G Padmanabhan: Alternate payment channels - prepaid cards: issues
and challenges
Address by Mr G Padmanabhan, Executive Director of the Reserve Bank of India, at the
5th Financial Inclusion and Digital Payments Conference, Mumbai, 12 September 2012.
* * *
Assistance provided by S/Shri G Srinivas, Saswat Mahapatra and Smt Radha Somakumar gratefully
acknowledged.
Distinguished ladies and gentlemen,
I am happy to be in your midst today and share some thoughts with you on the future
roadmap of the Indian payments system. I have had the pleasure of interacting with the
industry participants in similar conferences organised by IAMAI twice in the past. Since then,
several developments have taken place which I firmly believe will result in a greater role to
the assembled stakeholders in the Indian payments industry.
The enactment of the Payment and Settlement Systems Act, 2007 was a watershed in the
sense that it permitted non-bank entities a formal entry into payment systems after being duly
authorised by the Reserve Bank of India. Several if not most of you assembled here are now
offering payment services albeit mostly in the pre-paid payment instrument category.
Nascent as your efforts are it is viewed by us in the Reserve Bank as a welcome and positive
beginning in our long haul towards a less-cash society. Given this profile of the audience, I
shall confine my comments to issues that are of more direct relevance to this group.
In our efforts to move towards a less-cash society, we have recently unveiled our draft
Payment Systems Vision Document, and placed it in the public domain for comments. I am
happy to share with you, that we received responses from several of you. We are in the
process of finalising the Vision Document taking into your comments and observations.
What are the issues that we have flagged in our Vision Document and what are the
challenges before the industry in fulfilling these goals? Our vision is to "proactively
encourage electronic payment systems for ushering in a less-cash society in India" and to
ensure that the "payment and settlement systems in the country are safe, efficient,
interoperable, authorised, accessible, inclusive and compliant with international standards"
One amongst the key additions which is relevant on this occasion is the term "inclusive" and
the emphasis on "less-cash" - please note we are not talking about cashless but less cash
which we consider more realistic. Besides, now that India is a member of Committee on
Payment and Settlement Systems, we have to be compliant with international standards.
What are the challenges in our achieving the stated goals? Recently, I happened to read an
interesting book entitled, "Jugaad" (NaviRadjou, JaideepPrabhu and Simone Ahuja). First,
what is jugaad? According to authors, jugaad is a colloquial Hindi word that means
something like, an innovative fix, an improvised solution born out of ingenuity and
cleverness. The authors point out that the biggest Indian jugaad to communication is the
"missed call" on the mobile phones. India perhaps leads the world in this! Negative
connotation to this jugaad notwithstanding, we need to think positively and appreciate that
innovation or jugaad- in a positive way- is going to be critical for India- not only for
competitive advantage, but also to ensure that our future development is sustainable and
inclusive. The authors flag six principles of jugaad in emerging countries which is worth
recounting to an audience like this:
1. Seek opportunity in adversity
2. Do more with less
3. Think and act flexibly
4. Keep it simple
5. Include margin
6. Follow your heart
These six principles when viewed in the context of this conference can be interpreted to pose
some fundamental issues.
First, can the prepaid industry today proclaim that they have done all what could have been
done? I am of the view that although the regulator has authorized the non banks to enter the
payments sphere and the non-banks have largely chosen PPI, the results are not very
heartening and encouraging. Available data indicates that the growth of the issuance of PPIs
in India has and continues to be sluggish. The average issuance of PPIs during the year
averaged 48.96 million, with a peak issuance of 57.46 million in July 2011. And even
amongst these numbers, it has come to our notice that a particular PPI issuer has issued
PPIs of Re 1/- each in large numbers! Reflecting this growth pattern, the volume of
transactions (2.3 percent) and value transacted (2.5 percent) with PPIs as a percentage of
total card transactions is also very marginal. Second, has the regulator done what could be
done? Let me try and defend myself. RBI has always been in the forefront of building an
enabling environment for the players of the payment industry. Since the inception of the
PSS Act and issuance of guidelines in April 2009, 21 non-bank entities have been authorized
for PPI issuance exclusively of which 18 are issuing PPIs, while the other 3 non-bank entities
are in the process of doing so. Apart from authorization, RBI has also proactively undertaken
policy measures in consultations with stakeholders to encourage the growth of the industry.
While doing so, we have always kept the management of risks and addressing AML
concerns as a cornerstone of our policy. Based on this approach, we have ushered in
several rationalisation measures. But as we all know, while the regulator can act as a
catalyst, it is the issuers who have to hit the ground running. Third, have the industry
associations done what could have been done? Are we focusing too much on so called
stumbling blocks and regulations instead of channelising our energies in achieving the
required scale of operations? Let me not pre-judge. But, may be it is time for more
introspection.
Let me now flag certain important issues which I hope would be discussed over the course of
next two days.
Payment system innovation and role of non-banks payment system providers
The increased role of non-bank entities in payment system is linked to their potential to
change the payment system landscape as they can leverage on their product offerings with
latest technological features to cater to wide segment of the market. Has this taken place in
India? As can be seen from statistics, the share of PPIs in the overall retail segment though
growing is yet to achieve a significant level. If we analyse the types of PPIs being issued,
paper vouchers constitute the major share of pre-paid payment instruments with
73.40 percent. The relative share of others is magstripe cards: 16.59 percent (mostly issued
by banks), m-wallets: 9.94 percent and e-wallets: 0.07 percent. What is the innovation that
has taken place if paper PPIs are merely acting as a substitute for cash? Similarly, why are
micro payments with PPIs not been successful even though regulations are not stringent in
this segment? KYC requirements for PPIs issued up to Rs.2000/- as well as utility payment
PPIs are quite relaxed. Why then have PPIs not been successful in at least these segments?
Do we have any credible answers?
Promoting access and inclusion
In our vision document we have laid emphasis on access and inclusion. We have been
receiving a number of suggestions from the PPI industry as to how PPIs could address the
present gap in access and inclusion. The questions to consider in this context are, is the
current model of PPIs issuers appropriate? Most issuers are geographically restricted. We
have not seen scaling up of transactions by several issuers after getting authorization.
Therefore, the larger issue is - do the PPI issuers have the wherewithal to be ready for the
long haul and provide nationwide effects? What are the plans for increasing the scale and
network services? Why cannot the PPI issuers try to build a relationship with banks by acting
as a Business Correspondents and load the government disbursements onto the prepaid
payment instruments issued by them which in turn would lead to promoting access and
inclusion through electronic payments? The access and inclusion concerns though are far
greater in semi urban and rural areas. What is the scale and presence of PPI issuers in
semi-urban and rural areas to address the access and inclusion gaps in the existing payment
systems? In this context, the related question for the regulator is whether there is a need to
review the entry norms so that only serious players come in? Or is it too early to take this
step?
Standardization and interoperability
In our vision document we have stressed on the need for standardization and interoperability.
We have been also receiving a number of suggestions from the PPI industry for permitting
interoperability among the PPIs, use at all PoS terminals, inter-operability with other payment
system operators as in the case of other payment products. All these are well appreciated by
us. For interoperability to happen, standardization is a pre-requisite. It is only through
standardization that the interoperability amongst non bank issued PPIs, usage of such PPIs
at channels where the bank issued PPIs and other payment modes are accepted can be
achieved. Convergence of any payment instrument into the mainstream acceptance
infrastructure is the need of the hour. For PPIs issued by non banks to be accepted at the
PoS terminals, they need to adhere to the form factor specification and connectivity to their
switch. Is the industry geared up for this? On the other hand, PPIs issued by banks have
access to acceptance infrastructure as they adhere to industry wide standards. Significant
changes will therefore be required in the technology and business model of non-bank PPI
issuers. Another important question is, when a majority of the cards are issued in paper
mode, is the industry geared up for such changes? Is there a specific plan to go paperless by
these service providers?
Interoperability also pre-supposes a central infrastructure for clearing and settlement. We
have already permitted transfer of funds from a fully KYC compliant PPI issued by a
non-bank authorised entity to a bank account through the sponsor bank route riding over the
banks membership with NFS, NPCI. Why is such a fund transfer not picking up?
In our vision document we have discussed about the need for collaboration and co-operation
between payment system operators. What is level of co-operation amongst the PPIs issuers?
Have there been any efforts to collaborate at least on boarding of merchants? Is there any
effort to standardize the merchant code and enable all the PPI issuers once approved under
the PSS Act, to have access to all the merchants? Has the industry deliberated how
collaboration and co-operation could be achieved in the three party model to increase the
scale and volume of transactions?
Arriving at a consensus on these issues will increase the acceptability amongst the
customers as they will have a wider choice of PPIs and will help achieve the objective of
increasing the cashless transactions.
KYC related issues
Several requests for liberalisation of KYC requirements have been received from the
industry. Several schemes in other countries which are operating in a relaxed and liberalized
KYC environment have been cited. We are also aware of the use of PPIs for disbursement of
Government benefits in some countries. Before sharing with you what we are reviewing, let
me sound a word of caution. How many of you have read Ravi Subramaniam? More
specifically, how many of you have read his book "The Incredible Banker"? Can we draw
comfort that, what Ravi describes is mere fiction? The underlying message is clear.
Competition cannot degenerate into the race to the bottom! Relaxation cannot be confused
with abdication. If you are allowed to travel fast on a newly laid road, it does not mean that
you have unbridled freedom to close your eyes and drive! Now let me turn to what we are
trying to review.
In our vision document, we have committed that the PPI guidelines would be reviewed to
provide further impetus to the industry. But it needs to be appreciated that closer the PPI
gets to a bank account, the greater the need to apply the same set of KCY/AML regulations
which are applicable to the banks. In particular, as the functionalities of PPIs form an ongoing
relationship, comparable AML/CFT obligations will have to apply. That is the reason we have
been following a risk based approach within the extant AML framework for PPIs. We will
continue to evolve our guidelines balancing the demand of the PPI industry and extant AML
framework. While doing so there are a few aspects to remember. It must be remembered
that the schemes cited in other countries cannot be replicated in India in toto. The risk
perception while issuing PPIs up to USD1000 without KYC in USA may not be same as the
risk perception associated with PPIs up to Rs.50,000/- in India. The permissible limits, top
ups and reloadability will depend not only on the purchasing power but also on systems in
place to address the risk in terms of strong enforcement and compliance framework.
One of the reasons cited for replacing cash with PPIs is the trails that PPIs will provide.
However, it is essential that PPI issuers are in a position to deliver the requisite trails. In
some of the cases we have observed there is no proper system to track the card issuance let
alone system for tracing the transaction trails. To put it more directly, in a mobile based
prepaid system, this auditability is more straight forward if there has been proper adherence
to rules while issuing SIM cards since minimum KYC standards are prescribed now. The
national identity scheme needs to be vigorously integrated with the payment systems to
create the necessary synergies. The industry may need to examine how quickly the Aadhaar
scheme could be used to address the identification and authentication requirements. While
this process is ongoing, caution has to be the better part of valour. So, while the demand for
relaxation of KYC is well taken, the industry should work on improving the system for
providing the necessary trace and transaction trails.
There have been demands for increasing the transaction limits. Increasing transaction limits
by compromising on the KYC would be a risky proposition given its susceptibility to money
laundering. As you will be aware increase in transaction limits will need proportionate
increase in safety and security of transactions as applicable to other card schemes in the
form of an additional factor of authentication. The industry needs to deliberate more actively
on this issue and we as a regulator would be willing to act as a catalyst in the process.
Creating awareness - is the industry doing enough to increase the use of alternate
payment channels?
I am asked why a customer will buy a PPI and block up to Rs.50,000/- without earning
interest. It points towards the need for creating awareness about the PPIs. I do appreciate
that it is a tightrope walk as bringing cash transactions through the PPI route also needs
identification of that segment of population that would be happy to hold cash and use it
anywhere. The test lies in convincing them about the advantages of such a product but the
acceptance infrastructure and backward linkages have also to be built. We have to find ways
to address such issues through awareness campaigns over the mass media.
The need for orderly growth - Is the industry adhering to laid down rules and
regulations?
As a part of our oversight responsibility, we had carried out on site inspections of certain
operators. This revealed several shortcomings relating to maintenance of escrow accounts,
adherence to guidelines on KYC, absence of an efficient system to monitor and report
suspicious transactions and in putting in place systems and practices for ensuring customer
protection.
The regulatory guidelines for the PPI industry are three years old in the country. Entities are
still learning the eco system and the business models are still evolving. Being new, non-bank
entities are obviously focusing more on business than the processes. This is not very
heartening from a regulatory perspective.
Let me now conclude. I have tried to highlight some of the important issues that the PPI
industry should address to make this alternate payment channel scale up and become more
vibrant. At the same time, certain concerns relating to non-adherence to regulations and laid
down procedures have come to light during the first round of on-site inspections of some of
the entities. This needs to be addressed and remedied urgently. In this context, industry
organizations like IAMAI can play a useful role if they increasingly assume the role of a SRO
rather than a mere lobbying body for its members. I thank you for your attention as I leave
you with these thoughts and concerns.
I wish your deliberations all success.