WHAT HAPPENED?
Transaction volumes over the Unified Payments Interface (UPI) more than doubled over a year, touching 2.73 billion in compared to 1.25 billion a year ago. The March numbers are also a 20% jump from February’s 2.29 billion. Transactions value crossed ₹5 trillion in March, up 18% from February.
REASON
Digital payments are attracting growing interest. At one level, the reason is straightforward:-Digital payments allow buyers to pay sellers without physicalcurrency changing hands. Though the technology has been around for a long time, it is finally becoming much easier to use for small-value retail payments. Moreover, the pandemic has accelerated the switch to digital payments,As people have shifted to e-commerce and taken steps to avoid handling currency in ordinary purchases.
DATA GENERATION & PAYMENT PROVIDER
Digital payments also generate real-time data on sellers’ businesses, the timing of cash flows, and buyers’ purchasing habits, Allowing payment providers to offer credit, savings, wealth management, collections, insurance and other financial services. But a provider who handles only a fraction of a customer’s payments has only a partial picture of that customer. Payment providers therefore are eager to control all means of payment: bank accounts, e-wallets, credit cards, cryptocurrencies, and so on. And e-commerce and social-media platforms want to go a step further by combining their powerful data-collection engines with payments.
BENEFICIAL FOR CUSTOMERS?
With near-total knowledge of users’ behaviour, a provider can both address customers’ every need and lock them in for the long term, Because their costs of seeking similar services elsewhere will be too high.This tie-in need not be entirely exploitative: a merchant who uses a provider for a wide suite of services can be offered more credit, Because she will be less likely to risk losing those services by defaulting.
ON CRYPTOCURRENCY
There is also much excitement about crypto-currencies, which are just one form of digital payment, typically requiring an initial exchange of a fiat currency like the US dollar into a given unit. A cryptocurrency like Bitcoin offers ostensible benefits as a means of payment because, unlike fiat currencies, it cannot be inflated away (as its supply is fixed), & it allows for decentralized payment verification, Eliminating the need for any party to trust the others involved, let alone trusting government or regulators.
But there are impediments to Bitcoin’s use. Its value is not managed by a central bank, so it can fluctuate wildly. Firms, barring those led by true believers, do not want to keep a currency whose value can fluctuate by 10% every day. By some estimates, the annual electricity use needed to verify Bitcoin transactions exceeds that of a medium-size country. Cryptocurrencies are thus a work in progress.
POLICY CONCERNS
In any case, the emergence of a dominant digital-payment provider, cryptocurrency or otherwise, would raise important public policy concerns, Such as whether it could be trusted to collect and handle customer data responsibly. Owing to its mixed track record on data and privacy issues, Facebook’s proposed stablecoin (Libra) met with scepticism from financial regulators.
A related issue concerns antitrust. Does a single payment provider that handles all business services—including e-commerce and logistics— have an excessive amount of market power?
The recent tensions between Chinese regulators and Ant Group owe something to the fear that E-commerce platforms like Alibaba are using their market power—enhanced through payments—to restrict competition.
One remedy here would be to create public payment bridges, such as India’s Unified Payments Interface, where the key payment services are open to all comers and not controlled by any one private entity.
THE BIGGER CHALLENGE
But perhaps the greatest regulatory concern is systemic risk. When one or two providers dominate an entire country’s digital retail payments, commerce could be devastated if anything goes wrong. The only way around this is to have multiple providers, multiple bridges and multiple technologies in the payment arena.
CONCLUSION
Central banks are now contemplating getting into the digital- payments game themselves. They fear losing control over payments as physical cash becomes redundant, that the private sector will get it wrong, or that other central banks will steal a march on them. Central bank digital currencies would ensure a public presence in payments.
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