India’s central bank creates $66m digital payments infrastructure fund

Written by Ruby Hinchliffe
8th June 2020

The Reserve Bank of India (RBI) has created a $66 million (INR 5 billion) Payments Infrastructure Development Fund (PIDF) in a bid to improve the digital payments ecosystem in India’s rural and north east districts.

The fund will be administered and propped up by recurring contributions from the central bank

The central bank has made an initial seed contribution of $33 million to the PIFD, with India’s card issuing banks and network operators expected to make up the other half of the fund.

The fund is significant, as it follows calls by the industry for monetary incentives to draw companies to more rural and operationally expensive areas of India.

RBI says it wants to attract acquirers to deploy the point of sale (POS) infrastructure – in both physical and digital modes – to cities which house less than one million people, as well as to all the north eastern states.

“Over the years, [the] payments ecosystem in the country has evolved with a wide range of options such as bank accounts, mobile phones, cards,” says the central bank in a statement.

“To provide further fillip [stimulus] to digitisation of payment systems, it is necessary to give impetus to acceptance infrastructure across the country, more so in underserved areas.”

The fund will be administered and propped up by recurring contributions from the central bank, which will cover operational expenses from card issuing banks and card networks, and yearly shortfalls “if necessary”.

In January 2020, India’s government waived the Merchant Discount Rate (MDR) – the charge levied for electronic payments on merchants by banks. The charge, typically around 12 rupees ($0.17), was dropped to boost digital payments, particularly transactions across RuPay cards, which are domestically issued by the National Payments Corporation of India (NPCI).

However, payment companies and ecosystem players have since raised concerns that this causes the deployment of PoS machines to take a big hit.

Without any monetary incentives as per the ban on MDR, banks and payment companies are therefore less inclined to deploy their machines and acquire merchants in rural zones, especially with costs of maintenance being higher. The PIDF is attempting to address this issue.

India has also experienced its fastest growth of ATM deployment since 2016, adding more than 7,000 machines according to Retail Banking Research (RBR).

The country’s Independent ATM deployers (IADs) installed three times the number of ATMs over 2019 compared to banks, suggesting the growth is in part down to financial inclusion efforts by non-bank institutions attempting to tap consumers in rural areas.