Digital Payment Systems

India is deeply attached to traditional cash management systems for money transfers and commerce. Despite the best efforts of the central bank, penetration of online payment systems has remained localised to urban areas.

Banks and financial institutions in India are poised to leverage the benefits of technology, and mobile devices, to increase their presence in under-banked sectors in India, without needing brick and mortar structures. Owing to the emergence of affordable smartphones, there has been a distinct shift with the masses becoming less averse and more trusting of technology. Ever since the mobile phone has become a ubiquitous accessory even in rural India, it has brought a vast segment of the population into contact with the digitised financial sector. This has made a visible difference in the functioning of banks and the conduct of banking operations, as is evidenced by a noticeable focus towards expanding digital capabilities to improve services for their existing customers and increase access to customers in under-banked areas. Unfortunately, this zeal has not been matched by the growth of digital infrastructure to support the technology offered by the financial sector which undeniably is spearheading financial inclusion in India.

India has traditionally been a cash-intensive economy which has been heavily reliant on traditional banking structures and lending systems. As a country so deeply attached to traditional cash management systems for money transfers and commerce, penetration of digital banking and online payment systems, despite the best efforts of the Reserve Bank of India (RBI) has remained localised to urban areas. Some may argue that this is on account of the urban population being more adaptable and tech-savvy; however, that is more of an argument of convenience. The telecom connectivity in rural areas has remained highly fragmented which has prevented the on-boarding of the vast rural population into the digital payment systems.

RBI´s Role
The RBI has been actively encouraging electronic payment systems to reduce cash dependency in the economy and ensure payment and settlement systems in the country are interoperable, accessible and inclusive. This was even reflected in the ´Vision Statement for Payment Systems in India´ which was published by the RBI in 2012.

This push towards digital payment systems is not merely on account of convenience. In remote regions of India which don´t have basic amenities such as electrification, the banking system has failed to establish last-mile connectivity. From a practical standpoint, establishing brick and mortar systems to service these areas is not only impractical but is also economically unviable. As a result, total financial inclusion remains a distant dream. Access to the financial sector can only be achieved if wired line connectivity and moreover wireless telecom integrates these regions into the digital payment ecosystem.

Integration of the digital payment ecosystem in India would therefore be the first step towards financial inclusion. The RBI also appears to be cognisant of this and in its vision statement has stated that ´payment systems will be driven by customer demands of convenience ease of use and access that will impel the necessary convergence in innovative e-payment products and capabilities.´

As of today, we have a multitude of alternative digital payment systems on offer. These include the likes of the Unified Payments Interface (UPI), which essentially allow account-to-account transfer, which are making online payments much easier without requiring a digital wallet or credit or debit card. They instead use a virtual address rather than needing a multitude of details as required for conventional inter-bank transfers. This system is based on the Immediate Payments Service (IMPS) framework set up by the National Payments Corporation of India which lets you transfer money immediately and works even after banking hours. Hopefully, this will simply the costs for money transfer and help the vast population of individuals who send funds to their dependants accounts to do so, without having to pay traditional transfer fees or be constrained by banking hours.

Last-mile Connectivity
In contrast to online wallets which are best described as an online repository for your intended expenditure which you ´top up as you spend´, the UPI system simplifies fund transfers between two accounts. Wallets are essentially ring-fenced from bank accounts for security and require to be funded from an existing bank account. This presupposed that most wallet users will already have a bank account; however, this is far from the case. Where a person has no existing bank account, his ability to use wallets is acutely restricted. Wallets also typically do not allow for cash withdrawals which are fair, considering the concerns around money laundering; however, money transfer to a person who does not have a bank account (which involves delivery of cash) has still not been addressed by any of the products offered in the digital payments ecosystem. This may inadvertently result in a wider population being forced to use digital payment systems which at some point will become the backbone of cash flow in the economy. To achieve this status, it is imperative that the base infrastructure, including the payment and settlement systems, inter-connectivity and reliable Internet access becomes accessible through India to ensure last-mile connectivity. Without last-mile connectivity through digital payment systems, attempts at reducing cash dependence in the economy will remain to be ideological posturing.

The RBI also released a consultation paper on ´Peer to Peer Lending´ which, if deployed as intended will hopefully allow for better deployment of unutilised cash and eradicate the usurious and unregulated money lending market. This system also places reliance on technology-based platforms which will act as intermediaries to connect potential borrowers and lenders in an online marketplace for inter-person lending. This also relies on rural India having Internet connectivity and these peer-to-peer lending platforms will not be able to capture the money lending market unless the potential borrowers have access to these platforms through smartphones or computers.

Without belabouring the need for nationwide Internet connectivity any further, it would be pertinent to point out another issue plaguing the digital payments sector, which is that most of the current systems have an on-boarding process which requires some level of physical customer verification. The RBI has a strong case for not diluting the requirement for in-person verification and extant ´know your customer´ (KYC) measures, since it is easy to argue that to prevent financing of terrorism and money laundering, these checks are critical. Given that rural areas are beyond the reach of most financial institutions, this is a massive impediment for the segments of society which have been at the fringes of the financial system and are located in rural areas.

An alternatives method to KYC or in-person verification is by way of biometric authentication in the e-KYC process which authenticates the identity of a customer against the biometric information of the customer contained in the database maintained by the Unique Identification Authority of India (UIDAI). Unfortunately, this alternative KYC verification measure is co-dependant on the UIDAI database which stifles the growth of digital platforms by limiting it to individuals who possess an Aadhar card issued by the UIDAI.

Recently, some financial institutions have launched a service where the in-person verification is conducted via video-conferencing; however, the KYC form needs to be printed, signed, scanned and uploaded. Although this a laudable step in the right direction, as it allows for an online KYC verification for account opening, it presupposes that the customer would be able to print and scan the form. A purely online system for on-boarding which does not require any printing or scanning is yet to materialise.

With the advancement of technology, insistence on a physically signed copy of a document or physical copies for that matter has become redundant. The benefits of digital payments, banking and finance are largely negated if there is a physical interface required with a customer. Paperless banking is a concept which is yet to materialise in practice due to regulatory ambiguity over the acceptance of substitutes for physical signatures, dismal enforcement of contractual obligations and untested regulations surrounding the formation of contracts by electronic means.

The RBI has also been promoting online payments and digital banking and has tried to keep pace with technological advancements by updating its regulations and guidelines. As an illustrative example of this is that in 2015, the RBI dropped the requirement for mandatory physical presence of their customers before commencing mobile banking service which was earlier mandated in 2014 in its Master Circular on mobile banking transactions in India.

As an alternative to the laborious process of obtaining a digital signature certificate, which is the only substitute to a physical signature recognised under law, the government has introduced the e-Sign facility which is an attempt to facilitate digital signing of a document by an Aadhaar holder using an online service.

e-Sign is designed for applying digital signatures on documents as a substitute to physical ´wet ink signatures´ using authentication of consumers through the Aadhaar e-KYC service. The e-Sign is an integrated service that facilitates issuing a digital Signature Certificate which can be affixed to a single document by authenticating the identity of an Aadhaar card holder. Although useful, this again is dependent on the user already having an Aadhaar identity which is mandatory for availing the e-Sign service.

The ambiguity surrounding the acceptance of a scan of a physical signature and biometric verification using third-part biometric readers – such as mobile fingerprint readers – has resulted in reluctance towards using these as a measure to check credentials of the person purporting to sign a document. This has been a major impediment to paperless transactions which don´t even require a print of a document to be obtained by the customer. Although digital payment platforms are well-equipped to reform the banking and finance industry, a key factor which is often overlooked is that since the concentration of telecom subscribers is much higher in urban areas, the connectivity in rural areas is dismally poor. Although one may argue that it would be commercially unviable to have last-mile connectivity, financial inclusion would remain a distant dream unless wireless cellular connectivity enables these under-banked and underfinanced locations to access financial products and digital payment systems offered through Internet platforms. This would at the very least enable the process of their financial inclusion to be initiated by digital banking and finance solutions offering non-face-to face customers access to regulated financial products and credit facilities. This may perhaps reduce the dependence on cash in such sectors and also eradicate the exploitative money lending and money transfer systems.

While the RBI takes a proactive stance in promoting digital payment systems and financial products, the success of these digital payment systems is inextricably dependant on the telecom infrastructure. Even with regulatory support from the RBI and a vast array of digital payments and banking platforms on offer, financial inclusion through digital outreach will continue to remain a distant dream if telecom companies do not mirror their enthusiasm to address financial inclusion.

(This article has been authored by Akash Karmakar, Associate at AZB & Partners. The views expressed here are his own).