report recommends promotion of “Aadhaar based KYC where PAN has not been obtained” and making of “quoting Aadhaar compulsory in income tax return for natural persons” (page 163). Both these measures imply a replacement of the PAN by Aadhaar in the long term, and a sharp reduction in growth of new PAN holders in the short term. We appeal for this recommendation to be reconsidered as integration of all functionally separate national critical information infrastructures (such as PAN and Aadhaar) into a single unified and centralised system (such as Aadhaar) engenders massive national and personal security threats.

3.13. The report suggest the establishment of “a ranking and reward framework” to recognise and encourage for the best performing state/district/agency in the proliferation of digital payments. It appears to us that creation of such a framework will only lead to making of an environment of competition among these entities concerned, which apart from its benefits may also have its costs. For example, the incentivisation of quick rollout of digital payment avenues by state government and various government agencies may lead to implementation without sufficient planning, coordination with stakeholders, and precautions regarding data security and privacy. The provision of central support for digital payments should be carried out in an environment of cooperation and not competition.

3.14. CIS welcomes the recommendation by the report to generate greater awareness about cost of cash, including by ensuring that “large merchants including government agencies should account and disclose the cost of cash collection and cash payments incurred by them periodically” (page 164). It, however, is not clear to whom such periodic disclosures should be made. We would like to add here that the awareness building must simultaneously focus on making public how different entities shoulder these costs. Further, for reasons of comparison and evidence-driven policy making, it is necessary that data for equivalent variables are also made open for digital payments - the total and disaggregate cost, and what proportion of these costs are shouldered by which entities.

3.15. The report acknowledges that “[t]oday, most merchants do not accept digital payments” and it goes on to recommend “that the Government should seize the initiative and require all government agencies and merchants where contracts are awarded by the government to provide at-least one suitable digital payment option to its consumers and vendors” (page 165). This requirement for offering digital payment option will only introduce an additional economic barrier for merchants bidding for government contracts. We appeal to the Ministry of Finance to reconsider this approach of raising the costs of non-digital payments to incentivise proliferation of digital payments, and instead lower the existing economic and other barriers to digital payments that keep the merchants away. The adoption of digital payments must not lead to increasing costs for merchants and end-users, but must decrease the same instead.

3.16. As the report was submitted on December 09, 2016, and was made public only on December 27, 2016, it would have been much appreciated if at least a month-long window was provided to study and comment on the report, instead of fifteen days. This is especially crucial as the recently implemented demonetisation and the subsequent banking and fiscal policy decisions taken by the government have rapidly transformed the state and dynamics of the payments system landscape in India in general, and digital payments in particular.

Endnotes

[1] See: http://cis-india.org/.

[2] See: http://finmin.nic.in/reports/Note-watal-report.pdf and http://finmin.nic.in/reports/watal_report271216.pdf.

[3] See: http://finmin.nic.in/cancellation_high_denomination_notes.pdf.

[4] Open Access refers to “free and unrestricted online availability” of scientific and non-scientific literature. See: http://www.budapestopenaccessinitiative.org/read.