Jojoe Cherian, TCS Financial Solutions
It has been more than three years since we covered Indian Payments in volume 4 of the TCS BaNCS Research Journal. Over this period RBI (Reserve Bank of India) and NPCI (National Payments Council of India) have taken progressive strides in further modernizing the payments infrastructure in India. In addition, since then, there has been increased availability of new payment instruments, especially in the P2P (Person to Person) and P2B (Person to Business) space. It is worthwhile to take a closer look at some of these key advancements achieved in the last few years. Payments being an integral part of the core infrastructure on which economic activity rides, past trends often serve as a reliable indicator of future direction.
Progress over the Last Few Years
India has seen RTGS volumes grow at 21% CAGR for the last four years with the number of participant banks increasing from around 100 to nearly 170. This growth in itself is spectacular, but is even more significant considering that the minimum threshold for RTGS was doubled from Rupees One Hundred Thousand to Rupees Two Hundred Thousand, thanks to a mass adoption of the alternative scheme, NEFT (National Electronics Fund Transfer). Remarkably, in terms of the value of the total transactions in a year – more than 75% of growth was observed (only customer transactions) between the years 2011- 12 and 2012-13. Due credit needs to be given to the RBI (Reserve Bank of India) for having the foresight to launch the Next Generation Real Time Gross Settlement (NG-RTGS) system, which not only places India comfortably in meeting increasing payment volumes, but also provides a platform that will enable advanced liquidity management services and future date functionality.
The NPCI (National Payments Corporation of India) has introduced a National Automated Clearing House (NACH) scheme to support high volume electronic transactions efficiently. The aim of NACH is to centralize different regional clearing schemes and standardize processes and practices therein. Besides supporting NACH credit transactions, the system also enables financial inclusion with the AADHAR Payment Bridge that has enabled benefits and subsidies to be passed onto beneficiaries based on a unique identification number for residents of India. The NACH is today used for Old Age Pension Payments, Student Scholarships and a host of other Government Welfare Schemes.
In the last three financial quarters alone, the payment volumes on NACH have grown exponentially from close to 1 million per month to over 20 million per month. NPCI expects these volumes to grow significantly as more regional clearing transactions move to the NACH, and it has displayed far-sightedness in building a system capable of handling 10 million transactions per day. Additionally, NACH- Debit is ready to be launched shortly, which will not only promote digitization and centralized management of debit mandates, thereby reducing the risk of frauds, but also provide a high degree of control to the payer with regards to modifications/ cancellations. This system will also serve to expand the service network by including corporate customers and providing them with opportunities to further strengthen their liquidity management as far as collections are concerned. Keeping pace with global payment trends and developments in Europe (SEPA), the payment infrastructure in India is also being modernized by adapting to newer and more robust standards. This is best demonstrated by the adoption of ISO 20022 standards for NG-RTGS and NACH-Debit. By enforcing ISO 20022 compliance, RBI and NPCI have enabled the flexibility of offering value-added services, and also built a standardized platform for improved efficiencies and Straight-Through-Processing.
Consumers in India are emerging as rapid adopters of alternative channels like mobile, kiosks and through business correspondents. They expect the relationship with their banks to become more conversational, and are demanding real time and complete servicing capabilities. Features like the ability to make utility payments from the mobile, receive alerts when the beneficiary is credited are now par for the course. The corporate treasurer is now more aware and expects the same level of services as provided by the best global transaction banks. Seamless payment initiation, real-time status reporting, easier reconciliation and the optimal use of liquidity are all now standard expectations from a corporate customer who is now interested in exploring the flexibility that hand-held devices can provide. Kiosks and business correspondents have played a key role in providing economical servicing channels to expand financial inclusion.
The last three years have witnessed the near doubling of the number of ATMs, and PoS machines increasing by more than 75%, and card based transactions increasing by 66% in value. RBI has also issued licenses to non-banking institutions to offer services that would enrich the ecosystem, and further increase usage of these electronic payment modes that ultimately benefit the end consumer. RBI has allowed for white labelled ATM service providers and issued licenses to five companies in the last year (2013-2014). Nearly 25 companies have been granted licenses for issuing pre-paid payment instruments and close to 10 of them are offering mobile wallets.
The Main Forces Behind the Progress
The progress made by the Indian payments industry has been the result of some key forces that have not only transformed the payments landscape but have also provided India with a platform to meet future needs in this key area.
The role played by supportive and enabling regulatory and government institutions like the RBI and NPCI cannot be overstated. These institutions have modernized systems, standardized processes and built scale to ensure that India has a sound and stable payments infrastructure. The RBI has also enabled an inclusive and structured framework in the form of facilitative regulation in addition to advisory to provide impetus to these important changes. These developments have been all encompassing and designed keeping in mind the challenges thrown up by the diverse nature of banking in India. The directive and focus towards Socially Inclusive Banking has further necessitated the need for efficient payment solutions catering to all social strata of Indian society.
The opening up of the payment ecosystem has allowed for new players to introduce a differentiated set of products and services. This has also increased competition and traditional banks have been proactively working on improving and expanding their payments portfolios.
The transition from paper-based to electronic payments in the Central and State Government bodies offered a huge confidence boost to the electronic payments infrastructure and the capabilities of banks. This has given banks the much needed impetus to modernize their payment systems, with many banks having readily embarked on this journey.
Information Technology has been an invaluable contributor to this progress by enabling unprecedented customer connectivity and developing sound back-office systems, thereby reducing the overall cost of ownership and transforming accessibility parameters across the ecosystem.
Security and risk management improvements have been continuous with examples like the introduction of PIN based chip cards and enforcing two factor authorizations for online transactions, making card based transactions more secure.
Gazing Into The Crystal Ball
The only thing that can be said with certainty is that the transformation is not yet complete. This is evident from indicators like the value of transactions (as a multiple of GDP) of electronic payments – India is still at a figure of 12-13 times GDP compared to a figure of more than 50 times in some of the more mature economies.
Further standardization of processes and reference data is on the anvil. The Northern, Southern and Western CTS (Cheque Truncation System) grids have now adopted a uniform holiday calendar. In the coming years, it is expected that efforts will be made to standardize the various bank codes being used in India. Similarly, a uniform account numbering scheme on the lines of International Bank. Account Number (IBAN) may also be implemented.
Focus on interoperability with the ability to switch over from one payment system to another based on availability will be a key driving force. This has already been achieved in areas like ATMs and is expected to be a principle applied to relevant payment systems. The concept of inter-operability will also extend to the customer servicing channels with the ability to initiate, modify, view or cancel transactions across all channels.
There has been a concerted effort to increase efficiency through the promotion of electronic payments, with more and more government bodies willing to use electronic payments for pensions, subsidies, grants, loans and other purposes. Educational institutions are moving from traditional cheque or DD (Demand Draft) payments towards NEFT/RTGS payments. Increasing number of service providers are, and will further continue to, demand faster, hassle- and paper-free payments.
India will continue to see new payment clearing schemes and payment types. Implementation of a GIRO system in India is already on the drawing board. This is expected to provide much needed automation for low value payments in the P2B (Person to Business) space. Evolving Person to Person (P2P) and Person to Merchant (P2M) payments using the mobile phone are expected to grow further. A whole host of banks, including various small, co-operative banks today offer P2M solutions. In fact, today individuals can even make donations to religious institutions using mobile payments.
As the adoption of electronic payments increases, the legal framework will need to provide coverage to address exceptions and disputes. It is expected that the IT infrastructure inside the institutions serving financial products and services will need to become more robust. Hence, further growth and modernization of payments in India will happen under the ask of increasing adherence to new regulations. The cost of regulatory compliance is a given and banks will look at means and ways to optimally adhere to incremental enhancements in payments related regulations.
A lot of banks are seeing payments as a growing business and an area for differentiation. They perceive value in being able to increase transaction- based revenues and not purely rely on the traditional credit spread business model. Offering-specialized, value-added, corporate payment services are now seen as a tenable strategy to grow the wholesale banking business. The focus is going to be on revenue through cross-channel operability, real-time reporting, segregated pricing and flexible bulk file handling. In the retail space, the thrust is going to be on costs as banks will continue their efforts towards migrating customers to lower cost electronic automated channels efficiencies in back-office systems to reduce human intervention. Government business would be another area especially for the larger banks centered on multiple format file handling, reconciliation enablement and easy exception management.
India has gone through a variety of payment infrastructure changes in the last few years, and a period of consolidation is expected where benefits from these changes will be reaped. The number of players in the payments space is bound to increase with new banks, MNOs (Mobile Network Operators), pre-paid instrument providers participating, but the Indian market is large enough for various banks to succeed in the payments area.
The key to success will be the ability to clearly identify addressable segments in the market space and align the business model and related IT and operations to serve those segments.