Digital Highways
The transition to a cashless economy requires building a safe and secure payment infrastructure
Ali Baba had only to say ‘Open Sesame’ for the treasures of his cave to be opened to him. Modern payment systems, too, are fast approaching this fairy tale scenario. A bank in The Netherlands, for instance, has begun a voice-activated payment system where a customer just has to utter the requisite command to make payments. South Korea has developed a biometric sensor in mobile phones which enables secured e-payments without further authentication. A Japanese bank is working on ‘facial recognition’ technology as a substitute for debit or credit cards. There are banks that are exploring the use of a biometric which reads a vein in the user’s palm to make payments. The world of payments seems to be waking up to a new technology every day. India, too, isn’t far behind. The country now has multiple cashless payment avenues: banking apps, the Quick Response (QR) code system, the Aadhaar payment app, mobile wallets, ‘contactless’ cards, and more. The initiatives like united payment interface (UPI), which facilitate payments between two bank accounts via mobile driven by RBI is most sophisticated. Some experts maintain that India is ahead of even the US in its payments systems and the variety and ingenuity of its payment options. “Most countries are looking to rebuild their payment systems, while India already has the National Electronic Fund Transfer (NEFT) and the Immediate
Payment Service (IMPS) in place,” says Dilip Rao, Managing Director (Asia-Pacific), Ripple Labs, a US- based company that facilitates payments among global banks.
To find new payment solutions and reduce the time to market, Indian banks are teaming up with financial technology companies like never before. While the large banks have their own processing – or ‘switching’ – infrastructure, the new ones have mostly outsourced the job to fintech companies. “We’re good at managing money, at compliance, in auditing and governance,” says Ritesh Pai, Country Head (Digital), YES Bank. “We’re happy to engage with solution providers who want to test their payment solutions with us.” YES Bank has so far partnered with more than 100 start-ups across different verticals and sees much advantage in doing so. “The time to market is shorter this way,” adds Pai. “Some of the best practices in the world are available with these companies. It also brings down the cost of doing business.”
The government’s initiatives, such as the Unified Payment Interface (UPI) for money transfer from bank accounts, Bharat Interface for Money (BHIM), a mobile wallet using the UPI platform, and Bharat Bill Payment System (BBPS), which enables bill payments through UPI – all of them launched by the public sector National Payments Corporation of India – have opened the field wide for further experimentation. “The pace of technological change in India is going to be much faster than elsewhere because of the government’s push,” says Sanjeev Chandak, Co-founder of FTCash, which enables micromerchants like milk vendors, newspaper agents and kirana store owners to make and receive electronic payments. “The objective is to reduce use of cash, since the cost of handling cash has to be borne by the system.”
The core payments infrastructure of most countries – barring a few like South Korea – is owned and operated by their respective central banks. But networking between them is mostly controlled by the inter-bank settlement intermediary companies Visa, MasterCard and American Express, all of which are US- headquartered. To challenge them, as well as to obviate any possible surveillance by them of its domestic financial markets, China unveiled ‘UnionPay’ a decade and a half ago. UnionPay has been a great success, surpassing Visa in 2016 in terms of card payment transactions by value. Similarly,
Dilip Rao Managing Director ( Asia- Pacific), Ripple Labs “Most countries are looking to rebuild their payment and settlement systems. With NEFT and IMPS, India is way ahead of many countries”
NPCI launched the RuPay card a decade ago (See India’s Move to Be a Player in the Network Game.)
Experts are convinced that, in every country, the core infrastructure for payments should be controlled by its own central bank. “This is as sensitive and of as much strategic interest as the defence sector,” says R.S. Jain, Chairman and Managing Director of software firm RS Software, which worked closely with NPCI on the UPI launch. This view is shared by other countries, too. There was an outcry in the US in March this year, when China’s Ant Financial – owned by e-tailing giant Alibaba – made a bid for the US- based payment remittance company MoneyGram (the deal is still to be finalised.) “Many MoneyGram customers are in defence services,” says a global security expert. “It is a security issue, especially at a time when Chinese- US relations are not at their best.”
INADEQUATE ACCEPTANCE INFRASTRUCTURE
Payment infrastructure comprises the core payment setup, along with the processing and acceptance framework. Experts believe India’s acceptance infrastructure still needs to be beefed up. “We need to grow the acceptance infrastructure, the distribution arm of the payments industry,” says Jain. “This has to be supported by the core payment and processing infrastructure.” For every 1,000 credit and debit cards, for instance, developed markets have 18-20 POS machines, China has 12-13, while India has less than three. Though POS machines have been in existence since the mid-1990s, India has so far only 2.5 million of them. The reason is their high cost and considerable operational expense – installing the software, acquiring merchants, training merchants, security and fraud management, and more. Only four Indian banks – State Bank of India, ICICI Bank, HDFC Bank and Axis Bank – have invested in acceptance infrastructure so far. “The standalone POS business is a lossmaking one,” says a leading banker, who prefers not to be named. “It has to be made profitable by cross-selling it with other banking products to acquiring merchants.”
In its bid to encourage digital payments, the government has set a target of 5.5 million POS machines by the year-end – more than twice the number currently in use – which many bankers privately maintain is unfair to them. “The government ought to understand business intricacies and leave such commercial decisions to banks,” says one of them, preferring to stay anonymous. It also wants to increase the number of digital transactions to 25 billion in 2017/18, from 10 billion the previous year, which, bankers feel, is way too ambitious. Yet another government decision rankling with them is the lowering of the merchant discount rate (MDR) on card transactions below `2,000 from 0.75 per cent to 0.250.50 per cent, which brings down their earnings from POS machines even further. (The MDR is the commission merchants pay the POS- owning bank, which the bank in turn has to share with the card-issuing bank and the network intermediaries.) A Reserve Bank of India committee is currently looking into MDR charges – if they are brought down further, banks would be even less interested in investing in POS machines.
There is a view that these machines may well become obsolete in coming years, given the pace at which acceptance infrastructure is changing. In the last decade, there has already been a major shift from telephone line POS machines to GPRS- (or Internet-) based ones. There are an equal number of both kinds currently in use in India. The latter is around 30-35 per cent more expensive, but has
Raj Jain, Chairman & MD, RS Software “There are three key elements in the payment infrastructure – core payment schemes and switching, processors, and acceptance infrastructure. I’m of the view that core infrastructure should come from within the country”