Uncovering The Problems With Digital Payments In Cashless India
Author: LawSphereX
Category: Technology, Cyber & Privacy
Published:
Updated:
UNCOVERING THE PROBLEMS WITH DIGITAL
PAYMENTS IN CASHLESS INDIA
Dr. Ghazala Abidin, Associate Professor, School of Law, Manav Rachna University, Faridabad, Haryana
ABSTRACT
Using a mobile device to make purchases for goods and services is convenient when you use mobile payments. There are numerous wireless communication technologies available for use in making these payments. Convenience, security, flexibility and other advantages are associated with mobile payments. In recent years, digital payments have grown in popularity in India. To ensure a reliable and efficient digital payment system in India, a number of issues still need to be resolved. This study aims to explore numerous problems and obstacles in India’s mass adoption of digital payments. Information from primary and secondary sources was gathered, assessed and analyzed in order to construct this study. The results of this study revealed a number of issues that have made the adoption of digital payments difficult.
Online fraud, cybercrime, reluctance to accept digital payments since transaction records must be properly maintained and tax liability concerns are a few of the problems. The Indian legislative system pertaining to digital payments has certain shortcomings and requires revision. India has made great technical strides in the area of digital payment, but prospects of such operations hinges on improving customer security and safety even more. Keywords: Digital Payment, Cashless Economy, Electronic Payment, Online Transaction, Digital, Payments, Adoption, Internet, Mobile
Introduction Digital payment systems were implemented in India before the internet was even a thing. In the 1980s, India had no internet infrastructure, but instead of using cash, the credit and debit cards were being used. Andhra Bank was the first to create the credit card system in 1981. 1 Credit cards were also issued by a number of other banks. An Automated Teller Machine (ATM) was originally installed by the Hong Kong and Shanghai Banking Corporation (HSBC) Bank in 1987. 2 People began to use little plastic cards instead of currency over time. Even so, until the internet knocked on the doors of the Indian economy, cash remained a necessary part of payment. In India, the internet began to gain enormous popularity in the 1990s. One of the earliest internet service providers, VSNL Limited, offered 9. 6 kilobits per second internet connections.
3 After that, people started selling goods online. Stated differently, the e-commerce sector emerged, albeit in its early phases. However, the demand for an online payment system emerged as a result of online sales. On the verge of the new decade, in 2000, Bill Desk was established. It was the first payment aggregator in the nation, and it helped consumers of ecommerce make digital payments simpler. The National Electronic Funds Transfer (NEFT) system was introduced in 2005, making digital operations like as fund transfers easier. In the 2000s, debit card use also experienced a sharp increase in popularity, making digital payments both in-person and online simpler. There was a noticeable increase in the variety of options offered by India’s digital payment systems. 4 In 2008-2009, the National Payments Corporation of India (NPCI) was founded.
Over the past ten years, this umbrella group has spearheaded numerous innovations in the domain of retail payment system in India. By the year 2010, there were a number of online payment options, including debit and credit cards, NEFT etc. To improve India’s payment system, the NPCI introduced a number of additional digital payment choices in the years that followed. For 1 Harsh Roongta, “How credit cards transformed India’s financial system”, REDIFF. COM (Oct. 20, 2014), https://www. rediff. com/money/report/pix-column-how-credit-cards-transformed-indias-financialsystem/20141020. htm.
2 Ibid.
3Charles Assisi, “A brief history of the internet in India”, FOUNDINGFUEL (Aug. 15, 2020), https://www.foundingfuel.com/article/a-brief-history-of-the-internet-in-india/.
4 Shubham Badak et.al, “Revolution of Digital Payment in India”,10 JoMCCMN 29-37 (2023).
instance, BBPS, RuPay, National Financial Switch (NFS), Aadhaar Payment Bridge System (APBS) etc. 5 Furthermore, since the advent of digital payment system, such as, e-wallets, phone banking and the Unified Payments Interface (UPI), online transactions have increased in India. The UPI payment system was introduced in 2016 and facilitates instantaneous transfers of money across bank accounts. Since its introduction, the number of transactions has increased from 0. 01 million in August, 2016 to 8. 07 billion in March, 2023, making it one of the most widely used payment methods in the nation. 6 The nation has seen a notable augment in the use of e-wallets such as Paytm, PhonePe, and Google Pay because of its convenient features; cash back programs and user-friendly layout.
The use of conventional payment methods like credit and debit cards has decreased as e-wallets have grown in popularity. In the year 2016, with the introduction of demonetization, the government has been promoting a cashless economy. The goal of the action was to encourage digital payments and end black money. Since then, the government has launched a number of programs to persuade citizens to transition to a cashless society. The Pradhan Mantri Jan Dhan Yojana (PMJDY) is one such program that attempts to give financial services to every household in India. 7 Millions of unbanked people have been successfully enrolled in the financial system. Through programs like RuPay cards, which provide cash back incentives for digital purchases, it also encourages the usage of digital payments.
Additionally, the government unveiled the Bharat QR Code, a worldwide QR code that eliminates the necessity for a point-of-sale terminal and lets businesses accept digital payments from any bank. In July 2020 alone, nearly 20 million transactions were made using the code in India, demonstrating the code’s considerable popularity. 8 In India, the development of digital payment method has accelerated recently. The beginning of UPI, e-wallets and phone banking has transformed the way individuals in India do business. There is now less currency used and more access to financial services because to government programs promoting a cashless economy, financial inclusion, and the usage of digital payments. In addition, the Covid-19 epidemic has expedited India’s transition to digital payment
5 Ibid.
6 Prasanna TR, “The History of UPI”, 11 IJCRT 634-640 (2023).
7 CA Rohit J. Gyanchandani, “Pradhan Mantri Jan Dhan Yojana: From benefits to impact; all you need to know”, MINT (Oct. 20, 2023), https://www.livemint.com/money/personal-finance/pradhan-mantri-jan-dhan-yojanafrom-benefits-to-impact-all-you-need-to-know-11697440909622.html accessed 13 September 2024. 8 AP Hota, “One nation, under code: How India leads the way in the interoperability of QR code for payments” ET, Oct. 8, 2017.
methods. 9 Online purchases replaced cash transactions as the favored method of payment as consumers grew more cautious when handling currency. Online transactions allowed people to bypass crowded locations like banks and ATMs as social separation became the norm. The economy is concerned about a large rise in the usage of digital payments. 10 Issues and Challenges in Digital Payment System: Indian Perspective The rapid development of the Indian economy can be attributed, in large part, to the extensive acceptance of e-commerce, e-payment and digital payment. Many fraud cases have been reported as a consequence of the pervasive use of e-payment methods, prompting the commencement and execution of plentiful regulations in India as well as across the globe. The main issues concerning the digital payment are discussed below.
Threat to security Despite the fact that most electronic payment systems use encryption, there is still a chance of phishing, in which unsuspecting users’ private information is compromised to obtain sensitive data including financial and personal information. Many individuals are afraid to use these electronic payment systems because of their high level of security. There is no assurance that these payment systems won’t be hacked, even if some of them are quite guarded by the advancements in technology. 11 Conflicts with transactions In the event of an electronic payment dispute, reimbursement is possible; however, this will be exceedingly challenging to accomplish in the absence of adequate documentation to support the claim. Increase in the cost of doing business Businesses incur additional costs due to the growing popularity of electronic payment
9 Supra note 5.
10 Inder Pal Singh Sethi, “Digital Payments driving the growth of Digital Economy”, NATIONAL
INFORMATICS CENTRE, (Jan. 15, 2024), https://www.nic.in/blogs/digital-payments-driving-the-growth-ofdigital-economy/. 11 Hemant Trivedi & Shashi Sanchiher, “Challenges in Digital Payment Adoption in India”, 5 IJEMMASSS 32-
38 (2023).
methods.12 Even those with their own electronic payment systems must bear the additional costs associated with guaranteeing the security and protection of sensitive personal data of their customers. Dangers posed by fraud and cyber attacks Organizations, governments and individuals were harmed by the emergence of cyber security attack vectors against these new attack surfaces, which resulted from the fast spread of online fiscal, retail and assembly system. In these domains, cyber security breaches increased between
2019 and 2022. These include identity theft; DDoS attacks; data exfiltration; integration (API)
exploits; AI data analytics manipulation; and insider risks. 13 Although phishing is still a popular technique for stealing data, it is still a powerful hacking tool in the digital economy. A phishing assault affected 83% of firms in 2021, up 26% from the year before, according to Proof point research.14 Even while many of these attack vectors were already in place prior to Covid-19, a number of hacker techniques have evolved to target more recent digital assets and platforms. Strong customer authentication features have been made available by payment service providers in order to comply with privacy and regulatory requirements and lower consumer risks.15 Problem of growing attacks on digital currency and financial technology A number of present-day and emerging technological capabilities are required to support the
fintech offering of digital currency offers. The decentralized and distributed ledger system that underpins block chain technology is the only way to guarantee top security, data integrity and confidentiality. Block chain is a next-generation platform that powers Web 3.0, which includes autonomous machine-to-machine capability, edge security and artificial intelligence, even if many enterprises still view it as a digital transformation. Block chain and fintech systems, while generally thought to be secure, are not immune to hackers. Peer apps, online transaction
12 Mehul Mistry, “Digital India: Top 6 concerns about online payments”, YOURSTORY (Mar. 21, 2022),
https://yourstory.com/2022/01/digital-india-top-concerns-online-payments. 13 Smruti Abhijit Salunke, “Online Dispute Resolution System for Digital Payments in India”, 5 IJLMH 1552-
1572 (2021).
14 Zainab Alkhalil et. al., “Phishing Attacks: A Recent Comprehensive Study and a New Anatomy”, 3 FRONTIERS 1-23 (2021).
15 Ibid.
systems and digital currency wallets are still susceptible to a number of attack methods, such as malware and ransom ware; phishing emails; digital current manipulation. 16 Cyber security vulnerabilities affecting online payments As more fintech companies expand their worldwide payment capabilities, they are focusing on security requirements, following security standards and protecting privacy. These include new service offerings, cross-border payments and simple wage payment systems for businesses. Numerous nations contemplating fintech digital payment and currency face numerous obstacles in facilitating these services. Fintech depends on dependable infrastructure and mobile internet connectivity to provide dependable connections between payers and payees.
Many are concerned about the capability to safeguard fintech platform and user from cyber security violation, given the prevalence of internet dependency in developing nations. Hackers could exploit a fintech platform that is located in a developing country and has security flaws to launch assaults into other nations by using the site’s APIs, multiple integration connections, and reciprocal right ti use central bank digital currency. 17 Fraud and impersonation in the context of digital currency and payments Hackers employ a variety of techniques to get admittance to individual’s bank account, health record and private communications, much like they do with conventional banking payment and financial systems. Some of these techniques are business email compromise; phishing emails; attacks on mobile devices; account takeover etc.
18 It became important to safeguard digital payments in light of the growing concerns about the digital payment infrastructure. In order to control the payment services, the Indian government passed the Payments and Settlement System Act, 2007 (PSS Act). Regulation of Digital Payment in India: A Legal Framework The promotion of digital payment is greatly aided by a supportive legal environment. Several nations have updated and re-evaluated their legal mechanism for payment service, employing activity and risk based methods, in light of the rapidly changing digital payments industry. The
16 International Monetary Fund, “World Economic Outlook- Growth Slowdown, Precarious Recovery”, IMF
eLIBRARY,(Apr. 9, 2019) https://www.elibrary.imf.org/display/book/9781484397480/ch002.xml
17 Medhora & Rohinton, “We Need a New Era of International Data Diplomacy” FT, Jan. 18, 2017.
18 Tim Maurer & Arthur Nelson, “The Global Cyber Threat”, FINANCE & DEVELOPMENT (Mar. 2021)
https://www.imf.org/external/pubs/ft/fandd/2021/03/pdf/global-cyber-threat-to-financial-systems-maurer.pdf.
goals of modernization initiatives in the retail payments sector have been to promote competition, efficiency, safety and innovation. The legal and regulatory environment that governs India’s payment systems is examined in this section. Under the PSS Act, the Reserve Bank of India (RBI) oversees the payment mechanism in India. As per Section 4 of the PSS Act, in order for a PSO to launch or run a payment mechanism in India, RBI authorization is required. 19 Authorization is not needed for the government securities traded via the RBI-owned and run RTGS, NEFT and Securities Settlement Systems. Two requirements should be fulfilled for a mechanism to be regarded a “payment system” under the PSS Act. Firstly, it should allow payments to be made between a person paying the tax and a recipient; and secondly, it should be engaged in clearance of payment/settlement services.
RBI has granted permission to various PSO categories to run various payment systems. These include Visa, MasterCard, ATM, Amazon Pay, Mobikwik, etc. These authorizations are in agreement with Section 4 of the PSS Act. The regulation set forth in the PSS Act applies to each of these. 20 The main goal of the PSS Act’s enactment was to assign the RBI as the power for the reason and for associated matters, and to endow for the directives and management of payment system in India. 21 The RBI has released the Payment and Settlement Systems Regulations 2008 (PSS Regulations 2008), which establish the conditions for initiating or maintaining a payment system, in accordance with its authority under the PSS Act.
It addresses things like the framework for a PSS Act authorization application and establishes the standard compliance obligations, like providing the RBI with accounts and balance sheets from system providers and returns, documents, and other information, among other things. Nonetheless, the majority of the significant legislative guidelines for payment system and PSOs have been provided by the RBI via circular and notification in accordance with its general authority to give directives and to set standards under Sections 10 and 18 of the PSS Act respectively. 22 Such a stance is against payment system mechanism in several nations, where the primary statute contains substantive 19Puneet Rajiv, “Payment and Settlement System in India: Present and Future”,
SCRIBD,
https://www.scribd.com/document/118986516/payment-settlement-systems.
20 Ibid.
21 Shiv Shankar Banerjee, “Role of RBI in the Payment System of India”, LEGAL EAGLE WEB.COM, (June 21, 2022), https://legaleagleweb.com/articalsdetail.aspx?newsid=25.
22 Ibid.
provision and obligation on payment service provider; and the subordinate legislation is used to give clarification or effect to these substantive obligations. Loopholes in the Digital Payment Legal Framework and Need for Reform Since the PSS Act was passed, disruptive technologies have emerged, resulting in technologyled payment solutions, which have significantly altered the payments market. The emergence of new payment services such as UPI, IMPS, PPIs, payment aggregators, etc. is a result of these technological upheavals. New business models and fintech companies have emerged as a result of the payments ecosystem. Notwithstanding these advancements, the PSS Act has remained mostly unchanged since its passage nearly ten years ago, with the exception of a few revisions pertaining to the safeguarding of customer fund and the definiteness of payment and resolution orders.
23 The majority of regulatory intercessions in the payment segment have been implemented via subsidiary law in order to accommodate these advances. The adoption of digital payments is influenced by a number of supply-side and demand-side factors, but a crucial facilitator of digital payment promotion is a legislative environment that supports the long-term use of these digital payment mechanisms. Such a framework necessitates a greater emphasis on consumer protection, innovation and competition for retail payment systems. This section emphasizes how the deficiencies in the law have prevented the PSS Act from offering such an enabling framework. The Inter-Ministerial Committees have previously proposed changes to address the gaps in the PSS Act.
24 A recurring theme in the committees’ proposals is that open access, interoperability and balanced or risk based policy, all of which are not up till now covered by the main statute, should all be included in the PSS Act. The low-equilibrium trap is being experienced by digital payments in India as a result of the previously described shortcomings in the current regulatory framework. Poor customer service, a lack of options for payment methods, a persistent dependence on currency with its elevated cost and the potential for money laundering and tax evasion are the results of this, and they could continue to do so. The problems with the current structure and the points raised above 23 Shehnaz Ahmed & Aryan Babele, “Modernizing the Law for Payment Service in India-Preparing for the Future of Retail Payments”, VIDHI CENTRE FOR LEGAL POLICY (Sept. 21, 2021), https://vidhilegalpolicy.
in/wpcontent/uploads/2021/10/Modernising-the-law-for-Payment-Services-in-India-Preparing-for-the-Future-of- Retail-Payments. pdf.
24 Ibid.
necessitate a modernized and simplified regulatory environment for digital payment services in India. Findings of the study The findings of the study reflect the following:
1. Infrastructure Challenges: The efficacy of digital payment systems is hampered by
poor internet connectivity in rural and semi-urban areas. A lot of users have trouble finishing transactions because of spotty or weak network signals. Digital payment systems are less reliable and efficient when there is insufficient technological infrastructure, such as old technology and a weak power supply.
2. Digital Literacy and Inclusivity: A lot of people don’t know about or comprehend
digital payment systems, particularly the elderly and those living in rural areas. They are unable to use digital payment systems successfully due to this knowledge gap. A sizable segment of the populace lacks the digital literacy abilities needed to effectively browse and utilize digital payment services.
3. Security and Fraud Concerns: As data breaches and cyber fraud occurrences increase,
worries over the security of digital payment platforms grow. Users are frequently targets of hacking, phishing scams and other online frauds. Some users are still unwilling to completely embrace digital payments due to security concerns; instead, they prefer traditional cash transactions.
4. Interoperability Problems: India’s digital payment ecosystem is disjointed, with
several platforms and technologies that frequently don’t function well together. Interoperability issues can cause user annoyance and inefficiencies.
5. Cost and Accessibility: Transaction fees and other hidden costs associated with certain
digital payment systems can put off users, particularly small businesses and those with little financial resources. Not everyone has access to the computers or cell phones needed to make digital payments. Some people cannot participate in the cashless economy because of this technological divide.
6. User experience issues: Transactions might be disrupted and users may become
dissatisfied due to frequent downtime or technical difficulties in digital payment systems. Complex user interfaces on some digital payment services might make it challenging for non-techies to use.
7. Regulatory and Policy Challenges: Users and service providers in the digital
payments arena may experience ambiguity and misunderstanding due to inconsistent regulatory frameworks and rules. Customers are reluctant to completely adopt digital payment methods because they are worried about how their financial and personal information is handled.
8. Economic and Social Impacts: Adopting digital payment systems can be expensive
and cumbersome for small businesses, especially those in rural areas. This could have an adverse effect on how they conduct business. The digital gap has the potential to worsen already-existing economic inequalities by making it more difficult for impoverished populations to use and profit from digital payment systems. These results underscore the many obstacles encountered throughout India’s shift to a cashless economy. Conclusion and Suggestions: A Way Forward India’s economy is rapidly becoming one of the biggest and most robust in the world. Certain essential elements, such as enhanced transparency and corporate governance are crucial for long-term development and growth alongside strong economic development. Only when the populace accepts digital payments and transactions will all advancements be possible.
Therefore, more potential developments and support for better processing conditions for digital payments could result from addressing the discussed challenges and providing better way out with respect to digital transaction with additional secure features, no difficulty in transaction and lower rate of running the digital payment. The following are some important facilitators and recommendations to go over the problems and obstacles in India’s digital payment system:
1. Redesigning the legal framework for digital payments: More than fifteen years ago,
when the Indian market for digital payments was still in its infancy, the PSS Act was
passed. It is the main piece of legislation governing payments in India. The law was largely passed to give the RBI the authority it needs to regulate payment networks by taking a systematic approach. Nevertheless, the PSS Act does not adequately address the three main policy objectives that support the majority of contemporary payment services legislation. In order to accommodate novel expense goods and service and take into consideration the dynamic character of the payment industry, the authoritarian mechanism for digital payment under the PSS Act needs to be revised. In order to do this, the PSS Act must be amended to develop a new, contemporary payment systems law that is based on a risk based methodology and applies directives proportionately.
As a result, low-risk goods and services will have an easier time entering the market and regulatory efforts can be directed toward the most systemically important players. Furthermore, such a regulatory framework should address the crucial concerns surrounding the obligation of payment service provider towards open access, interoperability and consumer protection that are at present dispersed throughout many sets of subsidiary enactments.
2. Adopt a separate law (Proposed Law) to update the PSS Act and simplify the
governance of payment services in India: Emerging goods and services along the payments value chain must be introduced into the Proposed Law’s defined and gradable framework. A risk-based framework that separates payment operations according to the risk they represent to the financial system must be included.
3. Pass a new law to revoke the PSS Act and establish two parallel regulatory
frameworks for systemically significant systems and payment services: Alternatively, the PSS Act might be abolished and replaced with a new law (proposed law) that would establish a two-tiered system that would include frameworks for SIPS and SWIPS designation and authorization for payment service providers. The proposed law should take a principles-based approach, with the core legislation laying out the general guidelines that regulated organizations must follow when conducting business. The RBI should have freedom under the proposed law to establish specific and binding regulations through directives. This would guarantee that important enabling measures for fostering competition and safeguarding consumers originate from the main legislation and are not dispersed via periodic notifications released by the RBI.
This strategy protects legislators from potential legal risks arising from excessive delegation,
whereby all substantive provisions are outlined in the subordinate legislation without any particular authority or direction specified in the primary statute. It also encourages certainty for businesses and inspires consumer confidence.
4. Provide an explanation of payment services: The proposed law needs to provide an
explanation of payment services. The following features could be taken into account when defining the term: the services have a distinct connection to payments; the service providers handle payments or handle transactions on behalf of merchants; and the service providers enter into agreements or have dealings with either customers or merchants. Clearing services should also be defined in the proposed law, as they are not in the PSS Act at the moment.
5. Establish a framework based on risk to govern payment systems and services: A
two-tiered regulatory framework and a risk-based strategy should be implemented by the proposed law.
6. Include principles to control operational risks: To address the operational risks
associated with retail payments, the proposed law may take the form of a principlebased framework. Introducing such principles in the main enactment will give authorized recognition to the regulated entities; and at the same time it will also update the subsidiary enactment with regard to the problem in hand, even though RBI may be authorized to ask subsidiary enactment to place definite necessity to implement such principles.
7. Introduce consumer protection provisions: The following recommended provisions
could be included in the law to safeguard consumers. • Include clauses requiring open access: The law must need authorized payment systems and payment service provider to grant access to its systems based on impartial, nondiscriminatory standards. • Introduce interoperability provisions: Payment service providers and specified payment systems shall be covered by the provisions on interoperability that the proposed law should outline.
Acknowledge the role of third-party service providers: The proposed law might acknowledge the idea and function of third party service provider, who are hired by PSOs and payment service providers to enable payment service.
8. Limit the kinds of subordinate legislation: The proposed law might take into account
simplifying and rationalizing the subordinate laws that could be published in the form of directives and regulations. A comprehensive strategy is needed to address these problems, one that includes building an
inclusive and user-friendly digital payments environment, strengthening digital literacy, assuring strong security measures and increasing infrastructure.