Rushing On Digital Payments Will Create Security Risks, Says Former RBI Deputy Governor R Gandhi

You can guide the public but cannot compel them to move away from cash, says R Gandhi.

UIDAI moves towards digital payment with Aadhaar enabled payment systems. (Photo: Altered by <b>The Quint</b>)
UIDAI moves towards digital payment with Aadhaar enabled payment systems. (Photo: Altered by The Quint)

R Gandhi, who spent 37 years at the Reserve Bank of India (RBI) and retired as deputy governor earlier this month, has cautioned against the rush to introduce digital payment options in a bid to reduce the use of cash in the economy.

Introducing a plethora of digital payment systems could create security risks if they are not adequately tested before being offered to consumers, said Gandhi in an interview with BloombergQuint on Tuesday.

Gandhi found himself at the centre of the demonetisation storm starting November when the government decided to withdraw 86 percent of the currency in circulation. Since then, the government has been pushing digital payment solutions in the hope that they will replace some of the cash in use in the economy. In his Mann Ki Baat address to the nation on November 27, Prime Minister Narendra Modi urged citizens to adopt means of digital payments. “A cashless economy is secure, it is clean,” Modi said.

Gandhi, who was responsible for both currency and payment systems at the RBI, has overseen this shift in priorities and cautions against choosing speed over safety in launching new payment options. The many conveniences of cash cannot be easily replaced, said Gandhi while adding that people will only move away from fiat currency when they are ready to.

On the payment systems side, we have been taking steps to take it to a higher level since the 1980s. The way we have been working, is to do it at a speed that the country can absorb. Now suddenly everybody wants everything to happen at the same time. That is going to be a challenge. Meeting the expectation that a lot of things have to be done in so short a time, along with that to keep the safety and security of the payment system, is going to be a challenge.
R Gandhi, Former Deputy Governor, Reserve Bank of India

While private wallet services, such a Paytm, benefited the most in the immediate aftermath of demonetisation, since then the government has tried to push its own digital payment systems.

In December, Prime Minister Narendra Modi launched the BHIM app, which was based on the Unified Payment Interface. In February, a QR-code based payment system BharatQR was launched. This Friday, the government is preparing to launch a biometric-based Aadhaar payment system. In addition, banks offer their own digital payment options and non-bank providers offer services such as wallets.

Has the government rushed through the introduction of all these new payment options? “Yes, that is my view,” said Gandhi.

The moment we target bottom of the pyramid people, they do not have the capacity to lose money even for a day, even if it is Rs 1,000. It is a big risk for them. We need rigorous tests and audits and only after that we should put it (a payment system) in operation. That means that we have to wait, we have to have time, we cannot rush.
R Gandhi, Former Deputy Governor, Reserve Bank of India

Commenting on Aadhaar Pay, which is scheduled to be launched by the Prime Minister on Friday, Gandhi said there is no problem with using the unique id for identification. However, what could prove to be a concern is the “gap” that exists between the unique identity database and the payment system.

“The way it is now structured is that a person is identified using Aadhaar number and biometrics. Then the payment is another system. Both happen simultaneously but are not uniquely coupled in a single system,” Gandhi explained saying that this gap could prove to be a vulnerability.

Fighting A Losing Battle Against Cash?

Despite the push towards digital payments, cash may very well remain the preferred choice for citizens, said Gandhi while adding that cash is a legitimate payment option and should not be vilified.

Currency in circulation has been rising steadily since November, but remains below the level that existed in the system before demonetisation. As of March 31, currency in circulation stood at Rs 13.35 lakh crore, shows RBI data. This compares to Rs 17.97 lakh crore on November 8. While digital payments have seen a pick-up over this period, there is no reason to believe there is a clear shift away from cash.

“You can guide the public but you will not be able to compel them,” said Gandhi adding that the eventual choice rests with the public which may chose cash over other payment options based on their own convenience and calculations. “Cash is a reality. It will continue.”

Gandhi also said that any attempt to keep currency in short supply deliberately will backfire.

If a public service authority, the government or the Reserve Bank, decide to have an artificial control on currency to force the people to go for an alternate course of payment, that will not work. It is the mindset of the people. That you cannot dictate. People will find their own way around it. Earlier when there was an actual currency shortage in the 1980s, people found their own method of tokens.
R Gandhi, Former Deputy Governor, Reserve Bank of India
Rushing On Digital Payments Will Create Security Risks, Says Former RBI Deputy Governor R Gandhi

In an attempt to bring parity between the cost of cash and the cost of digital payments, the RBI has also suggested that the fee or merchant discount rate (MDR) charged by banks and card companies be reduced.

Gandhi said that if an authority, such as a government, wants to bring down the cost of a public service, then the exchequer must bear the cost. Asking the service provider, such as a bank to reduce charges below commercial levels, will only result in those charges being transferred to another group of consumers or another service, he added.