Chapter 11

Overview of Payment System in India

National Payments Corporation of Indian (NPCI)

Reserve Bank of India, after setting up of the Board for Payment and Settlement Systems in
2005, released a vision document incorporating a proposal to set up an umbrella institution
for all the RETAIL PAYMENT SYSTEMS in the country. The core objective was to consolidate
and integrate the multiple systems with varying service levels into nation-wide uniform and
standard business process for all retail payment systems. The other objective was to
facilitate an affordable payment mechanism to benefit the common man across the country
and help financial inclusion.

IBA's untiring efforts during the last few years helped turning this vision a reality. National
Payments Corporation of India (NPCI) was incorporated in December 2008 and the
Certificate of Commencement of Business was issued in April 2009. It has been incorporated
as a Section 25 company under Companies Act and is aimed to operate for the benefit of all
the member banks and their customers.Various services provided by NPCI include:

a. National Financial Switch (NFS) -

Recognising the need to connect all ATMs in India to facilitate convenient banking, the
Institute for Development and Research in Banking Technology (IDRBT) conceptualised and
operationalised a multi-lateral domestic ATM network. This network is referred to as
National Financial Switch (NFS).NFS provides interconnectivity between the ATMs of all
participating member institutions and facilitates routing of transactions between these
institutions. This allows users to conduct a transaction at any ATM of a connected
member.NFS is currently the largest ATM network in the country with members that include
Scheduled Commercial Banks, Foreign Banks, Cooperative Banks, Rural & Regional Banks
(RRBs) and White-label ATM operators. NPCI has introduced the Sub-membership model
that enables the smaller and regional banks to participate in the ATM network.

b. Rupay
RuPay, India’s first domestic card scheme and network, was conceived to fulfil RBIs vision of
offering a domestic, open-loop, multilateral payment system to all banks and financial
institutions in India. RuPay was launched in March 2012 and is instrumental in creating less
cash economy and increasing financial inclusion. During the year 2014-15, Government of
India had initiated massive drive for Financial Inclusion under Prime Minister Jan
DhanYojana (PMJDY). RuPay Debit Card was made the default payment instrument. RuPay
currently offers a Magstripe and Chip & PIN debit card, Prepaid cards and facilitates
payments across different channels such as ATM/POS/e-Commerce/ Aadhaar-based
transactions at micro ATMs.

Performance highlights

Banks issuing RuPay cards (Total) 407

Commercial Banks issuing RuPay cards 40

RRBs & cooperative banks issuing RuPay 367
cards
RuPay cards in circulation (mn) 153

POS accepting RuPay cards (mn) >1

% POS accepting RuPay cards 99%

Online merchants accepting RuPay cards 20

(‘000)

c. Immediate Payment Service (IMPS)

Paper-based and electronic systems like cheque, NEFT and RTGS have traditionally had a
processing time between 1-2 days, rendering them inconvenient for a lot of retail payment
requirements. Immediate Payment Service (IMPS), an innovative real time payments service
was launched by NPCI as an instant mobile remittance solution in November 2010. Since
then, IMPS has evolved into a 24 X 7, real-time, channel independent, retail payments
service that empowers customers to transfer money instantly within banks and RBI
authorised Prepaid Issuers (PPIs) across India. This enables non-banking PPI customers to
access the IMPS facility.

d. National Unified USSD Platform (NUUP)

The proliferation of mobile telephony services has far exceeded the financial services in
India. As per the Census 2011, more than 40 per cent of the Indian population did not have
access to banking facilities while the number of mobile phones in India has crossed 800 mn.
Hence, it becomes critical for a country like India to harness mobile technology to offer
banking and other non-financial services.
NUUP is a USSD based mobile banking platform that makes banking services accessible to all
bank account holders on their mobile phones. It is an interoperable platform that brings
banks and telecoms together. Since it uses the mobile handset as the transaction initiator,
NUUP has unparalleled reach and potential. NUUP currently offers 3 sets of services across
multiple languages – financial, non-financial and value-added services. Key financial and
non-financial services offered by NUUP include:
• Balance Enquiry
• Mini Statement
• Funds Transfer
• MPIN Management

e. National Automated Clearing House (NACH)

National Automated Clearing House (NACH), launched in December 2012, is a centralised
payment system that has been developed to consolidate multiple ECS (Electronic Clearing
Service) systems operating across the country and to provide a framework to remove local
barriers and inhibitors.NACH provides a national footprint that is aimed to cover all core
banking-enabled bank branches. It provides a robust, secure and scalable platform to the
banking and corporate participants. It has best-in-class security features, cost efficiency &
payment performance coupled with multi-level data validation facility that is accessible to
all the participants. It has been designed to meet specific needs of banks and corporates.

f. Aadhaar Payment Bridge (APB)

APB has been especially designed for routing the benefits of various social welfare schemes
directly into the bank account of the beneficiary using the Aadhaar number. The ABP is an
attempt towards financial re-engineering of the subsidy/welfare management program. ABP
has been recognised and awarded with two prestigious awards in the category of financial
inclusion for the current and potential impact.

g. Aadhaar Enabled Payment System (AEPS)

Aadhaar Enabled Payment System (AEPS) is an innovative solution that leverages the
Aadhaar infrastructure for greater financial inclusion.AEPS is an interoperable, bank-led
model that allows Banks to offer banking & financial inclusion transactions by providing
micro-ATMs to their Business Correspondents (BCs). The system provides an authentication
gateway that enables a seamless interaction between the originating channel and the
Aadhaar linked account. AEPS has the ability to manage both On-Us and Off-Us transaction
requests.AEPS has provided banks with the most suitable model to proliferate benefits of
Financial Inclusion and Direct Benefits Transfer (DBT) payments. Banks have deployed
micro-ATMs in various and far-flung places in India which have made Aadhaar-based
payments available and accessible to a larger population.

h. Cheque Truncation System (CTS)

Cheque Truncation System (CTS), introduced in India in 2008, allows an electronic image of
the cheque to be transmitted to the drawee bank by the clearing house including relevant
information such as data on the MICR band (cheque number, MICR code, Short Account
Number, Transaction Code), date of presentation, presenting bank among others. The image
and the data are transmitted over a secured network that allows the funds-transfer and
settlement processes to conclude without the need to wait for the physical instrument,
which can be retained at the presenting bank itself.
Thus, CTS empowers banks to settle interbank cheques basis the electronic image of the
cheque and other relevant data, thereby removing various issues & bottlenecks associated
with the traditional process. In addition, ‘CTS 2010 Standards’ – the security standardsfor
physical cheques make the clearing process more safe and secure.

4. 2 Leveraging Aadhaar in Service Delivery

The key rationale for Aadhaar is to provide an identity infrastructure for delivery of various
social welfare programs and for effective targeting of these services. While welfare is the
prime focus of Aadhaar, it can also be utilized by other enterprises and service providers
such as banks, telcos and others for improving their service delivery.

The potential of Aadhaar can be realized only upon use of the infrastructure as an ID proof
and as a Unique key by various state departments, central ministries, PSU’s and private
sector entities to provide service delivery to residents in an integrated fashion. The Aadhaar
number will also have value for the resident with applications in the ecosystem that
leverage the identity authentication and applications therefore forma critical and vital role
to Aadhaar’s success.

Aadhaar applications are broadly e-Governance or IT initiatives (or sub-modules within

those initiatives) within Government, Public Sector and Private Sector that utilize Aadhaar’s
properties of Unique key and linked ID verification in their service delivery processes. There
are many benefits associated with such integration for the various stakeholders that range
from better compliance management to significant savings in leakages and increased
efficiency and accountability in service delivery.

4.3 Usage of Aadhaar

Aadhaar and identity authentication can be used by the service delivery provider mainly for
the following three broad usage types:

Confirming Beneficiary: Various social sector programs, where beneficiaries need to be

confirmed before delivery of the service, are expected to be the most common users of the
authentication service. Examples of some such usages include subsidized food and kerosene
delivery to PDS beneficiaries, health service delivery to RSBY beneficiaries, registering job
applications by NREGS beneficiaries etc. This usage would ensure that services are delivered
to the right beneficiaries.

Attendance Tracking: Another key usage of authentication would be attendance tracking for
programs such as SSA (for students & teachers), NREGS where wages / outlay is linked to
actual number of days the beneficiary reports for the program etc.

Financial Transactions: Examples include banks that authenticate a customer using Aadhaar
as well as bank-related identity information (account number/user id along with
password/OTP, etc.) before enabling banking transactions such as funds transfer, funds
withdrawal, etc. Identity and address verification is a key requirement for enrolling a new
customer or opening a new account for an individual. Examples are the issuance of a new
The credit needs and avenues for safe custody of savings for the poor have been recognized
as areas of substantial gaps and have been sought to be addressed by expansion of bank
branches, cooperative credit structure and microfinance initiatives. However, the
remittance needs have traditionally been thought to be well met by money orders from Post
Office, sale of traveler's cheques, demand drafts by banks and through informal sources,
including physical carrying of cash by the poor themselves and their relatives and friends.

4.4 RuPay Debit cards:

RuPay is a new card payment scheme launched by the National Payments Corporation of
India (NPCI), to offer a domestic, open-loop, multilateral system which will allow all Indian
banks and financial institutions in India to participate in electronic payments. "RuPay", the
word itself has a sense of nationality in it. "RuPay" is the coinage of two terms Rupee and
Payment. RuPay Cards address the needs of Indian consumers, merchants and banks. The
benefits of RuPay debit card are the flexibility of the product platform, high levels of
acceptance and the strength of the RuPay brand-all of which will contribute to an increased
product experience. The main features are as under:

• Lower cost and affordability

• Customized product offering
• Protection of information related to Indian consumers
• Provides electronic product options to untapped/unexplored consumer segment

4.5 Remittance System Required by the Poor

The poor need a remittance system to send money to their families when they migrate out
of their villages or towns. Situations often arise when migrant workers in a city remit money
to their families in the village or when parents in the village need to remit money to their
children in the city. Other cases of remittance could arise on account of transfer payments
by Government or remittances of miscellaneous nature. As such the service they need
should meet the following criteria:

 Accessible service - The product should be available to them without unnecessary

hassle. Entry barriers such as existing relationship with banks, possession of checkable
accounts or filling up long forms act as deterrents in accessing the services.

 Timeliness and certainty of delivery - Predictability of delivery at the recipient's place

is important for those who depend on remittances for meeting their basic needs.

 Cost effectiveness, affordability and value for money services - The remittance needs
are mostly repetitive and small value. The present system of remitting through post
offices is costly. Other sources are risk prone, further adding to the cost of the service.

 Receipt of delivery status - Timely confirmation of delivery is a requirement for poor

people who have limited access to communication facility.

While these systems meet the needs of a modern economy, they leave the financially
excluded sections of the population untouched. The basic requirement of ECS and cheque
transactions is a checkable account with a bank which offers these products. The RTGS is
also a bulk payment facility and would be addressing the needs of high value settlements. As
such these systems pose a high entry barrier for the financially excluded sections. This calls
for a conscious attempt to build a payment and settlement system that caters to the needs
of the poor and excluded sections of society.

One of the starting points in this direction is the present drive at financial inclusion through
“no frills” accounts and use of BFs and BCs. However, it would be useful to look also into a
few international experiences in expanding the choice of remittance facilities for the poor.

4.5.1 International Experiences

Wizzit, a South African company enables customers to use their phones to send funds to
one another, buy airtime and pay their bills. The funds come from customer accounts at
Wizzit, which operates as a bank in South Africa under license from the Johannesburg-based
South African Bank of Athens (SABA). SABA is a subsidiary of the Athens-based National
Bank of Greece1.Globe Telecom, a mobile service provider in Philippines provides an e-
wallet facility to its customers. The product turns cell phone into an e-wallet, and the
customers can use their phones to transact business. Non subscribers can send money
electronically to Globe mobile subscribers.

4.5.2 Experiences from India

In India, mobile services are presently used for conveying information regarding banking
transactions. The potential exists to expand the services for enabling remittance facilities
through mobile phones. Already no frills accounts and Government payments are being
routed through mobile network and telephone on a pilot basis at Warangal, Pithoragarh and
Aizwal. One successful example of suitable remittance product is the model adopted by
Ahmednagar DCCB. It has implemented a system of low cost anywhere banking solution
which has a facility of card to card transfer. Savings / current account holders at all its 280
branches have a choice to keep their savings bank account or a part thereof in a separate
account at the bank's head office. Customers can have access to this account from all the
bank branches. Each branch has been provided with two PoS devices which are connected
through a dial-up telephone line to the head office. The customers can go to any branch and
deposit or withdraw cash after authenticating access to their account. About 30,000 cards
have already been issued. Wholesale dealers have adopted the model and ask retailers to
make payments through this mechanism. Add-on cards have also been provided to the
customers asking for the same. An account holder at a village can deposit cash in the village
branch of the bank and her children studying in the city can withdraw cash from another
card. It was learnt that the customer is charged only Rs.4 per transaction. Such experiments
may be studied for replication.

A low-value card, linked to a bank account, which can be encashed at PoS and which would
allow transfer of small amounts from one card to another, would alleviate the problems that
poor face in getting affordable remittances facilities. This would require national switch with
linkages to PoS. Further, this would substantially increase banking outreach as at present
there are about 3 lakh PoS as compared to around 70,000 scheduled commercial bank
branches and 22,000 ATMs. However, a majority of PoS machines are now located in urban
and semi-urban areas. It is expected that as the system takes roots more PoS will come in
rural areas, facilitating such transfers. The e-kiosks in villages could be yet another source of
operating a remittance system that is accessible to the poor. Thus, while the financial
inclusion through opening of no frills accounts with banks would improve the remittance
facility for the poor, a conscious effort at devising a product within the existing payment and
settlement system would enable the poor to benefit from the improvements in banking
technology.

From the above it is quite clear that when it comes to transferring money from one village
to another, the poor in India are substantially challenged. Both the originator and the
beneficiary have to sometimes travel quite a lot of distance to be in a position to send/
receive money. Also, the base fees for enabling a transfer work adversely against small
ticket remittances. For small transfers, the fee itself would constitute more than 25% of the
remittance. The remittance needs of the poor may have to be met by a multi-pronged
strategy which uses the existing infrastructure optimally and in addition, new products
should be introduced which leverage on technology.

4.6 Reaching the Poor

The combined network of nearly 70000 branches of scheduled commercial banks (including
RRBs) and a network of more than 1.50 lakh post offices can ideally provide the institutional
mechanism for extending remittance facilities in remote areas. With adoption of
appropriate technology, it may be possible to bring down the transaction costs which would
encourage and enable the poor to make use of such remittance facilities. A committee may
be set up with representatives from RBI, Department of Posts, NABARD and commercial
banks for exploring the feasibility of integrating postal network with the banking system and
developing a nationwide remittance system.

The remittance product could be an electronic product similar to “Instacash” where a 16

digit code is given to the originator of the transaction, and the beneficiary can take the
amount from select post offices by giving the code, and identity proof. This product should
be available across banks, post offices and other institutions and be affordable. Another
option could be to credit the remitted amount to a central server at the originating point
and at every touch point should be able to withdraw it.

Banks should endeavor to have a BC touch point in each of the six lakh villages in the
country. There should be a micro-bank in every village. Banks should introduce card-based
remittance products which can be encashed all over the country. This may be card to card
transfer, or simply a scratch card type remittance card.

Given the fact that nearly 80% of farmer households in the country are small and marginal
farmers, who rarely have work on their own farms for more than 100 days a year, the
availability of wage employment in the vicinity of their villages is critical. National Rural
Employment Guarantee Act (NREGA) scheme ensures that every household in need can ask
for paid wage work for up to 100 days per year. There should be creative use of the NREGP
payments through bank accounts to enhance financial inclusion, as practiced in Andhra
Pradesh. In Andhra Pradesh, the beneficiaries / depositors are issued smart cards to enable
transactions at several locations besides the bank branch.

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