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Last Mile Payment System

Over the centuries, money has morphed in form while retaining its essential function as a store
of value. From goods on barter, to coins, to promissory notes, to currency notes and plastic,
money is first & foremost a payment mechanism.

The digital revolution has affected many well-established businesses, for better & for worse.
Analog has been ceding ground to digital in almost every sector one can imagine. From travel to
photography, from newspapers to running shoes – upstarts are challenging the legacy players.
Why should payments be any different?

Payments are ubiquitous. Everybody, everywhere has to pay bills. Everybody has had to borrow
or repay a small sum from a friend. Everybody has to buy something from a merchant. A farmer
or a villager in our country purchases grocery, shoes, visits picture hall with his family, travels
in buses in addition to purchasing fertilizers/manures , making payments to suppliers of
machinery, paying installments of his loan, receiving subsidy, paying school fee for his children
etc.

Besided large value transactions, small payments play a big role in the life of rural masses.
Cash is the preferred mode of payment for them as they do not have access to formal payment
system. T he penetration of modern electronic payment products and services is
concentrated to a large extent in metro/urban and to some extent semi-urban centers of the
country and caters to the need of those citizens who already have access to the formal
banking channels.

A safe, efficient, accessible, inclusive, interoperable and authorised payment and
settlement systems with ease of use and access can convert the society into a less cash/cash
less society. Regulation can be channelised to meet technology requirements and international
standards/ best practices.

White Label ATM.00002 *Source http://www. The gap is wide specially with the targets fixed by the Government of India to cover 1000 people in Rural Area by providing a Bank’s Branch or facility of banking through a Business Correspondent or Ultra Small Branch or installation of ATM ( Mini ATM. White Label Mini ATM. Clearing Houses. Speed Clearing.rbi.Electronic Payments of Govt Subsidy 4.Non Cash Transactions (Assuming one More than 14. (Estimated) 2 Retailers in India 10 million (Approx.e-Commerce and m-Commerce More than Rs.This is an opportunity Banks should not miss.org.13 billion Electronic Transactions per year.in The availability of the banking facility is 0.4 billion . NEFT.Payment systems prevalent in our country are either paper based (e. ECS. of ATMs(Rural) 7881* Post Offices(Rural) 1.465 billion 4. MICR codes.) or technology based like RTGS.) 3. One Bank’s Branch or ATM or Post Office for 50. point of sale terminals or Mobile Banking may be other sources of providing Banking facility ). The Banking network needs to be expended by 50 times in the rural areas. These systems are suitable to the requirements of the exclusive masses but are not ready for facing the challenge of transforming cash based society living in unbanked areas to a cash less society with the inclusive growth object. Cheque Truncation etc. The challenges and opportunities for last mile payment system are obvious from the following data : Rural Population 8330 mio as per Cencus 2011 (Provisional Figures) No of Bank Branches(Rural) 34208* No. Potential for electronic transactions is also be underlined by the following indicators: 1.000 people living in rural area is the availability ratio of banking facility today.g.00002 per person in the rural areas. NECS etc.20 lacs Micro Branches Negligible Banking Facility per person 0.

Both RECS Service (ECS) and NECS facilitate STP-based processing of bulk payments in a centralised manner in all core-banking enabled bank branches within their jurisdiction.8 lakh transactions with a value of Rs. Simultaneously achieving financial inclusion in order to cover 2. Regional and National ECS.43 billion and Rs. On an average RTGS settles 1.2 lakh and above) transactions.945.93 trillion per year through 4. The payment system architecture for the length and breadth of a country like ours with an object to serve the last mile can be built on the unified platform of integrating various systems through technology innovations and setting up the desired infrastructure where all the players work together.2. while monthly values are averaging about Rs.40 million transactions (ECS Debit– Regional and local). The electronic payment and settlement system prevailing in our country can be summarised in the following table : 1.Credit Cards (as on Aug 2012) 18237281 6.transaction per person per month) 5. The dimension of payment for subsidy through EBT/DTS model (Electronic Benefit Transfer /D i r e c t T r a n s f e r o f S u b s i d i e s ) c a n b e u n d e r s t o o d by the fact that it in the range of Rs. which holds the key to smooth delivery of Banking facilities to the financially excluded population.60 billion for ECS Credit and ECS Debit respectively.Electronic Clearing The ECS consists of Local.13 billion electronic transactions. Regional and local) and 13. 2.31 8. a Task Force set by RBI envisiages the creation of an interoperable network of 10 lakh Business Correspondent agents using the combined infrastructure of India Post and Banks.Debit Cards (as on Aug 2012) 298572426 No of transactions Amount in Million Rupees 7. Considering the importance of RTGS for settling large value .National Electronic Offers eleven hourly near real-time settlements on week days and five Fund Transfer (NEFT) settlements on Saturdays with providing Positive Confirmation to the originator that beneficiaries account has been credited.60.Real Time Gross The RTGS system was introduced in March 2004 and now extends to Settlement 84638 branches as at the end of May 2012.738. and to serve the urban poor. RTGS settles gross inter- bank and customer (Rs. Average monthly volumes are 8.126.ATM Transactions(as on Aug 2012) 446097190 154. 3.POS Transactions(as on Aug 2012) 70738395 1.05 million transactions (ECS Credit -NECS. 4 trillion on a daily basis.25 lakh Gram Panchayats containing 6 lakh villages.22 In the vision document “Payment Systems in India: Vision 2012-15” RBI has identified the Business Correspondent model of branch-less banking..326. Reserve Bank of India can assume the role of mentor/ motivator/ mediator amongst the players of the related field.

of which 38 have started operations.7 million (both financial and non-financial) and a value of Rs. 6. payment system 24X7.Prepaid Instruments The pre-paid instrument issuers’ universe is populated by both banks and non.Credit Debit Cards One of the fastest growing segments is the card segment with 18 million outstanding credit cards and 298 million debit cards. interbank electronic fund transfer service through mobile phones. action has been initiated for putting in place a Next- Gen RTGS. 4. 5.Mobile Banking The operating guidelines for mobile banking issued in October 2008 which were later relaxed in December. 5. 50 banks have been permitted to offer Mobile Banking transactions.000. After the enactment of PSS Act. 50. This system facilitates customers registered with their banks for this service to use mobile instruments as a channel for interbank fund transfers in a secured manner with immediate confirmation features. 2.banks. payment systems.000+ ATMs with an average daily volume of transactions standing at 4. 8. NFS which is the largest ATM switching network connects 80. facilitating mobile banking transactions up to Rs. The NFS enables customers to perform their transactions (both financial and non-financial) using ATMs under the NFS network without reference to the card issuing banks.Inter-bank mobile The IMPS is a service operated by NPCI which provides an instant. NFS is a service offered by NPCI. The NEFT platform is used for settlement of all interbank mobile banking transactions. Banks have also been permitted to provide money transfer facility up to Rs.000 from a bank account to beneficiaries not having bank accounts with cash payout facility at an ATM or Banking Correspondent. 7. most of the non- bank entities who have received authorisation to operate a payment system are in this business segment.National Financial The National Financial Switch is a national infrastructure with pan- Switch (NFS) Indian presence provides a switching service for connectivity across ATMs of banks. both for e-commerce and money transfer purposes. Last Mile Payment Systems . 2009.5 billion.

not all suitable for all E-commerce uses. which is digital money that is issued by a single vendor. very high-volume charging. will be introduced for the WWW. However. high potential transactions costs of micro-payments and large expenditures on infrastructure and IT. a secure. USA) in 1996 . cost effective payment solution is a dire necessity for promoting financial inclusion. several different micro-payment schemes exist. Scrip has a value. An efficient. Scrip consists of a signed message attesting that a particular serial number holds a particular value. The solution to the last mile payment problems has been found by many countries through integrated technology solutions but with a limited utility . The customer deals with his issuer. cheap. Current macro-payment systems used by most E-commerce sites are not suitable for high- volume. Mpay is very similar to the billing mechanism of the third party value added services of the phone networks. low-cost produce or service purpose. MA. Mpay This micropayment system proposal from IBM was previously named MiniPay. enabling access for poor residents — to the . banks face high costs of customer acquisition. The system is suitable for selling inexpensive information and other similar services that are usually delivered on-line. and debit-based protocol of a micropayment system. In PayWord customers generate their own “coins. In interiors of rural India. However. As a result.scrip. PayWord PayWord micropayment protocol proposed by Ron Rivest (MIT Laboratory for Computer Science. which lack basic infrastructure. even for very low cost. the vendor deals with his acquirer and the issuer and the acquirer settles the accounts. it must come with economic access for the poor. NetPay We present a new protocol called NetPay that allows customers to purchase information from vendors on the WWW NetPay. widely available. These payment technologies suffer from use of heavyweight encryption technologies and reliance on always on-line authorisation servers. If a country’s growth is to be truly transformational. In addition to the necessary contents of electronic cash the scrip will also hold an expiration date and information on the particular vendor with whom the scrip can be redeemed. but it has value only when spent with specific vendor. which are sent to vendors and then verified by brokers. NetPay differs from previous protocols in the following aspects: NetPay uses touchstones signed by the broker and Index’s signed by vendors passed from vendor to vendor. unbanked regions are those that are sparsely populated. Micro- payment systems offer an alternative strategy of pay-as-you-go charging.” or paywords. which are faster. and where large numbers of small transactions is common.Banks in India face unique challenges in fulfilling the goals of greater financial accessibility and affordability for the poor. just as cash does. The protocol aims to reduce the number of public key operations required per payment by using hash functions. Major micro-payment systems used globally are briefed below: Millicent Millicent introduces a new kind of currency .

Multiple BCs at the local level will also give customers a choice of BCs. Once a general purpose UID-enabled micropayments system is in place.1 A UEBA provides four basic banking features: 1. Rural residents will be able to transact electronically with each other as well as with individuals and firms outside the village. 4. low-cost revenue approach: The UID will mitigate the high customer acquisition costs.UID KYR sufficient for KYC: Banks in India are required to follow customer identifi- cation procedures while opening new accounts.Electronic transactions: The UID’s authentication processes will allow banks to verify poor residents both in person and remotely. It will thus vastly reduce the documentation the poor are required to produce for a bank account. with a facility for making electronic deposits and withdrawals in micro-amounts. It allows balance queries. 2. 2. It provides a convenient store of cash for savings. A customer can access their UEBA through a BC operating a handheld microATM device. Customers will be able to withdraw money and make deposits at the local BC. similar to that used by mobile operators. particularly in villages. Transactions on the UID-enabled bank account function essentially as a prepaid system. The key features of UID-enabled Micro-payment Model 1.economy. its infrastructure. less vulnerable to local power structures.Ubiquitous BC network and BC choice: The UID’s clear authentication and verifi- cation processes will allow banks to network with village-based BCs such as self-help groups and kirana stores. The customers are already familiar with this model and comfortable with paying for talk-time. and significantly bring down KYC costs for banks. and lower costs for transactions. a variety .A high-volume. This enables local BCs such as self-help groups and kirana shops to offer basic banking services at low risk to the bank. Financial inclusion gives the poor the resources to migrate for better jobs. high transaction costs and fixed IT costs that we now face in bringing bank accounts to the poor. 4. Few models of micro payment systems which have been introduced or are in the various stages of implementation along with new suggestive mechanisms are envisaged in the following paragraphs. This will make customers. and its institutions — has been a challenge in rural areas. and lower the risk of being exploited by BCs. and insure themselves against bad times and economic shocks. Without this. The strong authentication that the UID will offer. 3. combined with its KYR standards. they often find themselves trapped in their circumstances. to reduce the risk of fraud and money laundering. and provides a history of transactions. 1. This will reduce their dependence on cash. no-frills accounts. It works as a fast channel for sending and receiving remittances. an electronic good. can remove the need for such individual KYC by banks for basic.UID enabled Micro Payment System/ Business Correspondent Model A stable and secure channel for the delivery of micropayments is a UID-enabled Bank Account (UEBA) linked to a UID number. It is a convenient way to make payments. invest in entrepreneurship. 3.

52 million 79.66 79.76 169.99 906.58% Urban 621.86 78.52 millions) Teledensity (%) 73.2012) Total Subscribers Teledensity Total Subscribers 965. one of its flagship domestic industries has played a pivotal role in India’s growth story.53 951.03 Rural 343. ubiquitous and efficient with a potential to achieve the goal of deeper financial inclusion.39% in the previous quarter. is low-cost. India’s telecom sector.93 926. .06. On the technology front the objective is to enable the development of inter-operable standards so as to facilitate funds transfer from one account to any other account in the same or any other bank on a real time basis irrespective of the mobile network a customer has subscribed to. Trends in telephone subscribers and teledensity June 2011 Sept 2011 Dec 2011 Mar 2012 June 2012 Subscribers (In 885. The guidelines focus on systems for security and inter-bank transfer arrangements through Reserve Bank's authorized systems.97 75.30% of the total additions have been in rural areas as compared to 62. according to which only banks which are licensed and supervised in India and have a physical presence in India are permitted to offier mobile banking after obtaining necessary permission from Reserve Bank. Different countries are following different mobile banking models depending upon their requirements and availability of infrastructure. There has been a dramatic rise in mobile phone penetration over the last few years.76 40.Mobile Banking Model Mobile as a technology.58 Sectoral Teledensity (as on 30.66* *91.34 965.2. Reserve Bank brought out a set of operating guidelines on mobile banking for banks in October 2008.48 76.

interbank electronic fund transfer following elements: service through mobile phones. Shyamala deployed by Business Gopinath. withdrawal. IMPS facilitate customers to use mobile instruments as a channel for accessing their bank 1.NFC 2. The basic financial transactions on these Majority of interbank mobile fund transfer transactions are accounts (cash deposit. 3. DG RBI at Mumbai and this service is now available Correspondents. cash not real time. Union Bank of India and ICICI Bank in mobile based PIN system using “Mobile August 2010. October and November 2010 through biometric respectively. BCs (or  Access control the sub-agents of  Consumer electronics BCs) undertaking  Healthcare these operations will perform them on behalf of all Banks. exchange digital content. the mobile linked no. A standards-based withdrawals into connectivity technology. peer to peer transfer & balance In the above context. Under NEFT. credit customer’s channelized through NEFT mechanism. enabling current and future solutions Aadhaar linked in areas such as: Accounts. 3.. NFC harmonizes today's diverse Mobile and contactless technologies. hence are account. to the Indian public. Yes Bank.frills transactions are processed and settled in batches. A simplified accounts and put high interbank fund transfers in a secured common template manner with immediate confirmation features. NPCI has carried out a pilot on mobile inquiry) can be payment system initially with 4 member banks viz State Bank of executed through a India. for the KYC requirements for the Mobile and Aadhaar linked Accounts which is acceptable to all service providers. 24X7.The Report of the Inter- Ministerial Group on Delivery of Basic Financial Services through Mobile Phones has provided a comprehensive framework for mobile banking and mobile payments . Bank of India. Cash-in / cash-out Near Field Communication (NFC) technology makes life easier operations at the and more convenient for consumers around the world by making front end involving it simpler to make transactions. and deposits and connect electronic devices with a touch. The framework envisages sharing of the IMPS offers an instant. The framework envisages creation of “Mobile and Recommendations from the Report of the Inter-Ministerial Aadhaar linked Group: Accounts” by Banks. An Account . Axis Bank and HDFC Bank have joined Banking POS” or this pilot in month of September. Interbank Mobile Payment Service (IMPS) public based “microATMs" launch happened on 22nd November 2010 by Smt.

Users can share business cards. For example if the user wants to connect their mobile device to their stereo to play media. access information from smart posters or provide credentials for access control systems with a simple touch. such as Bluetooth. etc. ECMA. such as:  Intuitive: NFC interactions require no more than a simple touch  Versatile: NFC is ideally suited to the broadest range of industries.  Information collection and exchange  Loyalty and coupons  Payments  Transport NFC provides a range of benefits to consumers and businesses. . they can simply touch the device to the stereo’s NFC touch point and the devices will negotiate the best wireless technology to use. Wi-Fi.)  Inherently secure: NFC transmissions are short range (from a touch to a few centimeters)  Interoperable: NFC works with existing contactless card technologies  Security-ready: NFC has built-in capabilities to support secure applications Extending the ability of the contactless card technology. NFC’s bidirectional communication ability is ideal for establishing connections with other technologies by the simplicity of touch. make transactions. and ETSI standards  Technology-enabling: NFC facilitates fast and simple setup of wireless technologies. environments. and uses  Open and standards-based: The underlying layers of NFC technology follow universally implemented ISO. NFC also enables devices to share information at a distance less than 4 centimeters with a maximum communication speed of 424kbps.

customers can pre charge their NFC enabled mobile phones and transfer value in the local transactions with a facility to unload the value collected to their Bank account at periodical intervals or when BC’s visits their village. At least for a cap limit fixed by Banks. success of NFC contactless payments would also depend upon developing an open standard for all contactless / NFC transactions / systems independent of the payment system operators. . UTILITY of NFC In rural areas NFC enables Mobile phones can change the pattern of small value transfers(From cash to without cash). Further. Challenge with NFC is finding an ideal solution to host multiple cards in the same NFC handset.The pre charge of the mobile can also be done likewise. In our country there have been a few test runs with NFC payments. upgrading the PoS terminals at the merchant ends. use of NFC would require changes in payment processing. Additionally.

It is an app that stores credit card information. pulls in offers & deals and is a proximity payment system. there are several digital wallet initiatives being launched. . They typically leverage the mobile operators services – using the bill as a store of value or simply as a conduit. to name but a few are creating partnerships which make existing bank accounts mobile. currently being rolled out in the US. From credit card companies.Ecosystem (carriers + devices + social networks + banks ) as an alternative payments mechanism A slew of players – popmoney. to banks & payment service providers. zong. is an NFC (near field communication) enabled proximity payment system. to Google. Google Wallet. The bank-led partnerships work a bit differently than the mobile operator-led businesses. NFC : Nearness comparison for data transfer 4. obopay.

The customers will also benefit by having better access to loans and lower borrowing costs. Firms are designing innovative accessories for these devices to accept card payments and other forms of electronic payments. Jack Dorsey. The day is not far when Garib Bapat pays his milkwala through his mobile. started Square. While it can be argued that M-banking may not be the most necessary factor for an improved banking service in our country. The card reader is shipped free of charge. co-founder of Twitter & widely touted as the next Steve Jobs. iPad or Android device & an app that takes care of card authorization. Once you have a card reader. financial institutions will be able to reduce operational costs. through such mobile platforms.5. Of course. it is. The speed and efficiency with which money can be transferred and monitored. a credit card payment is suddenly possible. and street resellers. one can start accepting payments. . there is that small matter of the iPhone. they will be able to streamline operations. retailers. Whether you are a second- hand bookseller or hobbyist-chocolatier. which would have otherwise incurred on disbursement and loan collection. for most people Square is the defacto category.purchase vegetables by paying digital coins and in case any of these devices or single integrated device is lost or stolen immediately informs the Bank or Operator to stop the device.Consumerization of acceptance devices: Devices such as smart phones and tablets are being rapidly adopted by consumers. While there are quite a few players in this space. certain that traditional banking service alone may not result in any significant improvement in providing the un-banked community with access to the financial sector. however. receives the subsidy in his account directly with UID enabled Bank account. Square has two components – a card reader that can be plugged into the audio port of an iPhone.gets manure retailer by transferring through his digital purse. is likely to be far greater and higher as compared to a cash-based system. By leveraging operator's retail ecosystem comprising distributors. iPad or perhaps a cheaper Android. Best wishes for poor Bapat for cash-less transactions to become cash-rich. Apart from extending customer reach.