By Kunal Pande
India has witnessed tremendous growth in digital payments. We now routinely see digital payment modes being used not just at malls, or even kirana stores, but also at roadside tea-stalls, eateries, vegetable sellers’. The accelerated adoption has led to India reporting the highest volume of digital payment transactions, overtaking other parts of the world.
The driving forces behind the accelerated digital-transaction adoption have been the widespread availability of enabling infrastructure comprising mobile phones, telecom network, merchant acceptance modes, product innovation like UPI, national QR code, and incentives like fee waiver, discounts, and rewards, among others. Of course, the pandemic also acted as a catalyst, driving behavior change.
This has resulted in a significant jump in digital payments in the country. However, the country’s ambition of becoming a ‘less cash’ society is still many miles away. In fact, over the last few years, there has been an increase in cash-in-circulation as well as cash as a percentage of the GDP. While, in Tier-1 cities, the payment for majority of the e-commerce transactions is being carried out digitally, the situation is the other way round in the Tier 4 cities, where majority of payments for such transactions are still being done using cash.
There are several reasons behind massive use of cash—a lack of steady and reliable internet connectivity, availability of acceptance infrastructure, customer service (especially around disputes, frauds, etc) and the desire for anonymity. We have seen a number of initiatives, ranging from customer protection to the setting up of the Payment Infrastructure Development Fund, for addressing these needs.
The recent circular of the Reserve Bank of India (RBI) that allows Small Value Digital Payment in the Offline Mode is one such initiative in this direction, and it is expected that this shall spur innovation to enable digital payments where internet connection is unsteady or even absent.Before the current circular, a customer buying, say, milk from a roadside stall in a Tier 4 town could often face challenges in making a digital payment.
She could face the problem of the transaction not getting initiated or dropping mid-way due to an unsteady network connection. Also, sometimes, she could seeing her account being debited without successful receipt of the amount of the transaction by the stall owner. Any such experience not only pushes her to use cash but also leads to a shift in her behavior to use cash in other similar situations.
The new circular allows payment system operators offer convenient, low-value-payment acceptance mechanism not only in above situation but also at locations that do not have network connectivity.The offline mode can only be enabled with customer consent and requires the payment service provider (PSP) to implement safeguards to protect the customer. The offline mode is only allowed in the proximity (face to face) mode, and can be used for a transaction value of up to `200 with a cumulative limit of Rs 2,000.
The cumulative limit can be reset only in the online mode with additional factor authentication (or AFA, like an OTP). There is no compulsion to instantly send alerts for each transaction. However, an alert needs to be sent as soon as the transacted amount is received by PSP and an alert can include multiple transactions, albeit each transaction needs to be adequately conveyed.The circular provides for such transactions using cards without the need to switch on the contactless (NFC) transaction channel, thereby allowing usage over a large section of the card infrastructure that does not support contactless payments.
The move to allow offline mode is going to spur innovation in the payment industry, bringing digital payment solutions that do not require internet access. These include innovative offerings leveraging Secure Element (SE) that is present in every mobile phone SIM and SIM-overlay solutions that can even enable additional features on basic mobile phones to securely transact. The ability of SIM-overlay solutions to enable end-to-end encryption over USSD/ SMS messages, which do not require internet connectivity, can be used to replenish the cumulative limit for offline transactions.
A good use case for offline payment mode would be situation that is characterised by a requirement of low-value, instant transactions, such as reloadable wallets/cards supporting rapid ticketing at mass transport systems or multi-use city cards/wallets.
However, it is crucial that safeguards and customer protection practices, as recommended in the RBI circular, are strictly implemented such that the initiative does not lead to customer inconvenience. In this regard, campaigns should be rolled out to build widespread awareness of protection features and benefits for the customers.
Another, benefit of offline mode of transaction that can be explored is reduction of real-time load on central systems. As country adopts more and more digital payments such measures would be important measure to reduce such concentration risks.
Partner and leader (financial service technology), KPMG in India