Agency Architecture and Payments Regulation in India
The concept of agency architecture pertains to the organization and design of government roles, focusing on accountability, conflicts of interest, and economies of scope and scale. It's imperative for shaping effective government structures.
The Evolution of Payments
- Historically, payments were a minor part of banking, with banks benefiting from holding funds ('float') rather than prioritizing efficient payment systems.
- Today, payments systems operate globally with advanced IT protocols and standards, emphasizing the need for a revenue model and data monetization (with privacy considerations).
- Payments have transitioned into a technology-driven industry rather than a traditional financial one.
Challenges in Payments Regulation
Within organizations like the RBI, monetary policy and banking activities are prioritized. This has implications:
- Bank deposits in India are approximately ₹220 trillion, making banking a major industry compared to the smaller field of payments.
- The dual role of banking and payments regulation within the RBI poses a conflict of interest, potentially prioritizing bank profitability over efficient payments regulation.
Proposed Solutions for Payments Regulation
Effective regulation requires a two-pronged approach:
- Clarification of Financial Regulation Objectives:
- The existing Payment and Settlement Systems Act (2007) is inadequate, offering unchecked powers.
- The Financial Sector Legislative Reforms Commission (FSLRC) proposed clearer objectives, emphasizing consumer protection, prudential regulation, and systemic risk regulation.
- Improved Governance Arrangements:
- Creation of a specialized board within the RBI to oversee payments regulation, reducing bias from banking regulation interests.
- The 2016 Ratan Watal report influenced this idea, culminating in the "Payments Regulatory Board Regulations" notification.
The goal is to appoint independent directors with global payments expertise to the board, ensuring it evolves effectively without becoming superficial. Additionally, the FSLRC objectives should be legally established to avoid unchecked powers.
Future Steps and Strategies
The path forward involves addressing current policy failures and invigorating the Indian payments landscape:
- Reopen the payments field by implementing Watal report recommendations, such as RTGS access for tech companies.
- Remove protectionist barriers against global payment companies to integrate Indian businesses into global payment technologies.
Such developments require a strategic understanding of change management in India, recognizing the role of government committees like the FSLRC and Ratan Watal report in influencing policy.