The next salvo in digital payments

Written by S.V.Divvaakar | Updated: Nov 15 2013, 05:34am hrs
Central to RBI's vision for a less-cash society is the effective and steady substitution of cashthe dominant mode of transaction becoming non-cash or electronic modes of payments. While the adoption of electronic payments has risen sharply in the business-to-business space (electronic modes accounted for 52% of non-cash payments in 2012), retail payments still largely use cash and cheques, which are more expensive apart from being inefficient. RBI estimates that in 2012, more than 30 billion bills representing over R6 trillion were generated in India's top-20 cities, of which more than 90% were settled by cash and cheque.

What has impeded the adoption of electronic payments in the retail space To begin with, the absence of an acceptance infrastructure to accept and authenticate third-party payments, and distorted incentives. At the moment, consumers have to deal with each biller's captive acceptance points separately, thus engaging in multiple visits and transactions. A third-party infrastructure to accept any bill would enable optimisation in bill payment queues. Secondly, cheques can only be presented at a payees/payers bank and not at third-party banks/outlets. Cheque collection costs, borne by the banks, range from R24 to R40 per leaf, making up a serious amount with most cheques being for amounts less than R10,000. Add to that the free-riding credit on cheques issued on due dates but hitting the payees account days or weeks later.

RBI proposes to address these problems through an Indian Bill Payments System (IBPS) networkessentially, India's General Interbank Recurring Order (GIRO) network, involving billers, aggregators, customer service points, banks, mobile networks, ATMs, outlets and customersto facilitate payment instruction from one bank account to another bank account, initiated by the payer.

How does it work Typically, a customer would visit an IBPS point with details of the bill or simply look up the reference number, besides his own ID associated with the biller. A validation request is sent online to the biller, for verification before initiating the transaction. Upon successful payment authorisation (card, electronic forms), the IBPS delivers a payment confirmation on the spot, with a consumer receipt confirming the fulfilment of the payment. Separately, the biller, too, can send the customer a confirmation receipt for the transaction through the agreed notification channelsemail/SMS, etc.Central to the IBPS architecture will be a centralised database and a reference index number for all bills and participant billers, aggregators and service points. Most important, there will be a guaranteed settlement arrangement involving three bankscollecting bank, paying bank and payee bankbesides a unique verifiable reference number for every payment, to build customer trust in the acceptance network. And, given the realities of India, the IBPS will have an 'assisted' model with trained attendants to initiate the transaction, and also enable multiple payment modescash, cheque, card and electronic. Industry sources suggest that the core capital expenditure for a centralised billing exchange itself (much like the Aadhaar-enabled Payment Bridge) should be of the order of R50-75 crore, not accounting for long-term archiving of e-bills, which would be maintained by billers. Retail PoS devices at two million acceptance outlets would entail around R3,000 crore, with a three to five year service life. With these investments, assuming a base of 5 billion transactions per annum, the fixed capital cost is around R1.20 per bill, which presents a solid business case for substitution of cheques, which entail processing costs over R20 per leaf. This enormous cost-saving makes an assisted business model viable at the retail merchant outlets.

What are the other benefits For consumers, a choice of convenient payment points through any payment mode and instant confirmation of payments. For billers, significant reduction in collection and reconciliation costs. For the banking system, not only are costs reduced, it also opens another revenue stream and enhances the viability of banking correspondents in remote areas, thereby serving the financial inclusion objective profitably.

However, just rolling out the payments architecture will not be enough. A big part of the answer in making the transition towards electronic retail payments lies in removing the distorting subsidy on cheque payments, which inhibit the penetration of more efficient, real-time payment modes. Perhaps, with the creation of the IBPS, RBI will take steps to advise cost-recovery principles for cheque instruments. At the same time, charges for bill payments services should follow a fixed- cost per transaction principle unlinked to value, and the opportunity not frustrated by endless debate as happened in USSD based m-banking.

The author is fellow, Indicus Centre for Financial Incusion