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

Challenges Ahead

15. The developments in electronic payment products present challenges for both banks and the regulators. For banks, the challenges arise from technology, customer service and fraud control points of view. Further, banks would also have to gear-up for competition from non-bank players. Let me discuss the challenges for banks first.

Outsourcing

16. The fast paced developments in electronic payment products have posed technological challenges for many banks. In order to provide their customer the latest payment products, many banks have outsourced these activities to specialized entities. The numbers of such specialized entities are limited and many of these entities sub-contract the activities. The concentration of such activities among few service providers is a matter of major concern. Outsourcing of activities should not result in outsourcing of controls by banks. That would be tantamount to abdication. I find it strange when banks often approach us for permitting outsourcing of performing KYC checks. This would be the opposite extreme of the example I stated earlier. Outsourcing activities should be monitored by banks on a continuous basis. The operational and concentration risk aspects have to be assessed with due care on a continuous basis. Outsourcing has to be a measure undertaken to reduce cost and bring in more efficiency. Outsourcing cannot be a conduit for abdication of responsibility.

Cost

17. Technology driven innovation have to have two effects – (i) speed, auditability/security etc, (ii) reduction in cost for the consumers. In his recent book Global Crisis, Recession and Uneven Recovery, Dr Y. V. Reddy writes, “Ethics in globalised finance.....tended to comply with the formality of transparency, but attached no value to the fairness of transactions between the contracting parties...The level of interest charged, the level of profits made, or the level of remunerations to individuals were not required to be justified as morally right or wrong, because it was left to the markets to determine the appropriateness of compensations”. Extending this to the area of payment and settlement system which touches the lives of every citizen in a country, I would venture to say that no technology driven payment system can be called fair unless it is able to bring about an overall overwhelming reduction in the cost of transactions - achieved through decreased overheads and increased processing volumes.

18. A review of the progress we have achieved so far makes one conclude that while we have been able to achieve the first aspect, we are yet to pass on the benefit of reduction in cost to the customers. In fact, in many cases, the cost of transactions has often increased. Banks have also found innovative means of sustaining the income even when the regulatory interventions on charges have happened. What else can justify the customers being charged for moving money within the same bank from one branch to another? We have often been confronted with complaints where the customers are charged more for moving funds intra-bank vis-ŕ-vis inter-bank since the latter is regulated by the central bank. Such happenings defy all logic and needs to be debated in forums like the IBA. The banks often counter this concern raised by the central bank by arguing that such charges should be best left to the market. As a person who has seen both sides, I am of the view that while the central bank need not intervene in the pricing of various payment products, it should not hesitate to step in if it finds a large section of the customers that cannot afford or are shying away from such products on account of arbitrary fixing of charges linked to the value of the transactions in a technology-driven scenario. Rationalisation of service charges for paper and electronic products by the Reserve Bank was an attempt in this direction. Acquiring space in the payment systems arena is a huge opportunity for bank and non-bank entities if adopted with a level playing attitude where the increasing number of customers coming into its fold is the game changer for pricing strategy. But above all, no attempt would be considered fruitful without the benefits percolating to the aam aadmi.

19. Having stated the above, I must admit that one reason for costing of electronic products at a higher band in comparison with the traditional products has been the banks’ attempt to part-recover the cost of deployment of technology. The process of introducing innovative products in India has been costly for the banks due to the unsystematic developments during the initial stage of technology deployment by the banking industry. In a country of our size, co-operative efforts and sharing of infrastructure while deploying technology is a lost opportunity story.

Customer Service - dispute resolution and frauds

Dispute resolution

20. The customer dispute resolution has to be given a greater attention in the promotion of electronic payment products. Appropriate processes have to be implemented for speedy resolution of such complaints. The time taken for resolution of such disputes should be reasonable. In an electronic payment scenario, a time period of 45 to 50 days for dispute resolution cannot be accepted as normal. Our intervention in the resolution of disputes related to failed ATM transactions was necessitated by this unreasonable time period. Outlier issues cannot be the bottlenecks or benchmarks for dispute resolution process. By this logic, we feel that banks can bring down the 12 day period currently prescribed by RBI for failed ATM transactions by implementing systems for automatic reversals. The outlier issues like part cash disbursal have to be resolved through modifications in the ATMs.

21. In this context, the continuing of customer complaints related to failed ATM transactions is also a matter of concern. We are often asked to mediate cases where the credits are passed on within the mandatory period and later reversed. Few instances have come to our notice where the banks take written approvals from customers stating that they would forgo the penalty amount.

22. The role of system providers in timely redressal of such complaints is important. NFS accounts for around 98 percent of the inter-bank ATM transactions in the country. The operators-NPCI- have a role in ensuring that failed transactions involving their network are conclusively resolved. Being authorized arrangements, they have to also monitor the practices followed by system participants and report these to the regulator. Let me state in this connection that RBI has commissioned a survey of customers using the ATMs and based on the findings appropriate regulatory action would be taken.

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NOTE: Banknet Conferences are one of the largest organizers of Banking and Technology Conferences from India. Banknet Conferences organizes series of highly focused conferences, seminars and workshops, which provide a platform for knowledge sharing and networking for the professionals. Being part of "Banknet Group" it has access to relevant industry research, information and large database of professionals. More than 700 Financial Institutions / Companies from 24 countries had been represented at Banknet Conferences. This included delegates from nearly every major bank in India. Banknet Conferences had been supported by more than 100 major IT Companies and Financial Institutions from 11 countries. For more ......Click Here

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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