Changing contours of Payments - Barter to Bitcoins

The term “Payment” is as old as the human civilization. Since then the Payment industry has been evolving very fast and has transitioned from Barter System to Bitcoins.It has grown on the strength of technological innovations, as under:

• Barter
• Cash
• Cheque
• Online
• Mobile
• Virtual currencies viz. loyalty points, BitCoins.

With the advent of banking system, payment business has undergone dramatic changes. Put in other words, the payment business in banks can be explained, as follows:

• There is a growing awareness of the importance of payments in the retail banking business.
• The transaction account is at the core of the customer relationship and payment services play a critical role in customer acquisition and retention.
• Payments are also an important source and driver of revenue.
• At the same time, banks’ traditional role in retail payments is coming under growing threat from a plethora of alternative payment providers.

Reserve Bank of India, on its part, has been playing a pivotal role in promotion of electronification of payments in the country. Let us put forward the salient points of RBI vision of Payments- 2012-15:

I. To ensure payment and settlement systems in the country are safe, efficient, interoperable, authorised, accessible, inclusive and compliant with international standards.

II. To proactively encourage electronic payment systems for ushering in a less-cash society in India.

To have a clear picture of the payment industry worldwide, we need to have a World perspective:

• Payments revenue will grow faster than overall banking revenues.
• In 2011, global payments revenues accounted for 33 percent of total banking revenues.
• This is likely to increase to 37% by 2016.
• Payment now is being seen as a source of revenue and not only a “service”.

To promote electronic payment system, three essential factors are:

1. Awareness i.e., the user / beneficiary must be aware of the minute details of the facility.
2. Convenience i.e., the facility provides convenience to the user / beneficiary.
3. Robust Security i.e., the facility does / will not pose any threat to the user / beneficiary of losing his / her hard earned money.

To ensure healthy growth of payment system, we need to follow strictly the ‘Seven pillars of Payment System’, as narrated below:

1. Safety - by Second Factor Authenticationviz. 3D Secure, PIN@PoS and Dynamic OTP.
2. Efficiency–in Transaction processing, Notifications, Settlement process.
3. Interoperability- Involving other stakeholders, Creating an eco-system to be used by all, Leveraging the existing infrastructure.
4. Authorisation- Keeping the Regulator always in loop.
5. Accessibility- Developing Issuing and Acceptance infrastructure.
6. Inclusiveness-Reaching out to all segments, unbanked areas.
7. Compliance- Following Know Your Customer(KYC), Anti-Money Laundering(AML), Combating the Financing of Terrorism (CFT) and other relevant guidelines.

To gauge the penetration of electronic payments in India, I furnish here-in-below some data which are self-explicit:

To gauge the penetration of electronic payments in India, I furnish here-in-below some data which are self-explicit:

• E-commerceMarket size – $ 2.5 billion in 2009 to ~$16 billion in March 2013 and expected to grow to ~USD 56 billion in 2023.
• Credit Cards :Number- 19 million
• Transaction- 413 million
• Spends - Rs. 1206 billion
• Debit Cards:Number- 380 million
• Transactions- 470 million
• Spends- Rs. 794 billion
• POS Terminals:
• Number- 1.03 million                         (Source: RBI Data)

The constituents of E-commerce in India during the year 2013 vis a vis 2016 (Projected) are given below:

Future Trends in E-commerce in India will be as below:

• 40 million shoppers aged 19-24 years will spend online.
• Tier-II cities will grow at a faster rate.
• Mobile shopping has grown 8 times in 2013 (8x)over 2012 (x). It is predicted to grow over 150% CAGR till 2016 (27x).

Let’s now elaborate the emerging trends in payments in the areas of Mobility, Wallets, Near Field Communication (NFC), etc.

Mobility

More payment applications on mobile

Digital maturity of Indian users would drive mobile payments

Payment system is likely to leverage mobile infrastructure for

• Wider reach and accessibility
• Improving efficiency
• Convenience

P2P transfers and m-commerce are likely to register robust growth

Immediate Payment Service(IMPS) will be an emerging payment system

Wallets

Mobile wallet proposition is rapidly taking hold in India

State Bank MobiCash, Vodafone M-pesa, Airtel Money

Would help in financial inclusion

Challenge is to create profitable and productive agent network and changing customer behaviour

Near Field Communication(NFC)

Dual interface function cards- Payment and non-payment functions e.g. , Access , identity, loyalty, etc.

Combo Transit Cards- Transit authorities are showing keen interest in.

Challenge in creating the overall eco-system esp. for acquiring.

Small value retail payments are also expected to migrate to NFC over a period of time.

While continuous innovation and new facilities are getting added in the payment space, the main driver for growth is the convergence in technologies and also, in the payment related infrastructure. Emergence of Smartphones is leading the way to this convergence. Online banking on mobile blurs the distinction between m-commerce and e-commerce. It is not a distant dream when Mobile would be holding Debit/Credit Cards and Wallets in digital formats.

But all this progress in payment is not without glitches or challenges. A few such challenges are:

• Popularising new products amongst the masses.
• Consumer behavioural changes
• Security threats- Hacking, Phishing, Money Laundering, etc.
• Emerging and disruptive technologies
• New competitive thrusts
• Regulatory

However, these challenges are not challenges in true sense of the term as these are working as catalysts to create new alliances, which in turn create fresh opportunities for new entrants in the industry.

To give a fillip to payment industry, let me now dwell upon the strategies to be adopted, going forward:

• To deliver significantly and not just marginally.
• To add more customer value than the market alternatives.
• To build value propositions that go beyond reduction in cost.
• To penetrate niche segments first instead of broad market.
• To leverage established infrastructure.
• To adapt offerings to market context.
• To tap adjacent profit pools to differentiate offerings and add value.

I would like to conclude here by putting forward a “Vision 2025” for payment industry:

1. To move towards complete electronification of payments and minimisation of paper-based transactions.
2. To achievethis by making the payment systems completely secure, reliable, real-time, efficient and accurate (with 100% auto reconciliation).
3. To implement such systems to increase transparency, lower transaction costs, improve operational efficiency of trade and commerce and to provide support to globalization of economy.

About the author:

Shri Pulak Kumar Sinha  is the General Manager - Payment Solutions at State Bank of India. He is a Certified Associate of Indian Institute of Bankers and has a P.G. Diploma in Management from All India Management Association (AIMA).He joined State Bank of India as a Probationary Officer in 1981. Since then, he has worked in various capacities as Branch Manager, Regional Manager and Deputy General Manager at different places. His specialised areas are Credit and General Banking.

He was Chairperson of Reserve Bank of India Working Group on Evaluation of Feasibility of Aadhaar based Biometric Authentication as Additional factor of Authentication for card present transactions and related issues.