Payments and transfers, particularly direct benefits transfers (DBT), are the big drivers of financial inclusion at present. Effective implementation calls for new partnerships between banks and non-bank entities. Yet the opportunity remains clouded under debate over turf, roles and accountability.
Central to the debate are three issues: (1) Can non-banks issue payment instruments and accept cash clarifying whether cash-in cash-out transactions constitute banking transactions. (2) Who will be ultimately responsible for systemic risks posed by opening retail payment transactions to non-banking entities. (3) Who will regulate the evolving ecosystem, a cocktail of multiple sectors—banks, telcos, ICT infrastructure and retail commerce—each with its own regulators in place?
As for the turf issue, currently only bank accounts have been allowed/enabled to credit and withdraw payments under the DBT, which will be largest pipeline of fund flows. The scope for non-banking actors remains limited under present limitations to the purposes and the ceilings of prepaid instruments. The real question is: can banks alone deliver financial inclusion? The answer, with the limited reach and footprint of banking sector, is easy. It would therefore serve to clarify the distinction between payments and other banking functions, emphasising that payment systems that do not intermediate funds do not pose financial risks to the banking sector.
As for systemic risks—money laundering, suspicious transactions, etc, the real issues are: the vast variance and latitude in KYC norms of banks and non-banks and RBI’s own capacity to monitor suspicious activity on non-bank payment platforms. RBI’s concern in all this debate is over its own accountability, as being the one entity finally holding the can if any scams erupt in financial inclusion. Unfortunately, relaxing the KYC regime for no-frills or basic accounts opened by agents will only add to the variance and potential risks.
Taking both together, the most practical if not ideal solution is right in the face: Aadhaar, the dark horse in the arena. All the systemic risk concerns pointed out by banks can be addressed with two policy decisions: (1) Make Aadhaar the foundation of all KYC processes; with the Aadhaar authentication being a common identifier architecture for KYC for bank accounts, mobile SIM registration, benefits transfers, remittances, and prepaid instruments—cards, mobile money. This will significantly address RBI concerns on systemic risk, money laundering and fraud. (2) Route semi-closed prepaid instrument transactions through the Aadhaar payments bridge—which is operated by the NPCI, thus providing sufficient monitoring and controls by the banking sector.