vision for payment systems

Vision for Payment Systems

General ManagerState Bank of India

June 11, 2010

Overview

• What is a Payment System

• Payment Systems across time

• Current Indian Landscape

• Tomorrow

• Challenges

What is a Payment System

What is a Payment System

Financial system supporting transfer of funds

from payers to payees.

• Paper-based mechanism (e.g. Cash, Cheques,

Drafts etc.)

• Paperless mechanism (e.g. Electronic Funds

Transfer)

Payment Systems Across Time

Payment Systems across time-IndiaYesterday Today

Barter System Early civilization

Cowries , coins, precious metals Middle ages

Hundi 12th Century

late 18th Century

Currency

19th CenturyPromissory notes, bills of exchange, cheques

Travellers’ Cheques

20th Century

1980s

ATMs, MICR based cheque processing centres, Cards (credit and debit)

1990s

Internet Banking, ECS, EFT

2004

2005

2007

2008

RTGS

NEFT

Mobile Banking

CTS

Current Indian Landscape

Current Indian Landscape• Enabling legislation

– IT Act 2000

– Payment and Settlement Systems Act 2007

• Rapid growth in Indian economy

– India to become the world’s fifth largest consumer

market by 2025

– Aggregate consumption in India will grow in real terms

from the current INR 17 trillion to INR 34 trillion by

2015 and INR 70 trillion by 2025- a nearly four-fold

increase! (Source: McKinsey Global Institute)

Current Indian Landscape• Growing middle class

– Approx. 50 million in 2005 and estimated to grow to 583

million by 2025 i.e. from 5% to 40% of the population

(Source: McKinsey Global Institute)

• Fast growth in mobile telephony/other

communication technologies (e.g. broadband

internet, wi-fi etc.)

– 601 million mobile customers at the end of April 2010

– Almost 50% growth in 2009-10 in mobile phones (Source:

TRAI)

Current Indian Landscape• Young upwardly mobile class

• Growing literacy and a tech-savvy generation

• Improving network and communications

– Broadband subscriber base (>= 256 Kbps download) is

at 9 million at the end of April 2010

– Almost 40% growth in 2009-10 for broadband

subscribers (Source: TRAI)

Current Indian Landscape• Large-scale automation in Government and

Corporates

– Government projects: Online filing of Income Tax returns,

Indian Customs Valuation Database (database on imports at

all custom stations in India with valuation and

classification)

– Corporates: ERP implementation, Internet Banking for

Corporates

• Leadership in IT/ITeS sectors

– IT bigwigs like TCS, Infosys, Wipro etc.

Tomorrow

Tomorrow

• Mobile Payments Settlement Network–

– Solution to facilitate mobile-based inter-bank funds

transfer

– It would switch the transactions from mobile switch of

one bank to the mobile switch of another bank

– With this functionality, mobile banking customers of any

Bank can transfer funds within regulatorily specified

limits to an account held with any Bank through Mobile

Banking

Tomorrow

• Mobile banking over POS –– Today, just as debit cards, credit cards and other prepaid cards can be

used to make a payment over a POS counter, a method could be explored

whereby the POS machine could be modified to use Mobile Banking

– The biller could provide the bill details and customer mobile number on

the POS machine and the customer could use the mobile application to

make the payment

• Mobile Wallet -– In this case, the pre-paid card concept could be extended to the mobile

– Virtual pre-paid mobile cards could be generated for the customers by a

business correspondent as per regulatory stipulations

– Customer could spend this pre-paid card over POS, online or through

mobile application

Tomorrow

• Voice Payment System:

– This is a Mobile Voice Banking System which authenticates

voice input with the help of caller id and biometric voice

authorisation and validate sregistered users

– Functionalities like balance enquiry, funds transfer and mini-

statement could be made available

Tomorrow• Automated Clearing House –

– An initiative by NPCI aimed to redesign the existing ECS/NECS

system

– ECS is a bulk debit/credit system in India primarily used for

repetitive payments like salary, pension, dividend, utility bills,

loan installments and investments like SIP

– The ECS system has a highly decentralised set-up

– NECS by RBI is a centralised service only for credit transactions

– The existing ECS application accepts files from designated bank

branches only

Tomorrow• Automated Clearing House –

– NPCI proposes to implement a technology platform (ACH) which

would allow sub-members and authorised users also to implement

end to end straight through processing with scope for

participants to design their own products to meet particular

business objectives and to support financial inclusion measures

by providing support to UID and Mobile based ACH transactions

– Creation of Centralized Mandate Management Repository System

(CMMRS) with facilities like data and mandate validation, positive

confirmation of credit and debit transactions from / to the

remitting / destination Banks etc.

Tomorrow• RTGS – RTGS as a cross-border settlement system

– The RTGS is envisaged as the centralised settlement system into

which all the dispersed net settlement systems will flow

– Migration to an RTGS environment is the main objective of

payments system reforms in most countries of the world

– In fact, access to cross border settlement systems such as the

TARGET in Europe is conditional on the availability of a full

fledged domestic RTGS for each of the participating countries

– Apart from providing a real time funds settlement environment,

the RTGS is critical for an effective risk control strategy

Tomorrow• RTGS – RTGS as a cross-border settlement system

– Payments system risks in a net settlement system are such that

the default by one bank may lead to a 'knock-on' or domino effect

on the system

– Gross Settlement reduces the risk significantly, as transactions

are settled one by one on a bilateral basis in a real time mode

– In a cross border context, RTGS becomes even more relevant as

cross country risks are more difficult to manage as compared to

domestic transactions

– RTGS provides both the technology and process controls to

manage these risks better

Tomorrow• National Pay Card –

– The concept of a domestic payment card and a PoS switch network

for issuance and acceptance of payment cards

– All card issuing banks would be members of this card association

– The card would be accepted by all domestic merchant establishments

– Efforts would be made to rope in merchant establishments abroad

for acceptance of this card

– National Pay switch to be set up to route all domestic transactions

within the country thus saving huge costs towards switching and

other costs being paid in foreign exchange to Visa and Mastercard

– This would help promote financial inclusion efforts

Tomorrow• India MoneyLine –

– The existing NEFT system operates during weekdays from 9 am

to 5 pm and on Saturdays from 9 am to 12 noon

– India MoneyLine is an effort by NPCI to make NEFT to function

on a 24x7 basis or to develop a new system akin to the Faster

Payments Service in the UK which operates on a 24x7 basis

– Faster Payments is a banking initiative in the UK to reduce the

time taken for ‘low value’ payments both person to person and

business to business payments, essentially to a time as if the

two accounts were in the same bank

Tomorrow• Cheque Truncation System (CTS) by NPCI -

– Although electronification of payments is the objective,

prevalence of paper-based payments will continue to have a

substantial volume (Cheque clearing statistics)

– CTS has already been implemented in NCR, Delhi and has

stabilized

– It is proposed to introduce four regional grids i.e. Delhi,

Chennai, Mumbai and Kolkata to streamline the clearing

operations

– All MICR centres will be migrated to CTS eventually

Tomorrow• Electronic presentment –

– Electronic presentment of images of cheques by payee will

substitute physical delivery of cheques

– This combined with centralized signature storage and

retrieval system will eliminate several destination points and

reduce clearing time very substantially

– By using data communications the slow physical movement

would be eliminated

Tomorrow-Technology• Smart Card - Cards with embedded integrated circuits which

can process and store data which may/ may not require

(contactless cards) physical contact with the POS equipment

• Biometrics -Identification technology based on measuring

human body characteristics like fingerprints, retina, voice

patterns etc.

• Near Field Communication - NFC technology is an

extension of RFID that combines a smart card interface and

reader into a single device. NFC in mobile phones is likely next

in line in the evolution for mainstream payment systems.

Challenges

Challenges• Ecosystem should be conducive to the success of new

products/technologies

• Mandate management (ECS/ACH)

• Popularising new products amongst the masses

• Security

– Threats: Hacking/Phishing/Vishing/Money

Laundering/Terrorism

– Enforcing standards for strong encryption and

decryption

Vision 2025

• We need to move towards complete electronification

of payments and minimise paper-based transactions

• This could be achieved if the payment systems are

made completely secure, reliable, real-time, efficient

and accurate (with 100% reconciliation)

• Implementation of such systems increases

transparency, lower transaction costs, improve

operational efficiency of trade and commerce and

provide support to globalization of economy

Vision 2025

• Efficient payment systems help in the smooth flow of

money in the economy thus increasing the liquidity in

the hands of the customer enhancing his purchasing

capacity

• These would also help minimise cases of fraud, use of

counterfeit notes and black money

• Last but not the least, by implementing paper-less

payment systems, we will be making a significant

contribution towards a greener planet!

Thank You

Cheque clearing statistics

BACK

IT Act 2000• Provides legal recognition for transactions carried out by

means of electronic data interchange and "electronic

commerce“ that refers to use of alternatives to paper-

based methods of communication and storage of

information, to facilitate electronic filing of documents

with the Government agencies

• Specifies that electronic records can be authenticated

through Digital Signatures

• Confers legal recognition of Electronic records, Digital

SignaturesBACK

Payment and Settlement Systems Act 2007

• Designates RBI as authority for Regulation and

Supervision for Payment Systems in India

• RBI to issue guidelines prescribing the format of

payment instruction, timings, manner of transfer of

funds, criteria for membership etc.

• Rights and duties of system provider defined

• Guidelines for Settlement of Disputes provided

BACK

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