In pursuit of a digital India, everyday transactions are gradually moving away from physical and migrating to digital. Existing e-money and mobile wallets provide improved security, efficiency, privacy, affordability and transparency in financial transactions. They eliminate some middlemen with the use of mobile devices for payments. But there are looming challenges that are associated with protecting consumers in such private e-money schemes.
The present forms of e-monies are liabilities issued by the service providers. Convertibility of these private e-monies to legal tender rupee is subject to the financial management and operational soundness of the service providers. Acceptability of e-money between different schemes is not a given, and is subject to the mutual agreements between the service providers. Disruptions, such as fraud and errors, can lead to the loss of funds that either the consumers or providers have to compensate.
Escrow account issues
One administrative measure to protect consumer funds is the regulation of maintaining escrow accounts. The e-money service providers are required to open escrow accounts at banks. The balances of the escrow accounts must be equal to the e-money issued. This theoretically ensures that there is always sufficient money in bank accounts to satisfy the customer demands for converting the e-money balance to bank account money or cash. However, it takes time and labour to audit balances reported by the e-money service providers.
Even when the report shows e-money balance matching escrow balance, it still cannot be confirmed. Cases have been reported where people collaborated to manipulate the e-money system to modify balances to create “fake” e-money and thereafter convert the fake e-money to cash. It also exposed large discrepancies in the escrow account balances. This brings us to the perennial significance of cash transactions.
We are used to the certainty of cash transactions. When you hand over a ₹100 bank note to a merchant, both know the debt is settled and non-repudiated. But this is less certain in e-money transactions, especially when multiple e-money service providers, settlement banks and intermediaries are involved. When both the sender and recipient receive the confirmation messages of the transaction, there are still multiple reconciliation and settlement activities that take place between the service providers, banks and intermediates to finalise the state of the ledgers of these entities. It is cumbersome to conduct these settlements, relative to the high volume and low value nature of e-money transactions. Discrepancies can and have occurred in the past. Fortunately for the consumers, these discrepancies are absorbed by the service providers to keep the consumers happy, instead of undoing the transactions.
There is a lot of talk around personal information and privacy protection in our digital lives these days. On the other hand, governments are extremely concerned with digital means being exploited for illicit activities. There is a growing need to track and monitor activities in cyber space against money laundering and terrorists’ funding. The information collected and accumulated in the financial institutions and e-money service providers, offer powerful channels to detect those questionable activities. We are constantly looking for the right balance between personal information, privacy protection and law enforcement.
In this age of rising consumerism, the willingness to trust someone without any questions asked is a tall order. With private e-money service providers fielding these methods, the question of regulation, accountability and a universal approach becomes a large issue. Furthermore, financial inclusion or lack thereof remains a significant issue for the mass population.
Digital India rupee
Given that the future of India’s formal economy is slated to be digital, it is critical to examine a secure system that protects the consumer. The shortfalls in consumer protection can best be addressed by the use of a sovereign digital fiat currency, issued by the RBI, treated as legal tender in India. Since the digital India rupee will be issued by the central bank, the value of the currency is backed by the creditworthiness, assets and productivity of the nation. It is protected with layered hardware, software, protocol security and currency laws. This will address the issues of monetary supply, digital counterfeit, convertibility and acceptability. With the use of digital India rupee through existing e-money services, it will not require any expensive infrastructure or transformative technologies to enable its use.
Digital payments conducted with the digital India rupee are settled and finalised at the point of exchange. There is no need for subsequent settlements between the ledgers of the e-money service providers, escrow account banks and other intermediaries, because the digital India rupee is a bearer instrument just like paper notes and coins. Transactions conducted here are settled like cash. This will remove the labour intensive factors and financial risk costs associated with reconciliations and settlements.
Digital India rupee provides a favourable balance between privacy protection versus law enforcement. A digital legal tender gives the authority the visibility of the pattern and behaviour of the digital currency in circulation. The persons transacting or the contents of the transaction are not disclosed unless there is adequate suspicion in the transaction, requiring authorities to justify the need for additional information.
Essentially, digital India rupee will bring the trust and efficiency of cash to digital payments. It will accelerate the shift from an informal to formal economy and looming loopholes like black-market will see a steady decline, eliminating ‘negative elements’ from the financial system. Overall stability in the economy will indirectly impact the consumer with better price-output stability.
Therefore, in this era of digital India rupee, it is critical that asset security, data privacy, usability and careful disclosure are protected for the consumer. The recommendations for a digital India rupee are made based on ongoing evaluations of every progressive financial milestone that has been witnessed in India and around the world.
The writer is former head of Credit Suisse India