By Sanjeev Moghe

For a country such as India, characterised by sheer size and uneven regional development, access to amenities such as the internet is underlined by glaring differences. There are rural pockets where internet connectivity is either not reliable or is yet to reach.

This scenario has been a barrier in India’s vision to become a digital society, especially in the area of digital payments, as these methods require a working network/telecom connection at the merchant’s or customer’s end. Keeping this shortcoming in mind, the Reserve Bank of India (RBI) has allowed small-value offline payments to make digital payments more inclusive.

The framework was released on January 03, 2022, following three pilot experiments which were conducted in different parts of the country from September 2020 to June 2021, involving small-value transactions covering a volume of 2.41 lakh, aggregating to a value of Rs 1.16 crore.

An offline digital payment can be done without the need for any internet or telecom connectivity. Such payments can be done using any existing payments modes, such as cards, wallets, mobile devices etc. This method will be applicable only for face-to-face transactions. Further, such transactions will not be requiring any Additional Factor of Authentication, such as PIN or MPIN.

To protect customers, RBI mandated that this feature be allowed only if customer explicitly gives their consent to enable this feature for their payment modes. Since separate consent is taken for offline payments, this will work even if customer has not separately enabled contactless payments. Currently, RBI allows contactless payments on cards up to Rs 5,000 without requirement of PIN, however, these transactions are processed online.

The proposed functionality allows customers to make offline payments up to Rs 200 per transaction. With a single payment instrument, customer can make payments daily up to Rs 2,000 offline, after which the limit has to be replenished by the customer online. The replenishment will require Additional Factor of Authentication.

These measures will help reduce any fraud risk that may arise from allowing offline transactions, which are being processed without any Additional Factor of Authentication. Customers will also enjoy existing protections on limiting customer liability in case of any disputed transaction.

Since these transactions are happening offline, bank will not be able to immediately send SMS or e-mail alerts for the transaction. Once the transaction is recorded by the bank, details of the transaction will be sent to the customer.

While transaction limit of Rs 200 may seem small to many, for the segment being catered to—which is mostly rural areas with unreliable internet connections—the amount is significantly high. In fact, in the pilot run, the average transaction size was kept under Rs 50. Moreover, this limit can always be revisited once customer behavior patterns become available post first phase.

In 2012, National Payments Corporation of India had rolled out offline payments on UPI via Unstructured Supplementary Service Data (USSD) networks. However, due to high SMS charges, this did not have much success initially.

This time around, though, we will see banks and other payment intermediaries working on enabling new solutions in the near future. Stakeholders in the payment industry have already worked on possible solutions via pilot experiments run earlier.

The possible solutions involve establishing contact with the PoS machine via radio frequency and using a stored value on the chip to enable transactions in offline set up, resembling a prepaid wallet mechanism. The stored value will be up to Rs 2,000 daily, as mandated in regulation, and once customer has exhausted the limit, the value can be replenished. This replenishment will require a working network as this is done post Additional Factor of Authentication. Technologies such as NFC will allow offline payments without high charges incurred in USSD mode. SIM overlay is another potential solution, where payment functionalities are enabled on SIM card, allowing offline payments.

However, this is not without its challenges. Some of these solutions may require support from telecom companies whereas others may require a new card to be issued to customer which supports the functionality. These are operational challenges for the industry which will have to be tackled before a pan-India launch.
While the primary intent is digital inclusion, offline payments may also be useful in areas with low network such as basements in buildings and underground transport systems.

Moreover, since there is no Additional Factor of Authentication required, these transactions can be made quicker compared to online transactions, thereby reducing time taken per customer for performing the transaction. This will assist merchants in processing more transactions, by reducing the time spent by customer per transaction. Merchants will also benefit from reduced risk of transaction failure due to any network issue.

Nearly 70% of India’s rural population and 33% urban population is yet to adopt digital means of payments. For the country to fully embrace the Digital India dream, enabling offline payments will be critical given the boost it can give for digital payments in areas where the connectivity is poor. This will allow India to move ahead with a more inclusive digital payments space.

The author is EVP & head-cards & payments, Axis Bank