PSFI261112FLS - Reserve Bank of India

Payment Systems & Financial Inclusion :
Recent Trends , Challenges & Emerging
Harun R Khan
Deputy Governor
Reserve Bank of India
November 25, 2012
Role of Payment Systems in FI
 Simplistic definition
 the way we make and receive payments using different
payment instruments
 Payment systems act as a catalyst in financial inclusion
 Enabling payment systems to provide safe, efficient,
affordable, easily accessible and technologically robust
payment services to the unbanked
 Stepping stone for other bouquet of financial services, such
as, savings, credit, remittance and insurance possible by
creating enabling features.
Payment Systems in India:
Vision 2012-15
To proactively encourage electronic payment systems for
ushering in a less-cash society in India and to ensure
payment and settlement systems in the country are safe,
efficient, interoperable, authorised, accessible, inclusive and
compliant with international standards.
Payment Systems in India:
Vision 2012-15
RBI’s renewed commitment towards providing:
 A safe, efficient, accessible, inclusive, interoperable and
authorised payment and settlement systems for the country.
 A payment systems to be driven by customer demands of
convenience ease of use and access
 Convergence in innovative e-payment products and capabilities
 Integration of various systems through unified solution
architecture and current technology to aid in convergence
 Adoption and usage of resilient payment systems
 Regulation to channelise innovation and competition to meet
these demands consistent with international standards and best
Payment Systems in India:
Vision 2012-15
 Increased emphasis on the use of electronic payment
products and services
 accessed anywhere and anytime by all at affordable prices.
 Embracing new technology and innovation to unveil a bouquet
of simple, low cost, easy to use modern payment products
and services start to end (for customer),
 Real Time Small Value Gross Transfers, near real time batch processing
systems (beyond current timings and number of settlements), 24x7 small
value payment systems; Cards; PPIs; GIRO etc.
 Building dexterity of payment systems through standardisation
and a broad consultative process
 Overall regulatory policy stance is oriented towards promoting
a less cash/less paper society, the “green” initiative
 Vision Statement sets out the roadmap
 to ensure benefits of a structured modern payment and settlement
systems, including innovative products, to reach out beyond the currently
served target groups thereby facilitating greater financial inclusion.
Payment Systems as
Catalyst & Enabler for FI
Payment Systems as Catalyst &
Enabler for FI
 Payment systems act on the supply side of FI
 by providing products, processes and systems
 World Bank Global Payments Survey 2010
 101 central banks participated and 173 innovative retail payment
instruments and methods reported
 Innovative payment instruments and methods – driver of financial
inclusion in 14% of the countries
 P2B, P2P and utility bill payments most common types
 Small proportion of 10% support government payments
Payment Systems as Catalyst &
Enabler for FI
Innovations in retail payments –CPSS Report May 2012
 Access channels – branches/BCs; ATMs; PoS terminals;
 Access devices – PPIs, credit/debit cards, mobile phones,
Product innovations
 Card payments: internet; contactless cards using NFC;
dongles on mobiles;
 Mobile payments through SMS, USSD, or NFC
 Electronic bill presentment and payment (EBPP)
They meet the 4As’ requirement for Financial Inclusion:
Availability, Affordability, Accessibility and Acceptability
Payment Systems as Catalyst &
Enabler for FI
Demand side propelled by the desire of the excluded segment to
make use of formal banking channel for their banking and
payment needs
Financial inclusion as driving force of innovation
 Innovations have taken place either under a government
 New business opportunities in an untapped market
 Focus on mobile payments, innovations in card payments,
and improvements in infrastructure (BCs)
 Significant role of non-banks in innovative retail payments
 Successful innovations having market-wide impact where
there is cooperation between banks and non-banks
Payment Systems as Catalyst &
Enabler for FI
Financial inclusion as driving force of innovation
 For payment service providers including banks traditional
payment services do not make a business case for large
volume of small ticket branchless transactions
 Hence innovation through
Special bank accounts or prepaid accounts;
Use of business correspondents/agents
Use of technology for initiating and authenticating transactions
A combination of all the above
International approaches
International approaches:
Business models
Business models
Non-bank led
 Models adopted as per banking penetration and financial ecosystem
 India has chosen a co-operative and collaborative framework
 with banks playing a lead role with non-banks acting as
BCs/partners driven by ICT based solutions
International approaches:
Payment systems for FI
 “correspondent banking” model
 Over 95,000 business establishments including post-offices
 most used access channel for credit transfers, bill payments; government
agencies to pay social benefits;
 using a PoS device and card
Kenya: non-bank MNO model
 M-Pesa : mobile remittance scheme
 (i) P2P transfer; (ii) P2B transfer; (iii) cash deposits and withdrawals at
designated outlets; and (iv) loan receipts or repayments
Philippines combination of bank-led and non-bank led
 Mobile schemes: bank-led model (SMART) and MNO-led
model (GLOBE CASH)
International approaches:
Payment systems for FI
 Multipurpose prepaid cards
 Issued by non-banks; used at PoS terminals;
 Unbanked persons
Mexico: tiered deposit accounts and pre-paid cards
 Limit on the deposits: “low risk accounts”
 Prepaid cards for social benefit transfers
South Africa: WIZZIT mobile banking solution
 Mobile payment solution that connects existing banking
infrastructure with mobile network
 Provides mobile banking services to the unbanked by a nonbank
The Indian reality and policy
The Indian reality
 99,000+ bank branch network today compared to a little over 8,000
bank branches in 1969;
 Only about 40 percent of the citizens in the country have a bank
 only 36,000+ inhabited areas have a bank branch out of the 600,000
inhabited areas in the country;
 Only 13 percent of the people have a debit card and only 2 percent
have a credit card;
 Low level of penetration of both life and non-life insurance products
 Preponderance of cash transactions – high cash to GDP ratio (14%)
 Very low-level of non-cash payments
 High levels of mobile penetration – approximately 933 million
It is literally bottom of the pyramid which can be explored
by the Indian banking sector
Policy approaches
To make available structured modern payment and
settlement systems, including innovative products, for
facilitating greater financial inclusion and promoting a less
cash society - the “green” initiative
Banks: expanding the reach of banking
 Banks free to choose BCs - corporate/Individual BC
 Inter-operability of BCs permitted
 Simplified KYC norms
 Use of Aadhaar
 Basic bank account with ATM/Debit card facility
Role of non-banks
 as a BC; and
 as an Authorised payment system entity
 Issuance of PPIs including mobile wallets
 As WLA operators
 as TSP
Policy approaches
Providing impetus
 To infrastructure
 Rationalisation of Merchant Discount Rate for debit cards - attract more
number of merchant establishments to have acceptance infrastructure
 WLAs: to expand the reach of ATMs in Tier III to VI centres
 To non-cash instruments
 Rationalisation of PPI Guidelines - 3 broad categories of PPIs; focus on
electronic issuance
 All 3 categories of PPIs can be used for domestic money transfer.
To remittances
 Domestic Money Transfers (DMT) guidelines and rationalisation of NEFT
customer charges
 To mobile banking: banks free to fix daily limits based on risk perception
 To access centralised payment systems
 Rationalisation of access criteria for direct membership; and
 Opening a sub membership route - to expand reach of modern electronic
payment systems to all banks and their customers in smaller centres
Policy approaches
Providing impetus
 To EBTs and Direct Transfer of Subsidy (DTS): Aadhaar-enabled
unified payment infrastructure
 using Aadhaar as a natural financial address and authentication
mechanism for sending payments to accounts of beneficiaries and
enabling withdrawal
 BCs with micro-ATMs will perform transactions on the basis of
Aadhaar number and bio-metric authentication
 Pilots in several states for effecting EBT and DTS payments using
e-FMS (e- fund management system) implementation in states
 Using ECS for electronic benefit transfers such as MG-NREGA
payments to the beneficiaries
 Several state governments are making attempts in this direction
 Recently, the state government of Odisha has rolled out the eFMS through out the entire state for effecting MG-NREGA
 By enhancing security features (e.g. 2nd factor authentication for card
present & card not present transactions)
Challenges ahead
Challenges ahead
Rationalization of policy framework for BCs
 What is the innovation that banks can do in the BC framework
to enhance financial inclusion?
 setting up own dedicated infrastructure, or
 achieving economies of scale in setting up shared
infrastructure and competing for business based on that
shared infrastructure?
 Could this provide a lucrative business proposition to a BC
in terms of transaction volumes and revenues?
 Have we, as stakeholders, thought of such an approach?
 Technology service support to BCs
Could we enable delivery of appropriate services including
payments in a relatively low-cost, safe and efficient manner to
the financially excluded?
Challenges ahead
Aadhaar-enabled unified payment infrastructure
 using Aadhaar as a natural financial address for sending
payments to accounts of beneficiaries
 BCs with micro-ATMs will perform transactions on the basis
of Aadhaar number and bio-metric authentication
 Pilots in several states for effecting EBT and DTS payments
using Aadhaar
 Payments routed to beneficiaries accounts using the
Aadhaar-enabled Payments Bridge (AEPB)
 Aadhaar-enabled Payments System (AEPS) using
micro-ATMs enables beneficiaries to operate accounts
for withdrawal, deposit and remittance purposes.
Challenges ahead
Aadhaar-enabled unified payment infrastructure- What is the
business case?
 EBT and DTS payments add up to ` 3000 billion or roughly 3.5% of
 Another ` 1000 billion is estimated to be in the form of domestic
 These large numbers are huge transaction volumes
 payments game in India is a volume game.
Innovation is in using existing banking channels including the BC
network to route all payments electronically to the accounts of the
beneficiaries using Aadhaar as an authentication mechanism
 Are we in the industry geared for this expected surge in
 pro-actively taking measures to upgrade our processing capacities,
integrating Aadhaar with beneficiary account numbers?
 working in collaboration with Central and State Governments to digitise
data bases?
 dovetailing other banking products for sustainable financial inclusion of
the beneficiaries
Challenges ahead
Mobile penetration
 Mobile subscriber base as at end September 2012 is 906.62
 urban subscribers account for 63 percent (571.70 million);
 rural subscribers at 34 percent (334.92 million)
 Mobile banking services amongst this huge base of
subscribers is, however, very low.
 Less than one percent of existing bank customers them
under mobile banking
 Low penetration of payment and banking infrastructure in the
 Need for leveraging the mobile telephony as an effective
payment and access instrument for providing financial
services to the financially excluded including payment
 Are we doing enough in this direction?
Challenges ahead
Mobile penetration
IMPS - mobile based remittance system
 IMPS facilitates access to banks accounts and real-time
transfer of funds through mobile phones on 24x7 basis
 IMPS now enabled for
 person-to-merchant payments;
 putting through payment transactions based on
beneficiary account numbers and IFSC code of the
destination bank.
 usage over ATM and internet banking
Why is IMPS not picking up?
Challenges ahead
Mobile penetration
 What are the plans to take mobile banking services
to the existing customers in the initial stage and later
to the potential customers under financial inclusion?
 Are these initiatives part of business plans and IT
upgradation plans?
 Are staff at the front-line aware of these
 Would staff be able to provide relevant, comprehensive
answers to any existing and potential banking customer
on mobile banking?
 Have banks given any thoughts to training their staff on
these developments?
 And last but not the least, why have only few banks
come on board to provide these services?
Challenges ahead
Electronification of KCCs
Rupay Kisan Credit Cards
 23 banks certified for issuance of RuPay linked cards by NPCI
 Why are the certified banks are issuing only ATM cards
and not RuPay KCC debit cards?
 The PoS network terminal has crossed 0.6 million mark
 but only 0.13 million terminals are enabled for RuPay
 inadequate infrastructure is limiting the usage
 As these are backed by an account, can banks extend
mobile banking through IMPS for purchase of goods
and services associated with the scheme?
Mobile linked Kisan Credit Cards (m-KCC)
 Smart card linked, mobile based and Aadhaar enabled KCC
has been launched
 Anecdotal evidence indicates that banks are yet to launch this project in
a big way
Challenges ahead
Domestic money transfer relaxations
 Customer charges have been rationalised especially for
amounts upto `10,000/- in NEFT.
 lower transaction costs – through innovative methods –
illustratively SBI “green channel card” for walk-in customers
who regularly send money to a particular account;.
 Banks and their BCs are charging very high rates to walk-in
Why are banks not reducing the costs and adhering to
RBI specified charge structures?
Rationalisation of PPI Guidelines
 Scope for non-bank PPI issuers and banks to work together
to facilitate domestic funds transfer
 Need for building partnerships to enable domestic
Is this being explored?
Challenges ahead
Rationalisation of Merchant Discount Rate for debit cards:
 Debit cards outnumber credit cards
 predominantly used at ATMs to withdraw cash and not used
at merchant establishments.
 need for deepening the acceptance infrastructure for cards at
all merchant establishments, especially at smaller merchant
Is issuance more easier compared to acquisition?
Why is acquisition space dominated by a few banks?
What are the plans of banks to increase acquisition?
Policy measures on the anvil
Policy measures on the anvil
International Bank Account Number (IBAN)/
Basic Bank Account Number (BBAN)
 help in interoperability and portability of bank accounts
 Committee under CGM, DPSS constituted
GIRO system
 Effecting credit transfer from payer to payee from any bank
branch or authorised non-bank
 Scope of implementing a cheque based GIRO to be examined
 Committee under ED, RBI being formed
 Use as both address and identity proofs
Emerging issues : the
The 7C Framework
 Objective to provide low-cost ICT based payment systems to
the financially excluded
 leverage technology to create efficient systems &
processes to reduce transaction costs
 cost of transactions needs to be on the principles of
affordability by users and viable for the service providers
 benefit of reduction in transaction costs should be passed on
to the customers, especially at the BC outlets
 increase in the number of transactions would make the BC
outlets viable
 appropriate plans for effective technology deployment in
payment systems and products to reduce costs.
Is the pricing of products affordable and transparent?
Are we providing low-cost, technology based payment
products to aid financial inclusion without compromising
the sustainability of the model?
 Create easy-to-use products; and easily available products
 Standardisation and inter-operability are key factors
 Anywhere anytime banking in true spirit
Any innovative product to pass the above tests
Biometric authentication in lieu of PIN
Ensure easy availability through BC network
Use of mobile as an access channel
Do our payment products pass these tests?
What more do we need to do?
 Primary requirement to build confidence
 providing a safe and secure banking and payment system
having the highest standards of integrity
 Zero liability for customers to inculcate confidence in
electronic transactions
 Develop mechanism to reduce frauds like phishing and
identity theft in cards, internet and mobile payments
 Strengthening of IT security like redundancy, firewalls, antivirus updation, regular BCP & DR testing and role based
access system. Create system to fight Advanced Persistence
Threat (APT)
 Use the services of Mobile Banking Security Lab set up by
 Promoting confidence through prompt customer grievance
redressal mechanisms in ATM/ mobile and card transactions
Do our systems and processes create confidence
in people to use electronic payment system?
 Convergence of Players
 Banks and MNOs to leverage each others strength
 Convergence of Technologies
 Usage of Shared infrastructure like cloud computing to
reduce transaction cost
 Convergence of Processes
 Uniform, simplified and well understood processes by all
especially at point of sale customer interface
 Convergence of Products
 Simplified product design like flexi deposit schemes and
inbuilt payment services
 Convergence of different banks
 Can banks come together to create shared infrastructure
and products for FI
Are we working towards convergence?
 Commitment at the top and reflection at the ground level
 Key to increased usage of services by unbanked and increased
business growth from the targeted segment.
 Commitment from the three pillars of ICT based payment
system for FI.
 Branch officials
 Technology Service Providers
 Lack of commitment at any one level will hamper delivery of the
products and services.
 Commitment require skill-sets, very high levels of motivation
backed by appropriate incentives and trainings on products
and processes.
 BCs to be taken on board to deliver the services at the last
Are we all committed to achieve the goal set before
all of us and accountable for it?
Consumer Protection
 Ensuring that consumers are well informed
to enable informed decision making,
to protect against unfair and deceptive practices,
to access recourse mechanisms to resolve disputes, and
to maintain privacy/secrecy of their personal information.
 Consumer protection should not be the sole responsibility of
 Banks must incorporate consumer protection policies while
designing products and processes
 strengthen internal grievance redressal mechanism and
make it accessible
 call centres should become customer centric
 Technology enabled grievance monitoring and resolution
 ATM transactions where less cash is dispensed or accounts are debited
without cash dispensation.
Have we created accessible and timely resolution of
consumer grievances redressal mechanism? 39
 Financial literacy to enhance knowledge, skills and confidence
of consumers to understand
 the information they receive and
 evaluate the risks and rewards inherent in each type of financial service
and product.
 Convincing people to use banking services and subscribe to
different products
 Necessary condition to make the FI a viable proposition
 Raising levels of awareness on
 various banking and payment system products
 Security aspects and the responsibility of the users
 Tap potential of outreach, townhall events, roadshows, mass
media to spread awareness
 Electronic Banking Awareness Training (E-BAAT) for
targeted beneficiaries and not to forget employees at the
Are we creating awareness in staff members and
consumers for creating a viable payment system for FI?
Concluding thoughts
Innovate to Win
 “An innovation is more than just a great idea…. innovation
requires attention to other people: what they value and what
they will adopt. It must contribute to transformation in a
society and be adopted by users.”
 Grounded innovation “is an approach that aims to balance the
two axes of inquiry: understanding how the world works and
invention. Today we are living in a world where we have to
consider both technology and users as drivers of innovation.
Simply put, grounded innovation is when your technology
meets utility”.
Lars Erik Holquist
Principal Research Scientist at Yahoo Labs Eco
We are at the stage of grounded innovation as far as financial
inclusion and payment systems are concerned
 When large number of potential customer are financially
excluded, the payment systems should provide utilities that
can help them to become financially included and join
mainstream of financial services.
Financially excluded
ICT enabled financially included?
Innovate to unlock the next decade for people at
the bottom of the pyramid.
Think differently to bring more innovations for
universal financial inclusion by harnessing the
payment system
Thank You
Payment Systems in India: Vision 2012-15