Vision for Payment Systems
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Transcript of Vision for Payment Systems
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Vision for Payment Systems
General ManagerState Bank of India
June 11, 2010
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Overview
• What is a Payment System
• Payment Systems across time
• Current Indian Landscape
• Tomorrow
• Challenges
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What is a Payment System
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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)
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Payment Systems Across Time
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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
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Current Indian Landscape
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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)
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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)
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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)
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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.
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Tomorrow
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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.
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Challenges
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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
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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
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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!
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Thank You
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Cheque clearing statistics
BACK
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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
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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