S S Mundra: Indian payments system kaleidoscope
Valedictory address by Mr S S Mundra, Deputy Governor of the Reserve Bank of India, at
the International Conference on National Payment Schemes, organised by the National
Payments Corporation of India (NPCI), Mumbai, 22 May 2015.
* * *
1. Shri. M. Balachandran, Chairman, National Payments Corporation of India (NPCI);
Shri A.P.Hota, MD & CEO, NPCI; members of the NPCI Board, other distinguished guests,
delegates to the Conference from India and abroad ; ladies and gentlemen! It is a privilege to
be in the midst of this distinguished gathering to deliver the valedictory address at the
"International Conference on National Payment Schemes" this afternoon. Indeed, this is a
unique initiative by NPCI, the first of its kind to be held in India, which has provided a forum
for interaction amongst the market participants and institutions from various jurisdictions
engaged in various payment system related activities.
2. I observe that over the past day and a half of the conference, representatives from
various countries- both developed and developing- have made presentations about
innovative ways in which they have been making a difference to the payment systems in their
respective countries through diverse product and service offerings. I understand that
evolution and growth of card payment mechanism and mobile payments have been
deliberated upon and so also, the issues of cyber security, innovation in payment systems,
challenges/ opportunities faced by the global payment systems, etc. I am sure all of you
present here must have immensely benefitted from this experience sharing exercise and I
believe that you have a better appreciation of the national payment schemes operating in
different economies across the globe. What I propose to do in my address is to briefly trace
the recent developments in the area of payment systems in India, highlight some of the
issues and challenges that are likely to assume importance in the foreseeable future and the
way forward in dealing with these challenges. Let me, however, begin with emphasising the
importance of the payment system for the economy.
Importance of payment systems
3. We all know that safe, secure and efficient payment systems are vital for the
working of financial markets and more generally for the economy itself. Any disruption to the
payment system has the potential to disrupt the functioning of the financial markets and lead
to systemic instability. When we talk about such large scale disruption probably we have in
mind the bigger and systemically important payment infrastructure and larger payment
system members, viz. Financial Institutions, Exchange Settlement System, Central Counter
Parties and so on. At the other end of the spectrum, the payment system has to also serve
the retail customers. In that sense, the payment systems also have an inclusion mandate so
that the day to day needs of the people like remittance of funds and small value payments
are met. It is also important to emphasize here that the Central Bank and the Government
are also interested in weaning people away from cash and induce them to use cashless
mode of payments like card, mobile, direct debit etc.
Role of payment system in promoting financial inclusion
4. Let me briefly touch upon the role of payment system in promoting financial
inclusion. There is a strong linkage between financial inclusion and the payment systems.
The financial inclusion in its simplest form refers to banking inclusion where the endeavour is
to link the unbanked population with the formal banking system by opening their bank
accounts. To inculcate the banking and savings habit amongst the people, it is important that
all individuals have bank accounts where funds could be held - which initially could be
through remittances in form of direct benefit transfers under the Central /State Government
schemes.
5. The PMJDY scheme launched by the Government of India has achieved
stupendous success in linking the unbanked with the banking system. Bank accounts have
been opened for nearly 99.99 per cent of the households in India which has brought in
150 mn new customers coming into the banking system fold while nearly 135 mn RuPay
debit cards have also been issued. These are huge numbers on a standalone basis and the
payment system must be geared to handle this multi-fold increase in transaction volume. The
payment system would need to be robust enough to process, settle and reconcile millions of
new transactions day in and day out. I am sure that the Indian participants present here
would leverage upon the intricacies of a wide variety of payment system infrastructure learnt
during the course of the conference to improve the payment system infrastructure in the
country to be able to cater to the needs of a billion people.
Evolution of payment systems in India
6. I now turn to some of the important developments that have taken place in the area
of payment system in India under the guidance and oversight of Reserve Bank of India.
Introduction of MICR clearing to mechanise the cheque clearing system in early
•
1980s
• Setting up of the Institute for Development and Research in Banking Technology
(IDRBT) in 1996 with an aim of technological upgradation and development of a
reliable communication network
• Introduction of Electronic Clearing Service and Electronic Funds Transfer in the
1990s
• Permitting issuance of Credit and Debit cards by the banks in 1990s
• Interconnectivity of ATMs across the country by introducing the National Financial
Switch in 2003
• Following the improvement in the Information Technology and introduction of CBS
by banks, RTGS and NEFT introduced by RBI in 2004
• Introduction of Cheque Truncation System (February 2008) and new RTGS with
enhanced features (October 2013).
• The second factor authentication for the 'card not present' transaction, the first of its
kind in the world, introduced by RBI (February 2009.)
• Launch of RuPay - a domestic card payment network (March 2012)
7. Let me also give you a sense of the manner in which the volume and value of
payment system transactions have gone up in recent years. In volume terms, the no. of
transactions handled in the RTGS has gone up to 92.77 mn as at the end of March 2015
from 68.51 mn as at the end of March 2013. During the same period, in value terms, these
transactions have gone up from Rs.677 tn to Rs.754 tn. Under the retail payments (including
paper clearing and retail electronic clearing), the volume handled more than doubled from
694 mn as at the end of March 2013 to 1687 mn as at the end of March 2015. Similarly, in
value terms also, this has more than doubled to Rs.65 tn from about Rs.32 tn. Further, the
volume and value of card payments have also more than doubled in both volume and value
terms during this period. The volume handled as at the end of March 2015 was 1737 mn
transactions with a value of Rs.3.3 tn. These numbers are mighty impressive considering the
level of economic development in the country but as I mentioned earlier, there is much more
work needed to be done going forward. We need to develop the capabilities to handle more
and more number of transactions in a safe, secure and efficient manner, if our objective of
weaning consumers away from cash has to be achieved.
8. Several initiatives for infrastructure enhancements are currently on which include
implementation of Trade Receivables and Discounting System and the Bharat Bill Payment
System. RBI had come out with a Vision Document for 2012-15 earlier and most of the
objectives set out therein have been accomplished. The vision of RBI is to ensure that all
'Payments and Settlement Systems in the country are safe, efficient, interoperable,
authorised, accessible, inclusive and compliant with international standards". As I mentioned
earlier, a sound and efficient payment system is a pre-requisite for a stable financial system
and with the increasing volume and value of transactions, Central Banks can ill-afford to
ignore payment systems. RBI has also initiated the process of setting up of Payment Banks
to further financial inclusion.
Role of NPCI
9. You would have gone into the details of the role of NPCI in the sessions during the
course of this conference. Since, I had the distinction of serving on the Board of NPCI for
some time, I would briefly say a few words on the role and achievements of NPCI. It was set
up with an objective of ensuring pan-India payment systems with uniform business
processes and standards and has already created an enabling eco system necessary for
handling this huge task. Some of the achievements of NPCI which have significantly altered
the retail payments landscape in the country are as under:
• The National Financial Switch (NFS), a vast network of ATMs, has enhanced
accessibility to cash withdrawal and other basic banking facilities for customers,
besides facilitating value added services such as bill payments.
• Cheque Truncation System (CTS) - It has been rolled out successfully in three grid
locations across the country covering over 85% of cheque volume processed. NPCI
has now begun to facilitate the repository of images of cheques processed in CTS.
Immediate Payment Service (IMPS) which started in October 2010 as an inter-bank
•
mobile payment system has, over the years, transformed into a multi-channel
24x7 remittance platform in the country, accessible through net banking, mobile
banking, at BC point, at branches as well as at ATMs.
• RuPay - the domestic card system which was launched in 2011 has slowly gained
popularity and with its linkage under the Jan DhanYojana has become a household
name.
Aadhaar based payments, through linkage of biometric identifier with bank accounts,
•
is facilitating the benefit payments to bank accounts of millions of beneficiaries, and
will have significant on financial inclusion efforts in the country.
• National Unified USSD Platform (NUUP) - The setting up of National Unified USSD
Platform for providing an interoperable USSD based mobile banking system is an
unparalled feat in itself as it links all telcos and all major banks, and offers services
in over 11 languages. It has a lot of expectations as well as its potential for enabling
financial inclusion is enormous.
10. The above are some of the milestones in the journey of NPCI thus far. I fervently
hope NPCI is geared up to handle the huge volume of payments arising out of recent
initiatives of the Government to distribute social benefits to the citizens in the electronic
mode.
Replicating global success stories
11. There are many success stories within different geographies across the globe in the
arena of payment systems. To mention a few - the m-pesa system of Kenya, the 'tap and go'
card scheme at Singapore, the union pay card scheme of China. If these models have
worked so well and have been so successful in their respective countries, can we not simply
replicate the model in our jurisdictions? The answer, I am afraid, is a big NO. Let me say why
with the example of India.
12. India is diverse - in the sense of social customs, culture, religious beliefs. The
diversity and multitude of population and geographic spread of the country- are some factors
which make our task extremely complex. The ease with which people can handle technology
also differs across people of different age groups, income levels, literacy levels etc. Hence, it
is difficult to design product which can work seamlessly across all sections of the society.
Thus, while it is true that no scheme or model can work seamlessly across all economies;
what might indeed be best is learn from the other successful delivery models and customise
the product and service offerings to suit the DNA of the respective economy and society.
Technology and the payment systems
13. Growing mobile and internet penetration has opened new avenues for the payment
systems services. This is reflected in the way the new age customer transacts her business.
To quote Brett King, the author of 'Bank 3.0':
"Customers don't use channel or products in isolation of one another. Everyday
customers would interact with banks in various ways. They might wire money to a
third party, visit ATM to withdraw cash, go online to check salary credit, pay an
utility bill , use their credit card to purchase some goods from a retailer , fill out a
personal loan application online, ring up the call centre to see what their credit
card balance is or report a lost card. More sophisticated they are, they may also
trade some stocks, transfer some cash from their Euro A/c to USD a/c put up a
lump sum in a Mutual Fund or sign up a home insurance policy online".
14. The above statement denotes the diverse set of banking applications which
technology can support. In fact, there is a need of a single channel solution to multiple
product offerings. It must, however, be remembered that technology is just an enabler.
Almost all banks in India have invested heavily in web-based and mobile-based delivery
banking and payment solutions. Very often, these channels are supported by different
vendors and also one use different technology which increases complexity and involves cost.
Technology is ever evolving and adoption of new technology for staying contemporaneous is
a costly proposition. It is pertinent, therefore, that all the capabilities of the technology
enabled delivery solutions are optimally exploited, so that we are not saddled with
unproductive investments.
15. While there is a lot of euphoria around the adoption of mobile banking and mobile
payments, the model has been relatively less successful barring a few countries where the
right environmental factors existed. I am talking here about the delivery of financial and
payment services by using the mobile device rather than its use as an access channel for
internet banking etc. In the Indian context, an objective analysis would reveal various
reasons for slow adoption. There are technical issues like type of handsets, variety of
operating systems, encryption requirements, inter-operable platforms or the lack of it,
absence of standardised communication structures, difficulty in downloading application, time
lag in activation etc. These get accentuated by the operational difficulties in on-boarding
merchants and customers and customer ownership issues. The interplay of these factors has
stymied the deployment and adoption of mobile banking as an effective and widely accepted
delivery channel. Issues of coordination and cooperation between banks and telcos, is
another aspect which acts as either a driver or a barrier to the adoption of mobile banking.
These issues need to be quickly resolved if the mobile payments have succeed in our
country.
Emerging scenario
16. It would be interesting here to visualize few scenarios which may emerge in future:
• Simultaneous impact of playing out of Reed's law and Moore's law where both "the
payment space" and "the pinpoints" within the space would grow exponentially.
• Whether some of the technology companies and retail banks can undergo
transformation to such an extent that the technology firm would appear more like a
retail bank and vice-a-versa.
More and more collaboration between a bank and non-bank.
•
• The gradual shifting of micro payments to mobiles leading to reduction in
requirements of physical currency notes and coins.
• Salaries and payments distributed directly on the mobile wallet akin to currency
distribution.
• With the reduction in cash transaction, ATMs might have to offer other services
rather than only dispensing cash in order to remain relevant.
• Ease of credit through KYC, Mass Market Credit Rating at the click of a button.
• Whether cross-border transactions can also happen on mobiles in future?
The payment system players would have to gear up to accommodate and leverage upon
such possibilities going ahead.
Regulatory challenges
17. The innovations in the payment system space and introduction of new products are
already posing challenges for the regulators and these challenges are likely to intensify going
forward. Some of the possible dilemmas/challenges that the regulators would be faced with
in future are:
• Whether payment and settlement would remain banks' preserve? If not, what would
be regulatory stance?
• What would be the way forward in regulating virtual currencies?
• Cloud computing and Cyber Security
• Striking the right balance between ease of doing business and ensuring security
Challenges from mobile transactions becoming more user centric than transaction
•
centric
• Monitoring of cross-currency / cross-border mobile transactions, not if but when they
happen.
The most important challenge for the regulator would be to do a tight rope walk between
providing the "Right Guidance but not at the cost of stifling innovation".
Conclusion
18. Let me conclude by once again congratulating NPCI for organising this international
Conference. The institution has so far overcome difficult challenges and made significant
achievements in different spheres of retail payment arena. However, it is just the beginning.
It would need to be nimble-footed and innovate continuously to meet the challenges
emanating from a dynamic world. As I said before, such conferences serve as an important
forum to exchange ideas. I do hope that there are significant takeaways for the participants,
which would help shape the design of robust and efficient payment systems to handle
multitude of transactions and contribute to the economic growth in the respective
jurisdictions.
Thank you!