G Padmanabhan: Evolving customer friendly payment systems in India -
a continuing agenda
Inaugural address by Mr G Padmanabhan, Executive Director of the Reserve Bank of India,
at the launch of Mobile Banking services by Tamilnad Mercantile Bank Ltd, Chennai,
9 January 2012.
* * *
Assistance rendered by S/Shri G.Srinivas, K.Sivaraman, Saswat Mahapatra and Smt. Radha Somakumar is
gratefully acknowledged.
Mr Jaganathan, distinguished guests, officers and staff of TMB and ladies and gentlemen. It
is my pleasure to be amongst you on this occasion of the launch of mobile banking service
by TMB. TMB which has a history of 90 years of banking has come a long way from
4 branches in 1947 to 258 branches as on date.
I am pleased to note that TMB has been in the forefront in embracing modern technology
providing value added services to its three million customers. The Bank has launched
various technology driven products such as Internet Banking, SMS Banking and other
electronic payments like RTGS / NEFT etc. Launching of mobile banking service would be
another feather to the bouquet of products being offered by TMB to its customers.
Given that payment systems are continuously evolving, it is necessary that all the
stakeholders including the regulators are continuously engaged in gearing up to provide safe,
efficient, robust, accessible and affordable payment services to our citizens. The challenge
therefore, is to understand the various issues and the subtle nuances of this ever evolving
payments landscape and devise appropriate strategies - in short we should continue to stay
ahead of the curve. Have we as an industry been able to achieve this? I have accordingly
focused my thoughts on some issues in payment systems which I think need our collective
attention.
Innovations in payment systems - create a need or deliver a need?
Innovations in payment systems especially electronic payment methods have and are being
attempted keeping in mind the potential benefits in terms of more choices, reduced
processing costs, increased revenue and overall social benefits. However, not all innovations
in electronic payments have been successful. The success or failure of an innovation in
payment system would depend on the critical mass or what is generally known as the
network effect achieved which should be large enough to support its cost in the long run and
generate adequate returns.
Introduction of innovations in payment system often poses the classical "chicken or egg
dilemma". Unless there is product innovation, the customers would not have a choice of
products. And unless the customers express a need there is no incentive to introduce new
innovative payment products. However, it does not mean that every innovation would be
embraced by the public, providing the innovation with a critical mass and sustainability that
would make it a standard practice.
It is often the case that the success of innovation depends on factors such as: (i) how eager
are the consumers to use the new technology - this has definite relation to the feeling of
"safety" (ii) the "ease" factor - the perception in the mind of the customer on the easy to use
factor; (iii) the associated cost vis-a-vis existing products; (iv) the convenience in terms of
using the product "any time", "any where".
Given the above, it must be said that introduction of new and innovative payment systems is
a long-haul as these have an associated large cost and long gestation periods to achieve
"network" effects. As in any new entrepreneurial venture, there is an element of financial risk
associated with new payment systems, as it may not achieve the desired public acceptability
of the new product.
The last few years have seen the unveiling of a plethora of innovative retail payment
products (both paper and electronic) in the market, driven primarily by technological
developments, consumer demands and changing habits and complimented by policy
initiatives/interventions of/by public authorities. If we review our own payments system
landscape, the introduction of new payment products and methods during the previous
decades could be termed as supply driven such as MICR technology, electronic payment
systems viz. ECS, EFT, NEFT, NFS, CTS, various type of plastic cards etc. These supply
driven innovations for both paper-based and electronic payments have gained wide
acceptance over a period of time. All these innovations and new payment methods have
been driven by the regulator. The products were rolled out and banks were encouraged to
make use of these products to render better, faster, safer and secure services to their
customers. All these payment products have stood the test of time and have been success
stories. This illustration proves that the supply driven approach used by the regulator has
resulted in providing the Indian consumer with new payment systems and products.
Is it therefore the case that only the above approach would result in consumers using new
payment products and not otherwise? The answer to this again is perhaps not very clear.
While it would be true that in the case of an emerging market country like India, the regulator
has to be pro-active and induce supply driven innovations in payment products to bring in
safety and efficiency, the same may not hold true in the case of other countries. Such a
regulatory stance as taken by Reserve Bank of India is largely determined by the mandate
which the statute provides it with.
However, there have been instances where supply driven innovations have not been so
successful. For example, one of the banks in India experimented with "tap and pay" payment
product using "Near Field Communication" technology. The response received was
reportedly not encouraging enough for launching the product. However this technology is
again making its appearance and is likely to be available on a larger scale.
It is not always easy to classify an innovative payment product as either being supply driven
or demand driven. For example, it would be difficult to determine whether mobile banking is
purely supply driven (in terms of enhancing the capacity of the chip in the mobile to
undertake banking functions as well) or is it demand driven by the customers who would see
this particular service as a "value added service", (along with ringtone downloads for
example) that has prompted banks, payment service providers and telcos to provide this
service. Is it because of the technology capability to transmit financial information in an
efficient and secure manner that has made banks consider development of mobile based
applications for banking or is it the ubiquitous character of the mobile phone and its
affordability that has heralded m-banking as the next-generation innovation? There is no
clear answer. But what is evident is that mobile banking as an innovative and inclusive
payment method which delivers and fulfills a social need is here to stay.
Is mobile the most appropriate delivery channel for banking services?
As a logical corollary, should then one conclude that the mobile device is the most
appropriate delivery channel for financial services? If the test of safety, security, soundness,
efficiency, accessibility and authorized operations has to be positive, then I think the mobile
phone has the capability of providing these services and empowering the common man to
conduct his/her payment transactions any time and from anywhere.
The Reserve Bank recognised the potential of the mobile phone as a channel for conduct of
financial services quite some time back and the first measure to regulate this area was taken
in October, 2008. The Reserve Bank consciously opted for a bank-led model of mobile
banking and the reasons are well known.
In our endeavour to enable enhancements in mobile banking both in terms of the nature of
services offered and the value of transactions to be permitted under mobile banking, we have
been in constant dialogue with the stake holders and intervened to liberalise the mobile
banking guidelines in a phased manner the - latest being the removal of the cap of
Rs 50,000/-. Remittance from a bank account for cash pay out to the beneficiary through the
medium of mobile at an ATM/BC outlet has also been facilitated with the remitting bank
obtaining the beneficiary details. The Interbank Mobile Payment Services (IMPS) operated
by the NPCI with the approval of the Reserve Bank has enhanced the efficiency of mobile
banking by enabling real time transfer of funds between bank accounts and providing a
centralised interbank settlement service for mobile banking transactions.
Data reveals that as at the end of July, 2011 the total wireless subscriber base was
858 million, which included 292 million subscriptions in the rural areas. As against this only
55 percent of the people of India have deposit accounts. It is evident that mobile phones
have reached more households than basic banking services.
Given this scenario, should banks not embrace this new technology at a more sustained
pace and provide mobile banking services to their customers?
Let me provide you with some facts and figures on this issue. RBI has so far authorised
52 banks for providing mobile banking services, out of which 44 banks have commenced
offering these services. Transactions in mobile banking have been showing an uptrend.
During October 2011 more than 22.45 lakh transactions for close to Rs. 161 crore were
transacted. In terms of both volume and value of transactions on a month-on-month basis the
growth has been a little over 9 percent. A little over 96 lakh bank customers have so far
registered for mobile banking service. These numbers while looking impressive are not really
heartening if we juxtapose them with the data on the number of bank accounts and the
mobile subscriber base. They seem like a drop in the ocean! What this means is that banks
have not really made a significant penetration even amongst their existing customers to
extend mobile banking services.
In this connection, the question that begs an explanation is, as to why despite enabling
collaboration between banks and mobile service providers, this collaborative model is yet to
gather steam? Are there any insurmountable challenges inhibiting this partnership? If yes,
what are they?
I am aware that some of the issues that come up in this regard relate to (i) who owns the
customer? and (ii) who controls the transactions? Has there been any worthwhile attempt to
resolve them in a mature way? Or like sulking infants is each one trying to wear out the other
including the regulator? Let me say that if the latter is true, it can be a painfully long and
expensive process benefitting none and does not help in our efforts to achieve true financial
inclusion. Therefore I would urge upon the banks and MSPs to get their acts together. On
behalf of RBI let me assure you, once again, that we stand committed to the success of this
collaboration and would remove all genuine obstacles!
Responsibilities of banks and customers - a balancing act
Let me raise the issue of consumer protection and responsibilities of banks and customers in
the event of fraudulent/unauthorised payments in the customer's account and where we
stand when compared to other countries. Let me recount a conversation narrated to me by a
friend between a customer and his bank in US. The bank informed the customer that
unauthorised transactions were being suspected in his credit card account. The customer
retorted that the transactions were taking place in bank's books and not in his account as he
had not carried out those transactions as the card was very much in his custody. The
customer further added that the bank is responsible for ensuring that fraudulent transactions
are not carried out when the card is in the possession of the customer. If the same question
were posed by a bank customer in India, what would be the response of the card-issuing
bank here?
As you may be aware major credit card issuers in US have adopted zero liability policies or
limited liability policies to protect the costumers from fraudulent or unauthorised transactions
in their credit cards. Zero liability policies go beyond the requirements of federal law, which
limit individuals' out-of-pocket expenses to $50 if a credit card is lost or stolen and then used
fraudulently. Zero liability protection increases the costumer's confidence in credit card
transactions.
But in India the liability often shifts to the customers. Generally the credit card issuers are not
liable for fraudulent transactions unless the customer reports the unauthorised transactions
immediately. So the shift in liability from customers to banks comes into effect only after the
customer informs the bank. Banks argues that they take adequate steps to ensure safety of
card transactions, and the least they expect from the customer is to report the card loss
immediately. This is understandable and logical.
But the logical consequence of this would be that where a customer has adhered to all the
risk measures prescribed by the bank, but yet unauthorised transactions have taken place in
his account, should the responsibility then not be with the card issuing bank? This being the
case, is the time now ripe for us to implement a zero liability policy? I leave it to the industry
to debate and discuss the issue.
Therefore, the continuing message for us is that improving safety, security and efficiency in
payment system requires coordinated and cooperative efforts from all stakeholders. Together
we have achieved significant milestones be it 2FA for card not present transactions or
SMS/E-mail alerts for card transactions etc. However, I regret to note the areas where banks
are not meeting the requirements.
Take the example of the National Electronic Funds Transfer (NEFT) system. NEFT is a
panIndia one-to-one funds transfer platform enabling near-real-time settlement of funds, is the
major retail electronic payment system. The feature of positive confirmation to the remitter
either through SMS/e-mail - unique I might add, is one of its main attractions! However, a
large number of customer complaints are received regarding non-receipt of confirmation
SMS/e-mail. The beneficiary banks which are required to send confirmation messages
(N-10 messages) to the originating banks are either not sending such N-10 messages at all
or they are only sending them partially. Such behaviour patterns have resulted in many
customer complaints and impacted the overall systemic efficiency of NEFT.
With regard to alternate/electronic payment channels, the following issues have been flagged
to us:
ATM "out of order" board being utilised as a "cash management tool" particularly by
outsourced entities in places like University campuses which record heavy footfalls. If you
chose to ignore the sign you are often in for a pleasant experience of ATM actually working!
On site ATMs following the same opening and closing timings as the attached branch!
Similarly there are several complaints regarding inordinate delays in crediting customer
accounts and very poor or nil response from Customer Facilitation Centres. In many
instances customer accounts are credited only after RBI takes up the matter directly with
banks. Instances of banks not paying any penalty for delay in crediting customer accounts
have come to our notice. In one instance, the bank at fault insisted that they would pay the
penal interest to the customer only if RBI writes to them advising them to do so!! Such
aberrations need to be rectified at the earliest.
At the same time, we also have to contend with a set of people who try to defraud the same
system using uniquely Indian approaches - forcibly holding on to a few pieces of notes in
ATM machines that has cash retraction system - (i.e. cash getting sucked back by the
machine, if not removed within a specified time, often seconds), and then claiming non
receipt of cash. We have now agreed to the proposal of NPCI to remove this functionality
from all machines after a pilot proved extremely effective in curbing such misuse. Of course
due notice will be given to all customers. So remember hereafter if you are careless to walk
away from an ATM forgetting to collect your cash, it is lottery for the next user!
Pricing payment products
Let me flag a related customer service issue - pricing of payment products which has been
engaging our attention. One of the dilemmas that a central bank like RBI faces is whether it
should play an active role in pricing of payment products. The banks may argue that pricing
should be market driven and left to the banks. The public may expect the regulator to ensure
a fair pricing structure. The difficulty for the regulator is in balancing the expectations. RBI as
a policy does not usually intervene in pricing of payment products and expects the banks to
self regulate and ensure a fair price structure.
However, our intervention becomes necessary when the industry behaves in a manner
where the public policy objectives of affordability and accessibility to modern electronic
payments are not being served. Our intervention is necessary when customers shy away
from using payment products on account of arbitrary fixation of charges. The rationalisation
of service charges for paper and electronic products by the Reserve Bank was accordingly
an attempt in this direction.
Notwithstanding the above, anomalies in pricing structure continue to be present. There have
been instances where the fees for intra-bank fund transfers have been higher than inter-bank
fund transfers using NEFT and RTGS. The dichotomy is more baffling when on one hand
banks encourage their customers to use net-banking and other new channels but on the
other hand discourage them by pricing the intra-bank charges higher than the inter-bank
charges. Banks have also found innovative means for levying additional fees such as
charging additional fees for cheques collected under speed clearing.
The banks should introspect on their pricing strategies for payment products especially so in
a technology driven system keeping the objective of affordability and accessibility in mind.
The pricing should be commensurate with the cost of conducting the transactions. The very
purpose of technology proliferation in payment system is cost reduction, increased
convenience, service improvements, and risk mitigation, etc. Banks must find ways of
distributing the benefits of technology to the customers in terms of reduced transaction costs.
I would like to pose a few thoughts on pricing to the industry. How can banks help their
customers and themselves in influencing the payment system behaviour of the customers by
adopting an appropriate pricing structure? Should the pricing structure of banks not
encourage usage of use of electronic products over paper based products? Is there a need
for differential pricing (interchange fee) for credit card and debit card transactions?
Access criteria - to be liberal or not to be?
RBI has recently reviewed and revised access criteria norms for centralised payment
systems viz. RTGS, NEFT and NECS. These have been revised based on the objectives of:
(i) strengthening the risk management framework of payment systems by ensuring that
financially sound entities gain access to systemically important payment systems; and
(ii) facilitate wider reach and access to payment systems by suitably adjusting the entry
norms and thereby complimenting the financial inclusion endeavours of the Government and
the Reserve Bank.
Post revision of access criteria guidelines, we have been receiving a large number of
applications from banks for access to payment systems. We have till date accorded approval
to 17 banks for membership to centralised payment systems.
There are two issues which I would like to highlight in this context. First, should we consider
a bank's technological capability in the form of a CBS as the sole criterion for providing
membership to payment systems? The answer to this is that while technological capability
would be one of the determinants to access centralised payment systems, it cannot be the
sole criterion for providing membership. Financial soundness along with regulatory comfort
are other essential parameters for gaining access to payment systems. This is necessary to
ensure the safety, security and efficiency of payment and settlement systems which are the
bedrock of financial stability.
Secondly, the banks seeking membership should have necessarily carried out a cost benefit
analysis while seeking access to centralised payment systems. A bank wishing to become a
member of RTGS and NEFT should undertake a proper cost-benefit exercise, and should
have a proper business case for joining these systems. Considering the fact that the
expenditure for putting in place RTGS and NEFT infrastructure would be in the range of
Rs.1 crore to Rs.1.5 crore and Rs. 20-40 lakhs respectively, the need for a proper business
case cannot be over-emphasised. Suffice to say, if the volume of transactions is very low, the
per transaction cost especially in RTGS would be very high, rendering the whole proposition
uneconomical and unviable to the entity and to its customers as well.
Given this, smaller banks could explore options such as indirect participation. Illustratively,
RRBs have been permitted to participate in NEFT through the Sponsor bank route. Is there a
need to extend the contours of this policy to Urban Co-operative Banks is something the
Reserve Bank will examine.
Payment processing capabilities - the evolving challenges
Given the emphasis of the Government and the banking industry to extend financial services
to all segments of Indian society, the usage of electronic payment products is bound to
increase. There is a discernible move in this direction as seen by the rise in the total value of
cashless payments as a percentage of GDP registering an increase from 13.9 percent in
2008-09 to 14.3 percent in 2009-10.
This rise in volumes in electronic payment systems is primarily stemming from that segment
of population that has a bank account. But, given the continued emphasis on shifting cash
transactions to non-cash modes; ongoing financial inclusion initiatives (64 million new
accounts opened) and the efforts of the Government to transfer all social benefits
electronically to the citizens, the volume of transactions in the electronic payment systems
would grow manifold. The enormity of the numbers that we are looking at can be gauged if
the present subsidy schemes of the Government are brought into electronic payment modes.
From the data available with us, the present government subsidies amounting to
Rs.2.97 lakhs crore would alone translate into approximately 3810 million transactions per
year. This would in turn add 12 to15 million transactions to the payment systems over and
above the transactions already being processed on a daily basis.
RBI is seized of this challenge and is already contemplating measures to strengthen the
payment system infrastructure at the processing sites. However, this alone would not be
sufficient unless and otherwise banks are in readiness to handle the increased volume of
transactions. Banks could argue that a good percentage of such transactions could be
intrabank would not be part of inter-bank payment systems. However, irrespective of the nature of
transactions such transactions would ultimately hit the Core Banking Solution (CBS)
implemented in banks. Anecdotal evidence indicates that banks are already stretched with
their processing capabilities of their CBS systems. The incremental spurt in transactions
would further add to the processing load and would raise questions on the CBS of banks' in
handling such volumes. Any bottlenecks at banks' end would also undermine the capability
of the banking system to handle the future payment transactions and may prove a dampener
in our efforts to migrate more payments into the electronic modes.
Conclusion
In conclusion, we have come a long way in putting in place a safe, sound and efficient
payment systems in India. The challenge is to make them accessible, affordable and
inclusive. It is the social responsibility of everyone, who has the resources and the power, to
contribute to the success of financial inclusion. While we have the guidelines to M-power
financial services, it is necessary for us, the RBI, banks and the MSPs in particular, to take
this forward in a cruising mode by convincing the common man not only on the power of the
Mobile Phone for doing financial transactions but also the safety and security aspects of
mobile banking, to provide a level of comfort. I believe there are success stories of mobile
banking in states like Bihar, thanks to the combined efforts of all stakeholders which has
enabled not only financial inclusion but made less literate people mobile banking-savvy. This
needs to be emulated through adequate publicity and education to achieve M-powerment in
a significant way.
I would like to laud the contribution of banks in popularising the non-cash mode of payments.
Banks in recent years have introduced plethora of new payment products which have
resulted in significant growth in electronic transactions. But as indicated by me, the payment
systems issues are a continuing agenda and we all need to contribute to achieving the twin
goals of financial inclusion and provision of speedy, efficient, robust, accessible and
affordable modern payment methods.
I once again congratulate TMB for launching mobile banking services for their customers.