DIGITAL PAYMENTS -- AN INTRODUCTION

A report by investment banking firm Credit Suisse has pegged the digital payment market in India to grow USD 1 trillion by 2023. That is a fivefold increase over an estimated USD 200 billion in digital transactions till 2018.

 These are amazing figures considering the fact that India's literacy rate is still near 70% and per capita income was approximately Rs. 1,11,782 only in FY 2017-18. Can we say that going for a cashless India is another step towards accelerating progress? Well if that is the case, then the meaning, concept, implications, effects, and counter-effects of digital financial services need to be understood very well by one and all. Users of digital services have the right and duty to know the what, where, why, who, when and how of the digital payment landscape so as not to be cheated of their hard earned money. 

Digital payments are not just about transfer of money from one person to another without using actual cash or the bank building but hold more ramifications.

                     

Let us take a brief look at the timeline of digital payments in India:

1981-- First credit card issued by Andhra Bank

1987--First ATM in India set up by Hongkong and Shanghai Banking Corporation (HSBC) 

2004--RTGS system introduced by RBI initially only for inter bank transactions later extended to consumer transactions

2005--NEFT service started by the RBI

2006-- First E-Wallet-> Wallet365.com launched by TimesofMoney in association with Yes Bank

2010-- Paytm started its service as a prepaid mobile and DTH recharge platform

2016--UPI (Unified Payment Interface) launched by the government

However, it was the historic day of November 8, 2016, which reshaped the digital revolution in India and after which the above-mentioned terms -- cards, e-wallets, payment apps became part of the financial lexicon. That was the day that demonetization was announced and old large value currency notes of Rs.1000 and Rs. 500 were declared illegal. There was currency crunch and people stood in long queues outside banks to withdraw money, ATMs' ran dry and mobile wallets quickly grabbed this opportunity with intensive marketing techniques to bring people into the ambit of digital payments. Other financial institutions soon followed suit.

That is a broad framework of how the customer has been spoilt for choice over the passage of time with financial institutions providing them hosts of digitized services aimed not only to meet their increasingly sophisticated demands but also for their own survival in an ever-increasing competitive environment. But then how many of us actually have an in-depth and not just a broad understanding of digital payments. We can begin the learning of digital or electronic payments with the study of the five C's:

Coverage, Convenience, Confidence, Convergence, and Cost

The Reserve Bank of India's report, "Payment and Settlement Systems in India:VISION-2018" highlights the vision statement as-'Building best of class payments and settlement systems for a 'less-cash' India through a responsive regulation, robust infrastructure, effective supervision and customer- centricity' which revolves around the above mentioned five contours or the five C's. Let us take them up one by one: 

1. Coverage: by enabling wider access to a variety of electronic payment services -- According to a KPMG Group survey, India had the third largest internet user base in the world in 2016 with more than 300 million users of which 50% were mobile-only internet users. . But if we look at it in another perspective, this number represents only 19% of the country's population. Numbers are expected to grow to 500 million by June 2018 as predicted by the Internet and Mobile Association of India (IMAI) with 732 million potential users in rural India, which offers immense scope for expansion.

 So how can internet penetration and use of electronic payments be improved? Digital India Initiative with a total overlay of Rs. I,00,000 crores was launched after demonetization to provide internet access and comprehensive mobile phone coverage across India. The BharatNet Project was allocated Rs. 10,000 crores in Budget 2017 for internet advancement in rural India, to create a highly scalable network infrastructure. Catalyst, an initiative funded by United States Agency for International Developments (USAID) under the MSTAR Program is aimed to increase the adoption of digital payments in India, using a targeted 3 points ecosystem approach which includes structured knowledge creation, policies and partnerships for change and strategic innovations.

2. Convenience: by enhancing the consumer experience by the ease of use and of products and processes -- Nothing excites a customer more than doing any transaction with a few clicks on their mobile phones, at their convenient time and place. Earlier customers used to go to banks for their transactions, then they got the convenience of ATMs, followed by the facility of net banking and now mobile banking including digital wallets. The biggest advantage of digital wallets for customers is convenience- no need to carry cards or cash; makes purchases easier with a 'tap to pay approach' and faster processing of payments. Who would have thought this was possible a few years back that you could have bought consumer durables sitting at home or making bill payments or booking movie tickets without having to venture out. A small convenience fee is charged by the service providers but that is immaterial to looking at the benefits derived. 

Let us take the example of Samsung Pay, the mobile payment system of Samsung which has been designed to replace all plastic cards in your wallet. The system works on almost all existing POS terminals( in 24 countries) except where physical insertion of card is required.Samsung Pay uses near field communication (NFC) technology at tap-to-pay terminals and also works with other magnetic strip terminals. all you have to do is to scan your cards with the app. Verification is done either with finger prints, iris scan or mpin and your card gets registered. When you go shopping, and the bill is generated, you open the app and take out the card you want to make payment with and just tap on top or on the side of the POS terminal. After authentication , the payment is made. Just with a little tap. 

3. Confidence: by promoting the integrity of systems, security of operations and customer protection-- Digital payments acceptance by the users faces threats from various types of cyber crimes like fraud, phishing, malware, adware and the like. Do's and don'ts and best practices for consumers are normally prescribed by service providers but government initiatives for ensuring security and penalty for wrongdoers is still not fully in operation. 

Google and the Ministry of Electronics and Information Technology (MeitY)  in 2017 came together for a 'Digital Payment Security Alliance' to create community awareness on safe and secure digital practices. Cyberspace is constantly evolving. therefore, protection of national cyberspace needs to be a continuous activity. Data Security Council of India (DSCI) and PayPal together launched a report titled 'Securing India's Digital Payment Frontiers' in March 2018 to create awareness on cyber threats.

The rapid change in technology in terms of flexibility and ubiquitous use across the globe necessitates that the country is up to date in technology, both for products and security along with trained manpower (people), and policies/ procedures/ guidelines. Standardization of data protection laws and cybersecurity framework, comprehensive regulatory guidelines on technology risk management, payment security management,and business continuity management could help secure the digital environment.

4. Convergence: by ensuring interoperability across service providers-- Different sectors of the economy are getting linked to the financial services sector like never before. The market players include banks (traditional, small finance, payment), mobile network operators, pre-paid payment instrument providers, payment interfaces and much more. In order to provide consumers with hassle-free, smooth and universal transactions, it is essential to communicate, exchange and use/process data provided by different information technology networks, systems, and tools. This is called interoperability in financial sectors market. 

Let us take a simple example of ATM sharing by banks.It was only in 1997 that  the Indian Banks' Association (IBA) set up Swadhan, the first network of shared ATMs in India. It  allowed cardholders to withdraw cash from any ATM in the network, for a fee if they did not have an account with the bank that owned the ATM. In 2002, the network connected over 1000 ATMs of the 53 member banks of the association. The National Financial Switch was launched by the IDRBT on 27th August 2004. Any bank that provides core banking services with 24x7 transaction banking capabilities with or without ATMs may join the National Financial Switch through a sponsor bank. As of April 2017, the NFS Network connects total of 2,36,190 ATMs in India. Among them 2,16,952 ATMs of 99 Direct Member banks, 4,058 ATMs of 692 Sub Member banks, 1,034 ATMs of 56 RRB Member banks and 14,146 ATMs of 8 White Label ATM providers, which is the largest number of ATMs under a single network in India. That means that we benefit by having access to ATM facilities despite having cards issued by another bank because of the interoperability arrangement between financial service providers.

5. Cost : by making services cost-effective for users as well as service providers-- Not many of us are aware of the charges that financial institutions charge us for providing these digital services. Let us take a few examples.   For a NEFT transaction of SBI above the value of Rs. 2,00,000, a customer has to shell out Rs. 25 plus GST ; ICICI Bank allows 5 free financial and non-financial transactions  from its own ATMs and maximum of 3 transactions from other banks' ATMs.   Beyond that each financial transaction costs Rs.20 plus GST and each non - financial transaction costs Rs. 8.50 plus GST. 

Paytm claims that all transactions done through it are non-chargeable and also offers cashback for many payments done through it. But have you ever thought that it is here to earn profits and not to distribute freebies? How many of us know that though the transfer of funds from bank account to Paytm do not carry any cost but a flat 3% of the amount is deducted if the transaction is reversed! That means an amount of Rs. 1000 transferred from Paytm to your bank account will carry a deduction of Rs. 30. But these financial institutions are not to be blamed as the entire setup carries huge investment costs in terms of hardware and software. Paytm had to raise Rs. 2.2 billion in February 2017 for the furtherance of its commercial objectives.

Conclusion

 Even today there remain strong apprehensions about the digital mode of payments. The trust towards cash is deeply embedded in an everyday functionality. Concerns about security,  efficiency, and cost of digital payments are seen as hurdles and prevent people from making payments online.  Surmounting digital illiteracy and lack of trust in digital payments is crucial in creating a cashless society.

This first post on getting in-depth into digital payments in the most simple way is just the beginning. Deciphering digital payments is an effort to make a layman understand the basics of e-transactions and what goes behind the scenes in what looks like such an easy and approachable way of making payments.