Emerging Trends in Payment Systems and Challenges-
Inaugural address by Dr K. C. Chakrabarty, Deputy Governor, RBI at Banknet’s 7th Annual Conference on Payment Systems at Mumbai on Jan 19, 2011

Other products and payment channels

8. The card based payment systems have been evolving over the period. The card based payment system in the country covers credit/debit and prepaid cards. About 230 million cards have been issued in the country. We have been witnessing an increase in the usage of cards (debit, credit) across various delivery channels like ATMs, POS, internet transactions, etc. On an average, 396 million transactions of value rupees one lakh crore is being processed during a month using these cards. The challenging canvas for the central bank and operators of the various payment systems lies in ensuring that while the various products are increasingly used across various delivery channels, the security of the payment systems is not compromised and the customer’s funds are protected. This is a big challenge to be faced to avoid erosion of customer confidence in the new age payment systems. It was towards this endeavor that RBI mandated the additional factor of authentication for all card-not-present transactions, which is perhaps the first attempt made in this direction by any regulator. We are also in discussion with banks and the card companies to introduce an authentication system for transactions at POS. At the same time, given the sprouting instances of cloning happening, particularly with regard to ATM cards, we have also started contemplating a move over to more secure ‘Chip and Pin’ cards.

9. Subsequent to issuance of the guidelines on prepaid payment instruments, this segment has also seen a spurt in activity. Banks as well as non-banks currently operate in the prepaid payments segment. This product segment is being leveraged by non-bank providers for entry into payments arena. 16 non-bank entities have been given approval to issue these products. It is heartening to see that these players have been able to bring in many innovative payment products leveraging payment channels like internet and mobiles. Currently, on an average 5 lakh payment transactions are processed by these entities. Reserve Bank would promote the activities of these players so as to make the payments scenario more vibrant.

10. Mobile phone based payments are one of the important evolutions in payment systems. The guidelines on mobile banking issued by RBI were an initiative to promote the orderly development in the use of this channel by banks. Currently, 39 banks have been granted approval by RBI to provide payment services using this channel. 34 of these banks have started operations. On an average, 5.5 lakh payment transactions of value rupees 56 crore are being processed through this channel during a month.

11. Banking is an activity which only banks can undertake. For development of mobile banking, co-operation between the banks and the mobile service providers’ is important. World over the race for mobile companies to become banks and banks to become mobile service providers have failed. Mobile transaction platforms initially designed by banks or mobile service providers based on this race have resulted in silos, which provide only limited transaction ability and almost nil interoperability. This has resulted to stagnation in the growth potential for such services. A successful model requires building up of partnership arrangements which leverage on the respective strengths of the stakeholders. The roles and responsibilities of each partner have to be clearly defined and agreed to. No entity can consider itself to the dominant partner for deciding on issues like revenue sharing. Further, no entity can operate a successful service independently in the long run. This realization has resulted in coming together of operators in US to provide a transaction channel to their customers which would facilitate the use of bank issued payment instruments – effectively leading to the clear demarcation of the role of each service provider.

Financial Inclusion

12. Although I have listed out the efforts taken by the Reserve Bank in the promotion of payment systems and for ensuring the operations of efficient and risk free payment systems, none of these would receive applause unless financial concerns of the underprivileged sections in the rural and urban areas is addressed by the various participants. The banks have been including savings and credit/overdraft as major components of the financial inclusion plans. However, in a country like India where there is a large proportion of migrant labour, the crying need of the hour is to provide hassle free remittance services to this segment of the population. It is an unsavoury truth that, today, a migrant category house maid, even in metropolitan cities like Mumbai, face challenges in remitting funds back to her village. Let alone an uneducated maid, even the privileged class of people face challenges in remitting money. The other day, one of our own officers (who obviously believed in maintaining his anonymity) was turned away by a bank branch in Mumbai when approached to remit money to his own account maintained with the same bank at an urban centre in a different part of the country. The reason given the branch manager- the need to adhere to KYC norms! If the KYC norms are carried by the banks to this extreme to deny service, despite the person offering to prove his identity, in no time the banking sector will lose this business to alternative models. Another reason often stated by the bank branches for denying service is the cash management related issues. While this issue can be reason for imposing a reasonable charge, I find no justification for denial of service for this reason. Therefore, addressing this issue needs a clear mind set change on the part of the financial institutions. Having stated this, I also do clearly appreciate the challenges before the banks which ranges from identification of various delivery channels, decision making on whether to leverage on existing technology or adopt a big bang approach, extension of the existing risk management practices to various delivery channels, acquisition of all these transactions over the existing settlement networks, adoption of various services as part of their existing cross-selling and co-branding initiatives, fraud prevention and security standards, safeguards against money laundering, KYC issues and, above all, ability to leverage their existing reporting, auditing, and campaign management at back end.

13. The ICT enabled channel, including the mobile channel, is the most cost- effective way to achieve this. As stated earlier, leveraging this channel requires participation from all stake holders. In this regard, it is encouraging to note that such partnership arrangements have started to happen. We would be monitoring the developments. Any residual issues in scaling-up the models would be examined once these arrangements reach a critical mass. However, we have an open approach and would be ready to intermediate if the specific issues in this regard are brought to our notice.

14. New initiatives in the oversight of payment systems domain have begun and efforts to necessitate standards through a consultative process that is need-based and appropriately calibrated to reflect rational expectations have taken full form. An effort to comply with the general principles enunciated in the 'Report on Central Bank Oversight of Payment and Settlement Systems' published by the Committee on Payment and Settlement Systems (CPSS) duly taking into account our practices and requirements has been initiated. The general principles of oversight are (i) transparency (ii) international standards (iii) effective powers and capacity (iv) consistency and (v) co-operation with other authorities. RBI contributes to international oversight and co-operation initiatives as a member of the CPSS, the SAARC Payments Council and other such bodies.

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Nearly 100 banks & IT Cos participated at Banknet’s 7th Annual Conference on Payment Systems at Mumbai on Jan 19, 2011.. Now in its 7th year, Banknet's Annual Conference on Payment Systems is the largest payments event in India and has gone from strength to strength. It has on average attracted around 300 senior executives from around the globe. ...Click Here

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