"DIGITAL PAYMENTS - TRENDS, ISSUES AND OPPORTUNITIES”

• Watal Committee on Digital payments recommended creation of a matrix for digital payment.
• According to NITI AYOG, the digital payments market In India is all set to grow to $1 trillion by 2023 led by growth in mobile payments, which are slated to rise from $10 billion in 2017-18 to $190 billion by 2023.
• In the light of such a tremendous growth of digital payments, the regulations and security of the users’ data has become a challenge for the government.
• Accordingly, a committee on Digital Payments was constituted by Department of Economic Affairs, Ministry of Finance in August 2016 under the Chairmanship of Ratan P. Watal to recommend medium term measures of promotion of Digital Payments Ecosystem in the country. The Committee submitted its final report to Hon’ble Finance Minister in December 2016.
• On the basis of recommendations a group of stakeholders from different Departments of Government of India and RBI was constituted in NITI Aayog under the chairmanship Ratan P. Watal to facilitate the work relating to development of a metric for Digital Payments which was the most important recommendation of Watal committe. This group prepared a document on the measurement issues of Digital Payments. Accordingly, a booklet titled “Digital Payments: Trends, Issues and Challenges” was released in July 2017.

The Payment and Settlement Act, 2007 has defined Digital Payments as any “electronic funds transfer” that is any transfer of funds which is initiated by a person by way of instruction, authorization or order to a bank to debit or credit an account maintained with that bank through electronic means and includes point of sale transfers; automated teller machine transactions, direct deposits or withdrawal of funds, transfers initiated by telephone, internet and, card payment.

The payment system has two main segments.

1. Systemically Important Financial Market Infrastructure (SIFMIs)
2. Retail Payments

1. Systemically Important Financial Market Infrastructure (SI-FMI)

• Financial Market Infrastructure (FMI):It is defined as a multilateral system among participating institutions, including the operator of the system, used for the purposes of clearing, settling, or recording payments, securities, derivatives, or other financial transactions.
• Under SIFMI, new standards are designed to ensure that the essential financial market infrastructure (FMI) supporting global financial markets is even more robust and thus even better placed to withstand financial shocks than at present.
• Under this segment (SIFMI) there are four instruments of payments:
  • Real Time Gross Settlement (RTGS): It is defined as the continuous (real-time) settlement of fund transfers individually on an order by order basis (without netting). 'Real Time' means the processing of instructions at the time they are received rather than at some later time; 'Gross Settlement' means the settlement of fund transfer instructions occurs individually (on an instruction by instruction basis). This system is primarily meant for large value transactions. The minimum amount to be remitted through RTGS is Rs 2 lakh. For inter-bank fund transfer there is no floor.
  • Collateralized Borrowing and Lending Obligation (CBLO): It is a money market instrument developed by Clearing Corporation of India Ltd. (CCIL), introduced in 2003. This represents an obligation between a borrower and a lender to the terms and conditions of a loan. It also does not entail physical transfer of respective securities from borrower to lender or vice versa.
  • Government Securities:A Government Security (G-Sec) is a tradable instrument issued by the Central Government or the State Governments.
  • Forex Clearing:The term ‘Forex’ stands for Foreign Exchange. In simple terms it is the trading in currencies from different countries against each other. In India the settlement of Forex transactions is done by CCIL which was started in 2002.

2. Retail Payments

Under the Retail Payments segment which has a large user base, there are three broad categories of instruments. They are (1) Paper Clearing, (2) Retail Electronic Clearing, (3) and Card Payments. The instruments under these three categories are discussed below:

• Cheque Truncation System (CTS):CTS or online image-based cheque clearing system is a cheque clearing system undertaken by the Reserve Bank of India (RBI) for faster clearing of cheques. It eliminates the associated cost of movement of physical cheques.
• Non-MICR:The Non-MICR clearing refers to the process of manual clearing of cheques where the cheque is physically moved between the bank branches/banks for clearing. MICR (magnetic ink character recognition) is a technology used to verify the legitimacy or originality of paper documents, especially checks.
• ECS DR/CR:ECS (Electronic Clearing System) is an electronic mode of payment/receipt for transactions that are repetitive and periodic in nature. DR/CR is ‘Debit Record or Credit Record’. ECS facilitates bulk transfer of monies from one bank account to many bank accounts or vice versa. ECS includes transactions processed under National Automated Clearing House (NACH) operated by National Payments Corporation of India (NPCI).
• NEFT:National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this scheme, individuals, firms and corporates can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the scheme.
• IMPS:Immediate Payment Service (IMPS) offers an instant 24X7 interbank electronic fund transfer service through mobile phones. IMPS is an emphatic tool to transfer money instantly within banks across India through mobile, internet and ATM. It is offered by National Payments Corporation of India (NPCI).
• UPI:Unified Payments Interface (UPI) is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood.
• *99#:USSD based mobile banking service of NPCI was initially launched in November 2012. The service had limited reach and only two TSPs (Telecom Service Provider) were offering this service i.e. MTNL & BSNL. Understanding the importance of mobile banking in financial inclusion, *99# was dedicated to the nation by Hon’ble Prime minister on 28th August 2014, as part of ‘Pradhan Manti Jan Dhan Yojna’.
• USSD (Unstructured Supplementary Service Data) is a Global System for Mobile (GSM) communication technology that is used to send text between a mobile phone and an application program in the network.
• NACH:“National Automated Clearing House (NACH)” is a service offered by NPCI to banks which aims at facilitating interbank high volume, low value debit/credit transactions, which are repetitive and electronic in nature. It allows participating banks for centralized posting of inward debit/credit transactions and is run by NPCI.
• Credit Card:A credit card is a card issued by a financial company which enables the cardholder to borrow funds. The issuer pre-sets borrowing limits which have a basis on the individual's credit rating. These cards can be used domestically and internationally and can also be used to withdraw cash from an ATM and for transferring funds to bank accounts, debit cards and prepaid cards within the country.
• Debit Cards:A debit card is a payment card that deducts money directly from a consumer’s bank account to pay for a purchase and eliminate the need to carry cash or physical checks to make purchases. In addition, they offer the convenience of credit cards for small negative balances that might be incurred if the account holder has signed up for overdraft coverage. However, debit cards usually have daily purchase limits.
• Pre-Paid Instruments (PPIs):PPIs are payment instruments that facilitate purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments. PPIs are classified under three types:
  • Closed System PPIs:These PPIs are issued by an entity for facilitating the purchase of goods and services from that entity only and do not permit cash withdrawal.
  • Semi-closed System PPIs:These PPIs are used for purchase of goods and services, including financial services, remittance facilities, etc., at a group of clearly identified merchant locations/establishments which have a specific contract with the issuer (or contract through a payment aggregator/payment gateway) to accept the PPIs as payment instruments. These instruments do not permit cash withdrawal.
  • Open System PPIs: These PPIs are issued only by banks and are used at any merchant for purchase of goods and services, including financial services, remittance facilities, etc. Banks issuing such PPIs shall also facilitate cash withdrawal at ATMs/Point of Sale (PoS)/Business Correspondents (BCs).

SIFMI has a very low share in the overall Digital Payments transactions whereas in terms of value it has a significant share i.e. 89%.

 

Digital payments in India: an Evolution

• India’s payment system - particularly, its digital payments system - has been evolving robustly over the past many years, spurred by developments in information and communication technology, and fostered and in consonance with the path envisioned by the Reserve Bank of India.
• The National Payments Corporation of India (NPCI) was established in 2008–has been spearheading the development of the retail payments system.

• Introduction of MICR clearing in the early 1980s. It is online image-based cheque clearing system where cheque images and magnetic ink character recognition (MICR) data are captured at the collecting bank branch and transmitted electronically.
• Electronic Clearing Service and Electronic Funds Transfer in the 1990s.
• Issuance of credit and debit cards by banks in the 1990s.
• National Financial Switch in 2003 that brought about interconnectivity of ATMs across the country.
• RTGS and NEFT in 2004.
• Cheque Truncation System (CTS) in 2008. Cheque Truncation System (CTS) or Image-based Clearing System (ICS) is for faster clearing of cheques. Cheque truncation means stopping the flow of the physical cheques issued by a drawer to the drawee branch.
• 'Card not present' transaction in 2009. It is most commonly used for payments made over Internet, but also mail-order transactions by mail or fax, or over the telephone.
• New RTGS with enhanced features in 2013 that required banks to adopt ISO 20022 standard messaging formats. The objective of introducing ISO 20022 standard message format for payment system is to bring about standardisation in the messaging formats for various payment systems in the country and to conform to international standard.
• Non-bank entities have been introduced in the issuance of pre-paid instruments (PPI), including mobile and digital wallets. BHIM (Bharat Interface for Money) is a mobile payment App developed by the National Payments Corporation of India (NPCI), based on the Unified Payments Interface (UPI).
• These developments capture the evolution of the Digital Payments ecosystem in the country. It resulted in setting up Committee of Digital Payments in 2016 under the Chairmanship of Shri. Ratan P. Watal, Principal Adviser, NITI Aayog.

Major Trends in Digital Payment (2016-17 and 2017-18)

• The demonetization of specified bank notes in early November 2016 along with other measures announced by the Government and the RBI to promote the movement from cash to non-cash modes of transactions impacted the volume and value of payments systems.
• The year-on-year (y-o-y) growth of digital payments in 2017-18 was of the order of 44.6% which was nearly double the CAGR growth in volume for the period 2011-2016.
• Transactions relating to IMPS, PPI and Debit card had exhibited growth rates in triple digits in the year 2016-17. This growth trend however has slowed down in 2017-18 and all these instruments exhibited double digit growth.
• UPI however has grown multi-fold in the year 2017-18 and touched 915.2 mn transaction in 2017-18. This instrument had minimal presence in year 2016-17.
• The volume of paper clearing had been persistently showing negative growth throughout the year 2017-18 compared to the positive growth in 2016-17.
• NEFT volumes had showed an impressive increase in 2016-17. It continued to grow in 2017-18 albeit a slower pace.

In addition to UPI which was introduced recently, several other modes have been introduced by NPCI.

• Bharat Bill Payment System (BBPS)
• Bharat Interface for Money (BHIM)
• Bharat Quick Response Code Solution (Bharat QR)

Growth Drivers for Digital Payments

In 2017-18, the volume segment in Digital Payments is dominated by Debit Cards, PPIs and IMPS. These, together constitute close to 50 % of the total volume of Digital Payments. Their combined share in 2011-12 was ~ 14%. The Value segment in Digital Payments is dominated by RTGS and NEFT. These together constitute ~ 53 % of the total value of Digital Payments, which is almost same as in 2011-12

Authorized Payment Service Regulation

• Reserve Bank of India under the Payment and Settlement Systems Act, 2007 issues Certificates of Authorization for Setting up and Operating Payment System in India.
• Board for Regulation and Supervision of Payment and Settlement Systems Regulations, 2008. Regulate the digital service providers
• There are 58 banks permitted to issue pre-paid cards in India (as on 22nd June 2018).

Digital Payments Service Charges

• RTGS Service Charges:These charges would consist of monthly membership fee and processing charges per transaction.
• NEFT Service Charges:
  • Inward transactions at destination bank branches (for credit to beneficiary accounts) – Free, no charges to be levied on beneficiaries.
  • Outward transactions at originating bank branches – charges applicable for the remitter. Originating banks are required to pay a nominal charge of 25 paise each per transaction to the clearing house as well as destination bank as service charge. However, these charges cannot be passed on to the customers by the banks.
• PPI/Mobile Banking/IMPS/USSD: No charges are prescribed by RBI and the charges are determined by the entity. As a temporary measure, it was decided that all participating banks and Prepaid Instrument (PPI) issuers would not levy any charges on customers for transactions up to Rs. 1000 settled on the Immediate Payment Service (IMPS). Also, no charges are levied on USSD-based *99# and Unified Payment Interface (UPI) systems.

What are the major policy initiatives taken to promote Digital Payments in India?

In Union Budget 2017-18, major policy announcements were made by the Finance Minister for promoting Digital Payments.

• Amendment of Payment and Settlement Systems (PSS) Act, 2007for structural reforms in the payment ecosystem is under process.
• BHIM:
• For promotion of the BHIM app, the Government has approved two promotional schemes namely ‘Referral Bonus scheme for individuals’ and ‘Cash-back scheme for merchants’.
  • For promotion of BHIM Aadhaar, a promotional scheme with total outlay of Rs 395 under the name ‘DIGIDHAN MISSION’ has been established.
  • BHIM Aadhaar Pay was launched by government of India on 14th April, 2017 as a merchant based mobile application for accepting payments from customers.
• Financial Inclusion Fund:
  • 3 BHIM schemes i.e. ‘BHIM Referral Bonus scheme for individuals’, ‘BHIM Cashback scheme for merchants’ and ‘BHIM Aadhaar Merchant Incentive scheme’.
  • Financial Inclusion Fund of NABARD is proposed to be augmented with Rs. 439.202 crore.

• NEFT system – Settlement at half-hourly intervals instead of hourly from 8:00 am to 7:00 pm on all working days.
• Master Directions on Prepaid Payment Instruments (PPIs):
  • RBI had issued guidelines for issuance and operations of prepaid payment instruments (PPIs) in 2009 in order to foster an orderly development of the PPI ecosystem.
  • Based on past experience, Master Directions on the subject was placed in the public domain for comments on March 20, 2017 and decided to rationalize the operational guidelines to encourage competition and innovation, and strengthening safety and security of operations, besides improving customer grievance redressal mechanisms.
  • Revised framework will pave the way for bringing inter-operability amongst KYC compliant PPIs.
• Rationalisation of Merchant Discount Rate (MDR):
  • MDR applicable on debit card transactions has been rationalized based on the category of merchants with effect from July 2011.
    • Small Merchants (with turnover up to Rs. 20 lakh last financial year), MDR Not exceeding 0.40% (MDR cap of rupees Rs. 200 per transaction).
    • Other Merchants (with turnover more than Rs. 20 lakh last financial year), MDR Not exceeding 0.90% (MDR cap of rupees Rs. 1000 per transaction).
    • The revised MDR aims at achieving the twin objectives of increased usage of debit cards and ensuring sustainability of the business for the entities involved.
  • Storage of Payment System Data:With considerable growth in the payment ecosystem and also highly technological dependency, it necessitates the adoption of safety and security measures.
    • All system providers shall ensure that the entire data relating to payment systems operated by them are stored in a system only in India.
    • System providers shall submit the System Audit Report (SAR) conducted by CERT-IN (The Indian Computer Emergency Response Team) to RBI.

Emerging Global Trends and Challenges

As per the report of Capgemini, a global leader in consulting, technology services and digital transformation, on ‘Trends in Payments 2018’, the Top 5 trends in Digital Payments across the world are as follows:

• Alternate payment channels such as contactless payments fulfill customer demands for convenience and speed and could soon become main-stream.
  • Contactless payments enable consumers to make everyday purchases quickly and safely especially for low-value transactions. (Contactless payment is a secure method for consumers to purchase products or services via debit, credit or smartcards (also known as chip cards). To make a contactless payment, a person simply needs to tap their card near a point-of-sale terminal & do not require a signature or a PIN, transactions sizes on cards are limited).
  • Augmented Reality (AR)-integrated payment gateway delivers a superior customer experience. Mastercard now allows customers to log in to the mobile payment app Masterpass by scanning their iris (one of the safest means of facial recognition).
    
    
    

    Challenges unique to India The costs associated with online payment through RTGS and NEFT systems have also created a hindrance. These methods are not only expensive but also time-consuming at a time when there are a number of technologies available that offer real-time fund transfer.   India is far from creating a robust digital payment ecosystem. There are several structural challenges that are hindering the growth of digital payments in the country and the biggest among them is the cyber-security. Digital inequality in India is also a challenge for deeper penetration of digital payments.

• Banks and Fin-Tech (Financial Technology) companies explore distributed ledger technology to transform cross-border payments.
  • The current cross-border payments model lacks an international clearinghouse and relies on correspondent banks, which causes inefficiency, slow speed, and high cost. As a result, corporate customers are demanding transformation.
  • A distributed ledger-based cross-border payments model is expected to result in improved efficiency, enhanced security, and lower costs.
• Instant payments ‘new normal’ for corporate treasurers, industry: Banks are leveraging instant payments platform to connect with third parties to deliver better digital customer experience and provide innovative products and services to both retail and corporate customers.
• As global cyber-attacks rise, regulators focus on data-privacy law compliance:
  • Based on estimates, cyber-attacks cost the global economy 1% of annual GDP.
  • The cyber insurance industry grew 35% in 2016 to $1.35 billion in terms of direct written premium, which shows that corporates are looking to protect themselves from liabilities related to cyber-security laws.
  • Lack of harmonization in cyber-security laws in different countries is a challenge for multinational companies operating across the globe.
  • Regulators across the world are bringing in new cyber-security regulations and standards which could impose heavy fines, injunctions, audits, even criminal liability on firms for a data breach.
• Payments Infrastructure rationalization is likely through mergers and acquisitions to expand the reach of the payments firms, increase their value proposition to meet changing customer expectations, and create customized solutions.

• According to NITI AYOG, the digital payments market In India is all set to grow to $1 trillion by 2023 led by growth in mobile payments, which are slated to rise from $10 billion in 2017-18 to $190 billion by 2023.
• The Digital Payment ecosystem in India is undergoing a transformation with the entry of global tech giants like Google’s payments app that are acting as aggregators for retail transactions.
• Paytm – which has 7 million merchants – now becoming a bank and post the launch of Google Tez and PhonePe, which are also focusing on merchant payments, a steep rise in digital payments could be expected.
• While the number of PoS (Point of Sale) terminals has doubled since demonetization, the merchant acquisition infrastructure (is a mechanism of providing necessary infrastructure and facilitating payment for goods and services purchased through medium of a card) in India remains weak, as banks have not been able to drive adoption. This sector presents immense opportunities for digital players.

• Measurement of Digital Payments is extremely important to monitor progress. The different components of Digital Payments have to be comprehensively studied with respect to global best practices and the list of indicators which are universally acceptable and relevant in the current context may be considered by RBI.
• A handbook of statistics may be prepared giving time series data on Digital Payments based on these standardized indicators which could be followed for all data collection and reporting agencies. This would bring uniformity and will reflect the growth in Digital Payments more accurately.