Policy Update
Mallika Bhojak
India’s transformation towards a digitally empowered economy, mostly driven by technological advancements, government initiatives, and increasing demand for digital payment platforms that are currently being provided through the Unified Payments Interface, has been remarkable. Though the rapid evolution of digital payment technologies has taken place, there is no uniform distribution of the benefits reaped from this change. A large portion of the population in Tier-3 to Tier-6 cities, northeastern states, and union territories like Jammu & Kashmir and Ladakh continues to face barriers to accessing digital payment infrastructure. These regions, characterized by limited banking services and reliance on cash, are a testament to the persistent digital divide in the country.
To bridge these gaps, RBI launched the Payments Infrastructure Development Fund in January 2021. This is an initiative that underlines a commitment toward building an inclusive digital payment ecosystem and has been brought about by promoting the deployment of Point of Sale (PoS) terminals, QR codes, and other digital payment solutions in underserved areas for incentivizing the same. By targeting the most needful regions, it bridges the divide between urban and rural society, empowers small businesses and the marginalized communities0141 integrate into the formal financial system to foster inclusivity and economic empowerment.
Objective
The PIDF Scheme was structured to achieve a range of interlinked goals, all aimed toward a larger end of financial inclusion and economic empowerment:
- Geographic Equity: The Scheme places significant emphasis on the rollout of payment acceptance devices in the not-so-digitally-enabled regions, particularly Tier-3 to Tier-6 cities and areas that have challenging terrain like the northeastern states.
- Merchant Empowerment: Subsidizing the deployment cost of payment devices, the PIDF promotes the adoption of digital payments among small and medium-sized merchants. This reduces their dependence on cash transactions by integrating them into formal financial channels.
- Consumer Convenience: Digital payments are made accessible to consumers in underserved areas, enabling them to experience safe, efficient, and cashless transactions.
- Economic Inclusion: The Scheme is supporting grassroots level economic activities through nano-enterprises, namely those with less than ₹20 lakh annual turnover, thereby enabling broad-based financial inclusion.
Functioning
The PIDF functions through an established mechanism under the involvement of multiple stakeholders; the RBI on one hand and banks and Payment Service Providers on the other. Key highlights of its functionality include:
- Corpus Fund: The initial corpus of ₹500 crore is managed by the RBI. Contributions are also made by the stakeholders, such as banks and non-bank payment providers. The fund is periodically replenished so that the Scheme may be sustainable in the long run.
- Subsidy Mechanism: The Scheme allows for 30% to 90% subsidies on the payment device deployment, depending upon location and type of deployment. Areas that are located in rural or remote areas will have higher subsidization to make deployment easier.
- Eligible Devices: Under the Scheme, a variety of devices are supported, such as traditional PoS terminals, UPI QR codes, and sound-based notification devices, enabling flexibility in addressing diverse regional needs.
- Implementation Framework: Banks and NBPPs are held responsible for the deployment of devices and the making of claims for reimbursement. This promotes accountability and maximum participation.
- Monitoring and Evaluation: The Scheme has a robust monitoring framework that tracks its performance, ensuring deployments hit predefined targets. Data-driven evaluations for strategizing and solving emerging challenges will be made.
Performance
Since its launch, the PIDF has accomplished numerous milestones that exemplify its strength in bridging the digital payment divide:
- Infrastructure Deployment: Since March 2024, more than 89 lakh physical PoS terminals have been installed with the help of the PIDF Scheme, besides 3462 lakh UPI QR codes. The growth percentage in QR deployments from 2021 stands at 274 percent, thereby symbolizing the successful push by the Scheme for digital infrastructure development.
- Adoption by Nano-Enterprises: About 74.4% of the merchants who adopted digital payments did so in the last three years, with most of these being nano-enterprises. It underscores the focus of the Scheme on grassroots economic empowerment.
- Regional Outreach: All deployment efforts have been through Tier-3 to Tier-6 cities, making up 95.4 percent of infrastructure put in under PIDF; there have been substantial improvements to the payment infrastructures in states across the northern, J&K, and Ladakh territories.
- Increased Digital Transactions: UPI P2M (person-to-merchant) transactions have grown and constituted 59% of total UPI transactions in FY 2023-24 as against 34% in FY 2021-22. This growth reflects the Scheme’s contribution to the adoption of merchant-centric digital payments.
Impact
The transformative impact of the PIDF Scheme goes beyond mere economic, behavioral, and operational effects. On an economic front, merchants have observed revenue growth with ease because of the streamlined transaction process associated with digital payments. For businesses, their daily revenue on average increased by 20-25%. To be specific, 75% of the merchants pointed to cost savings because of a decrease in cash handling and trips to the banks.
From the behavioral perspective, the Scheme has led to a shift in consumer preferences as UPI becomes the preferred payment method. UPI is ranked as the top payment method by 88% of merchants, surpassing cash for the first time. The linguistic and technological barriers have been further addressed through the use of sound-based notification devices, thus building merchant and consumer confidence in digital payments. The adoption rate of such devices by merchants is at 68%, thereby validating their utility in rural and semi-urban geographies.
Operationally, digital payments have improved inventory management by enhancing the comfort of merchants in tracking and managing stock. Administrative burdens have decreased while improving cash flow management. About 61% of merchants achieved time savings, hence more focus on business growth and customer services. Although women’s participation in nano-enterprises remains at a low 7%, the Scheme has been impactful for many female entrepreneurs-especially in northeastern states, enhancing their financial independence and business opportunities.
Emerging Issues
Despite its success, the PIDF Scheme has several challenges that need to be addressed in order to make it sustainable in the long term. First being the limited knowledge about digital payment benefits among merchants and consumers in remote areas which act as a barrier to adoption. The activation rate of devices deployed in certain regions is relatively low, largely due to poor merchant training and a lack of demand from consumers. Moreover, the operational costs of maintaining and replacing devices in remote areas are high, which acts as a major barrier to the long-term sustainability of the scheme.
Fraud and security concerns also exist, 36% of merchants report consumer-side fraud. These problems underscore the importance of having strong cybersecurity measures in place to instill confidence in digital payment systems. Moreover, internet connectivity and power supply are irregular in rural areas, which often affects the smooth functioning of payment devices.
Way Forward
The following steps should be adopted to ensure that the impact of the Payments Infrastructure Development Fund (PIDF) Scheme is sustained and scaled up:
Targeted Awareness Campaigns:
- Developing tailored outreach programs for merchants and consumers in remote areas will help bridge knowledge gaps.
- Local languages and cultural contexts should be used to amplify the reach and effectiveness of such campaigns.
- Establishing trust in digital payment systems, thereby enhancing the activation and utilization rates of deployed devices.
Technological Innovation:
- Expanding the Scheme to include advanced solutions such as Near Field Communication enabled systems and contactless payment technologies.
- Promoting the use of low-cost, long-life payment devices that are more suitable for rural and semi-urban deployment.
- Establishing proper Cyber Security Control environments to ensure the scheme is protected from fraud threats and increase confidence in electronic transactions.
Sustainability of Infrastructure:
- Implementing financial incentives for the maintenance and replacement of payment devices.
- Ensuring that payment infrastructure remains functional and accessible for a longer time in underserved regions.
Strengthened Collaboration:
- Developing convergent collaboration among fintech entities, local authorities, and community-based bodies for synchronized implementation of the Scheme.
- Achieving resource optimality through multi-stakeholder cooperation in dealing with regional challenges.
Comprehensive Monitoring and Evaluation:
- Development of a robust data-based approach to monitor device deployment, usage rates, and disparities at the regional level.
- Feedback and monitoring to fine-tune subsidy structures and enhance the Scheme’s effectiveness.
Gender Inclusivity:
- Developing targeted programs for women entrepreneurs in digital payments, especially in underrepresented regions
- Providing tailored training and financial support to more women so that they can participate and benefit from the formal financial ecosystem.
In conclusion, the PIDF Scheme has already become a transformative initiative in bridging the critical gaps in India’s payment infrastructure, fostering financial inclusion. Addressing the challenges that have been discussed above and going forward with an open, collaborative approach will solidify the role of the Scheme even more as one of the cornerstones of the country’s cashless economy. The extended timeline would allow its success to build further, ensuring that no community is left behind in the digital revolution to pave the way for a truly inclusive and sustainable financial future.
References
About the author: Mallika Bhojak is a research intern at IMPRI, and pursuing her Masters in Economics from Dr. B.R. Ambedkar University Delhi.
Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.
Read more at IMPRI:
Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.
Read more at IMPRI:
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