Vision for Payment Systems
General Manager
State Bank of India
June 11, 2010
Page 1
Overview
• What is a Payment System
• Payment Systems across time
• Current Indian Landscape
• Tomorrow
• Challenges
Page 2
What is a Payment System
Page 3
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)
Page 4
Payment Systems Across Time
Page 5
Payment Systems across time-India
Today
Yesterday
Travellers’ Cheques
Promissory notes, bills of
exchange, cheques
Currency
2008
20th Century
2007
Hundi
Cowries , coins,
precious metals
Barter
System
2005
late 18th Century
NEFT
RTGS
Century
1990s
Middle ages
1980s
Early civilization
Mobile Banking
19th Century
2004
12th
CTS
Internet Banking, ECS, EFT
ATMs, MICR based cheque processing centres,
Cards (credit and debit)
Page 6
Current Indian Landscape
Page 7
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)
Page 8
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)
Page 9
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)
Page 10
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.
Page 11
Tomorrow
Page 12
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
Page 13
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
Page 14
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
Page 15
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
Page 16
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.
Page 17
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
Page 18
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
Page 19
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
Page 20
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
Page 21
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
Page 22
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
Page 23
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.
Page 24
Challenges
Page 25
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
Page 26
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
Page 27
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!
Page 28
Thank You
Page 29
Cheque clearing statistics
Number of cheques cleared (in lakh)
16000
14000
12000
10000
8000
6000
Number of cheques cleared (in lakh)
4000
2000
0
BACK
Page 30
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 Signatures
BACK
Page 31
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
Page 32