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Issue Highlights

The new paradigm in payment systems

From cash to contactless payments to mobiles money, it is a journey every government in the world undertakes in order to bring in transparency and efficiency in the payment systems:

It is in the last 10 years that India has seen a major shift from cash-based payment systems to electronic payment systems thanks to various measures initiated by the Reserve Bank of India, including the introduction of the Payment and Settlements Systems Act, the setting up of a robust RTGS/NEFT platform and the National Payments Corporation of India, regulation and promotion of alternate channels and payment gateways and guidelines on security measures for all electronic transactions. But, the shift not withstanding, cash/cheque based payments continue to dominate, especially in public sector banks in the country.

The RBI’s Payment System Vision Document 2012-15 has a SWOT analysis. It reveals that while electronic payment systems have registrered impressive growth, the benefits of the modern electronic payment systems are yet to reach all the sections of the society and accepted across the length and breadth of the country. These systems unfortunately continue to concentrate to a large extent in the tier-I and tier-II locations and benefit those citizens who already have access to the formal banking channels. “The analysis also pointed out that the existing ‘fit for current purpose’ payment system infrastructure needs to be transformed into a state of ‘ready for future challenges’ infrastructure. This can be achieved through standardization, interoperability, consolidation, common infrastructure creation and sharing intertwined with innovations in product and delivery channels. To drive this process forward, further capacity building in terms of both systems and human resources in the industry and the Central Bank (RBI) is essential. Also requiring special attention relate to managing cyber crime and security threats and the need to ensure seamless business continuity plans,” says the document.

Advent Of Mobile

What has incredibly influenced the payment systems domain has been the advances in communications and the associated technology. The most remarkable of the developments is the mobile banking and payments.

Experts cite several factors that contribute to the changing scenario:

  • Cashless purchases are becoming norm not just in the developmed countries but in Asia as well
  • Resistance among retailers to pay high merchant fees to the credit card companies
  • Financial services institutions and credit card companies feel threatened by innovative payment technology start-ups and they themselves forced to innovate
  • Near field communication (NFC) becoming a game changer in ushering in reliable cashless payment system

Some of the recent developments in payment services across the world are:

  • Barclays Pingit offers UK account holders the ability to instantaneously transfer and receive money for free using any Android or iOS device
  • Moven and OnTrees are offering a combination of mobile banking and payments services via smartphone
  • Starbucks, along with a number of other major retailers, has introduced new payment options through mobile apps powered by near field communication
  • VocaLink is launching Zapp, which will allow retail customers to pay for purchases via smartphone
  • eBay acquired payment services provider Braintree, whose Venmo app supports payments by tablet and smartphone
  • HDFC Bank’s Chillr, a mobile app, allows users to instantly transfer money to any contact in their phonebook
  • ICICI Bank facilitates voice authentication for funds transfer

All these developments show the remarkable changes happening in the payments sector but it is a fact that only those innovations which offer a combination of consumer benefits, product features and economic advantages would stay back.

Financial Inclusion

Banking experts are optimistic that the disruptive innovations in the payment systems will be critical for accomplishing the goal of financial inclusion. They believe such innovations will occur in three distinct domains – financial services, telecom and retail.

Ernst & Young had come out with a report which lists 6 key elements that make up the financial inclusion agenda of the country:

New game, new rules — evolving prepaid instruments landscape in India. Although prepaid market represented only 3.62% of the Indian card market, this will increase dramatically over the next decade.

Rethinking mobile money — the case for electronic rupee issued by the RBI. The challenge is to take a transformative step that will lead to a paradigm shift in the mobile money paradigm. One such step would be creation of electronic rupee.

Enabling payments — increasing POS penetration. India’s POS landscape is characterized by a large skew in favor of urban locations. Urban retailers seek technologies like Mobile POS, while rural merchants vote for biometric POS terminals, which enables them to accept Aadhaar enabled debit cards.

Evolving payment ecosystems – shared services models for inclusion and growth. Banks are introducing payment ecosystems that work across organizational boundaries to deliver innovative payment services.

Pathways to excellence – the transformation agenda for banks. Changing consumer behavior, the increasing urgency of financial inclusion and ubiquitous mobile telephony are powerful external factors that will transform the Indian payments industry over the next 10 years.

Cashless in India – government imperatives to promote electronic payments. The Interbank Mobile Payment Service and Aadhaar Enabled Payment System platforms have the potential to integrate the payment systems of various Government to Public (G2P) schemes and enable mobile phones to be used as front-end technology.

Mobile Money

As mentioned earlier, one outstanding consequence of the metamorphosis has been the mobile money. In the last two years, the number of customers using mobile devices for banking transactions have tripled, while the cumulative value of banking transactions by those using mobiles have gone up 11 fold. But the potential of mobile banking seems to have gone untapped to some extent.There are over 900 million mobile users in the country, but there are only 36 million mobile banking customers. This figure is bound to get a fillip when the government’s PMDJY scheme gets fully implemented. Mobile banking costs 2% of branch banking, 10% of ATM and 50% of internet banking.

State Bank of India leads in the total number of mobile banking users and the bank has seen 45% growth during 2014. Importantly, the bank saw about 70% of the customers coming in from the non-metros. In terms of value of transactions, private banks – ICICI Bank and HDFC Bank – dominate the mobile banking space.

Mobile banking has the potential for reaching out to a vast clientele. It is one of the cheapest options in terms of technology and the most efficient mode for reaching out to the masses. Each and every bank in India is now scaling up mobile banking as a channel. While private sector banks have been in the forefront in making use of this digital opportunity with better technology, almost all public sector banks too are in the space and have seen transactions going up.

With mobility and customer convenience are seen as keys to growth, banks are busy exploring new technologies. Experiments with near-field communication technology have failed to provide a mass-scale payment solution, but the industry is buzzing with terms like cloud computing and mobile solutions.

Experts are not very sure that mobile banking at one time will replace the physical wallets and internet banking. They aver these channels actually work complementary to each other. Physical wallets cannot be replaced in India. We are a cash-based economy and will remain so for years to come. While technology is the basis for digital banking and technology has indeed made it efficient and secure, there are constraints. Take for example, the screen size of a mobile. As for internet banking, it is not going to be replaced by any other channel. All serious transactions would happen through this channel unlike the mobile banking channel, which is limited to transactions like booking tickets, filling in airtime, or small ticket money transactions.

India Growing

Deepak Sharma, excutive vice president, Digital Initiatives, Kotak Mahindra Bank, defines mobile banking and payments as closely linked with customer transaction journey. “Hence, it is natural progression for banks,” he says, emphasizing: “We are following a path of frictionless, secure and convenient payment mechanism.”

Sharma says India is growing faster than all emerging countries and developed markets on mobile and there is a large mobile-first and mobile-only customer base for several segments. “While wallets provide checkout convenience, customers are more keen to see safe, convenient and rewarding payment options. Any platform that can meet their need will have significant customer uptake. One thing is sure, most payment innovations will be centred around mobile,” he adds.

The so called mobile money ecosystem is posing challenges to banks globally. The competition comprises businesses including telecoms and tech firms, which hitherto never aligned with financial services. What prompted this scenario to develop has been the consumers’ need for easy access to their money through whatever secure modes. Hence came into existence, concepts like electronic wallets. It is just happening – mobile money will be the prevailing norm. In many countries, more number of people makes use of phones than banks for their transactions. There have been studies which forecast that there could be exponential growth in this number in the immediate future. The moot question here is whether the role of banks in the financial system would get minimized as increasingly mobile platforms for transactions are now being designed, developed and operated by non-financial entities. In this scenario, what is cause for concern is the absence of any standards in such business models.

Security

That brings out the issue of security. To a great extent, technology in payment systems is able to counter security threats. However, there has always been a general rise in the number of frauds, card scams and cheating, which to a certain extent is the result of ignorance on the part of users of the systems concerned. There is skimming and phishing, but it is just one part of the security aspect. If the users of the system are made aware of such threats and they are always cautious, obviously the number of such frauds will come down. For example, the level of understanding about security aspects among the bank customers in semi-urban and rural areas is virtually very low and naturally they do not take the necessary precautions while transacting online or through ATMs and POS terminals. It is the aftermath of the Indian mindset to be very casual about security. Added to this is the lack of education. Banks and financial institutions have a major role in educating the customers, especially in rural areas, about possible security threats and how best simple precautionary measures and following the protocols can help avoid falling into the traps. The situation is likely to get aggravated in the light of programs being initiated like PMJDY, which involves mass opening of accounts and the customers enrolled forced to use electronic payment systems.

Sharma says online payment ecosystem – both personal payment and merchant payment – will become more synergistic in terms of security and convenience. “Two-factor authentication has already addressed the security issue to a large extent. As we go forward, one may get much closer to synergising payment and transaction platforms, thereby enhancing not only security but also building greater convenience for consumers,” he adds.

Contactless

He talks about contactless payment system and underscores the fact that any payment advancement is supported by the presence of an ecosystem. “This depends on consumer mindset around security vs convenience, issuing bank’s bet on issuance of NFC-enabled plastic or stickers for mobile device, merchants who have to be partners in checkout infrastructure and acquirers. If each stakeholder sees benefit in adopting this mode of payment, there will be significant uptake. Initial adoption will be driven in areas like mass transit, highways and toll collection before retail sectors adopt at a large scale.”

He adds that these are emerging systems. “As we waive two-factor authentication for transactions below Rs 2000, we may see uptake in select payment categories.”

Contactless payment system brings to the fore the relevance of NFC. Past years have seen NFC languishing in the background with little or no adoption largely as a result of customer reaction. Frankly, making a customer give up swipe process and opt for NFC involves either some incentives or a better customer experience. Several NFC-based initiatives have not taken off. Globally, Apple Pay is the first to adopt NFC and succeed in giving a reliable and happy customer experience, especially in terms of security. Additionally, several urban transport undertakings have successfully implemented payment systems based on NFC. But how relevant it can be when a person is making a decision about a mobile phone? What appeals to him would be its design, cost and features and not its properties with regard to using it as a mobile wallet. So what is required is to have innovations so that a new customer experience is created. Banks have a big opportunity to become wallet providers because this segment is going to be a critical in the payment system scenario. And NFC will be a crucial medium for the segment as contactless is bound to be the preferred mode in the years to come.

Many banking technology experts believe NFC is in a trial phase in India and mass adoption of the system will follow only upon successful conduct of the trials. India has the technological infrastructure required for adopting the system and there cannot be serious hurdles once the efficacy and benefits of the system are proven.

POS

POS is one area in payments domain that has spurred the digital transaction space. It has seen innovations like mobile POS working on GPRS. It is going to be a major factor in e-commerce in the country where POD system has become popular these days. Mobile POS will also be an enabling device in financial inclusion programs. The latest development is to convert a mobile device, say your iPad or a tablet, into a POS device. This cloud based POS system can be accessed directly from the internet and the access costs are minimal. The advantage is that one can access all the sales data 24 hours a day from a remote server and thereby monitor the business on a mobile device through realtime sales reporting.

There are views that banks must instead of levying a fee on use of cards, should in fact incentivise their use through loyalty or commission schemes to the users. This will promote the use of cards and bring down cash transactions. There is also the belief that India being a cash-based economy, should initiate steps to move to less cash and hopefully more digital payments. It has been established that card-based payments growth is no where near the number of active cards held by people and the infrastructure already created for card-based transactions. So, what is required is to allay fears about security, incentivize card usage and adopt viable merchant discount rates.

Debit VS Credit

Will India go by the predicted global trend of decreasing debit card transactions and increasing credit card transactions?

It is quite unlikely, feel several experts, mainly because we Indians are socially inclined and credit averse. We do not believe unlike the westerners in making use of credit. We are also aware of the pitfalls as demonstrated in the mortgage meltdown and the suspicious financial products that western banks brought into being, which resulted in the economic collapse. Normally, we have learnt to live within our means and use our debit cards.

The fundamental aim for managers of economy and regulators all over the world is to cut down cash usage. Cash transactions pose major challenges to all the stakeholders, whether banks, regulators, merchants or consumers. The challenge can be met only when there are alternatives available like mass scale banking, issue of debit and credit cards and strengthening of the mobile banking technology platform. There have been instances of success of such experiments in countries like the US, in Europe and SOuth East Asia where cash is largely replaced by debit cards and prepaid cards. These patterns need to be replicated elsewhere, especially where the unbanked population is considerbly high and the modern banking infrastructure is yet to reach the nooks and corners.

For instance, in India the government can promote electronic payments – from payment of taxes to payment of doles as social welfare measures. Platforms like the IMPS and the Aadhaar Enabled Payment System are measures in the right direction and these will integrate the payment systems of various government to public (G2P) schemes and enable mobile phones to be used at the frontend.

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