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."

Dilip Rao Managing Director (Asia-Pacific), Ripple Labs

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, 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 set-up, 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 loss-making 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 0.25-0.50 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.

Raj Jain, Chairman & MD, RS Software (Photo: Subir Halder)

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 advantages over the former - it can handle payment modes like Aadhaar and other biometric identities much more easily and can also be used with contactless or Near-field Connectivity (NFC) cards. "Biometric data is heavier than normal card data, so Aadhaar-based payments don't work too well on landline-linked machines," says Deepak Chandnani, CEO (South Asia and West Asia, Worldline, a payment processor for banks.

SBI and ICICI Bank have launched NFC cards, but their use has been limited so far given the lack of NFC-enabled POS machines. The newly set-up IDFC Bank is also pushing Aadhaar-based payments aggressively. For the past year or two, some banks have also been promoting mobile POS (mPOS), but that, too, has yet to pick up, since connectivity is a problem, especially in rural areas. "The average number of transactions on mPOS is much smaller than that on the conventional POS machine," says Chandak. It was launched in the US in 2008, as a means of enabling small or occasional merchants to accept card payments, but has failed to achieve scale even there. "It didn't achieve its potential mainly because of behavioural issues," says Pai of YES Bank.

QR and Mobile Wallets

Among non-POS payment systems, the use of QR code is expected to surge in the near future. It is already the dominant form of cashless payment in China. In India, there are 60 million merchants, while POS machines cover only 2 per cent of the merchant network. Its use involves clicking on the app through which the payment has to be made, taking a photograph of the merchant's QR code image, entering the amount to pay and pressing the requisite button the app provides. The QR code ecosystem is at the core of India's most successful mobile wallet company, the Noida-based Paytm, which has five million merchants on its rolls and hopes to double the figure by the year-end. Paytm, started in 2010, was among the first to bet on QR code - not surprising considering its main promoter is the China-based Ant Financial.

The NPCI, too, launched the 'Bharat QR code' in March this year in association with network intermediaries Visa and MasterCard, for which the BHIM app can be used. In April, Reliance Retail tied up with NPCI and Axis Bank for QR-based payments at its retail stores. In coming months, many more merchants are expected to include QR code in their payment options.

Mobile wallets - including Paytm - have, however, one big disadvantage so far: they are not inter-operable. Be it Paytm, MobiKwik or FreeCharge, both the customer and the merchant need to have the same company's account, or else money transfer is not possible. In coming years, unless they change, it could well be their Achilles Heel. "Open and inter-operable standards are absolutely vital for the payments' ecosystem in India," says Porush Singh, Country Corporate Officer, India and Division President, South Asia , Mastercard. So far, the mobile wallet segment has been resisting inter-operability. "These are the cracks that remain," says a market player, preferring not to be named. "The industry will have to mature and change over time."

Making the Right Choice

There is no doubt that massive investment will be required to build a wider payments infrastructure. But the question arises: which ones among the options available, should banks invest further in? The government has been sending conflicting signals. Of the target of three million new POS machines to be installed this year, one million will be of the traditional kind which is rapidly becoming obsolete, globally. Again, under the Jan Dhan scheme of providing bank accounts to all, the government had directed banks to give Jan Dhan account holders RuPay debit cards. But now it is promoting payments through Aadhaar-based app, which will make RuPay card redundant, resulting in losses for the issuing banks.

Porush Singh, Country Corporate Officer, India and Division President, South Asia, MasterCard (Photo: Vivan Mehra)

By and large, the new fintech players are also moving away from innovating on the POS technology. "Gradually, people are going to shift from hardware solutions like POS machines and cards to software solutions like UPI, QR code and so on while making payments," says Chandak. "It will be difficult for the POS players to keep pace with the changes taking place and making adjustments to their machines to accommodate Aadhaar or NFC-enabled payments. In the next five years, there will be a big incremental deployment of non-POS payment infrastructure."

Those who have already invested substantially in POS machines, however, contest this view strongly. "QR codes have not worked in either the US or the UK," says one of them, preferring anonymity. Many among them also believe that use of credit and debit cards (alongside POS machines) has already so ingrained in many customers that they are unlikely to shake off in a hurry. "The future could be a 50:50 division between POS machines and QR codes," says Chandani.

Nishant Singh, Founder-CEO, CRMnext (Photo: Vivan Mehra)

Though globally, payments are a major revenue earner for banks, the situation in India is turning out very different. "In US, almost 20-25 per cent of the profitability of retail banks comes from payments," says Jain. In contrast, in India, payments are a zero-sum game. "The banks have realised that payments can no longer be a source of revenue," says Nishant Singh, Founder-CEO of CRMnext, which provides customer relationship management (CRM) solutions.

Other Hurdles

If use of traditional POS machines increases, bankers and processor companies will have to upgrade their capacities to accommodate transaction volumes of much higher value than at present. Glitches galore followed when card payments rose dramatically following demonetisation, with transactions taking much more time and occasionally stopping altogether. "We used to do two million transactions a day, which went up to five million post-demonetisation, and has now normalised at around two to three million," says Chandnani of Worldline. Bankers complained that telecom operators were not providing them the priority bandwidth they needed to cope with rush. Though that rush has abated, there is definite need for a dedicated bandwidth for payments. While most of the fintech companies have upgraded capacity post demonetisation, many banks have yet to do so.

Another lacuna at present is the absence of any dispute resolution mechanism in the QR code payment system. If the payment receiver denies having been paid, the customer has no ready recourse. "In POS system, the railroads (inter-changeability and inter-operability) are well established," says Ramaswamy Venkatachalam, Managing Director - India and South Asia, FIS, a technology provider to the banking industry. "It will take time for similar railroads to be formed in the new payment mechanisms." At least, Reliance Retail is using the existing debit and credit card railroads, while facilitating payments through its QR code as well.

Sanjeev Chandak, Co-founder, FTCash (Photo: Rachit Goswami)

Finally, there are concerns over the security paradigm around Aadhaar-based payments. "Visa and MasterCard have a lot of in-built anti-fraud analysis, which checks transactions taking place," says Singh of CRMnext. "We need similar safeguards in Aadhaar payments. It's a challenge because this biometric-based payment system has not been tried before." China has seen many frauds reported around QR codes and has been working to prevent them - India could well learn from the Chinese experience. "Research suggests that one of the biggest hurdles in increasing digital transactions is customer apprehensions around safety and security," adds Singh of MasterCard. He notes that even fingerprints are not tamper-proof. "That is why two- or three-level authentication is a must." The RBI also insists on two factor authentication, which reduces the chances of fraud.

The new payment modes are expected to reduce the pressure on network and processor companies, because transactions are now initiated from the customer's phone rather than the POS. "We have to look at both sides of the coin. We have to look at the issue of legality, culpability, dispute resolution system. We are still experimenting," says Ramaswamy Venkatachalam, Managing Director - India and South Asia, FIS.