ePayments in Retail Banking
Dr. R B Barman, Executive
Director, RBI explained use of Internet and Information Technology in the Indian banking industry in the
Jt.seminar on "ePayments in Retail Banking" held on June 18, 2004 at
Mumbai. Economic entities transact to buy/sell real goods/services, financial products, and
lend/ borrow moneys. Payments can be in terms of - Cash - Transfer of bank credit.
Cash is perhaps the most popular means of payment especially for small value consumer
payments in India. However, an overwhelming majority of large value, commercial payments
and, in recent times, an increasing number of consumer payments are being made through
transfer of bank credit. Traditionally, transfer of bank credit took place through debit instruments like
cheques, demand drafts, payment orders, etc. The recent past has, however, seen an increasing plethora of choices for making such payments of which -
- Internet/ Phone /mobile banking
- Credit/Debit cards
- Customer payments through RTGS, are just a few. Information Technology based
retail financial services being proffered by the banking industry to its clientele has
contributed to broadening of product lines for retail banking as well as delivery channels.
Technological advancement has facilitated to create multiple channels for e-commerce such as
- Dial-up connectivity to Internet
- WAP based mobile network
- ATM network
- SMS and FAX messaging
- Multipurpose information Kiosk
These e-channels allow financial transactions from anywhere and anytime. On Internet banking, RBI
has come out with a report in December 2000, based on the recommendations outlined by an
expert Working Group, which have now become the base for banks to adopt when they migrate
towards offering Internet based Banking. The Reserve Bank of India is actively involved and
took a lead role to create e-payment Some of the e-payments infrastructures are :
- Electronic Clearing Service (ECS) - Credit and Debit
- Electronic Funds Transfer (EFT), and Special EFT
- Centralised Funds Management System (CFMS)
- Negotiated Dealing System (NDS) for screen based trading in Government securities
- Real Time Gross Settlement System (RTGS)
All these systems have a positive impact on
quick, safe and electronic movement of money for various sectors.
Many new initiatives are also in the offing,
which would enhance the e-payments scenario of the country. Some of these are:
(i) Expansion of MICR technology: In order to hasten the clearing process, the Reserve Bank has taken upon itself the
developmental role of expansion of the coverage of the MICR based clearing system to many more
cities from the earlier implementation at the four major metropolitan centres. While today there are 39 MICR based cheque processing
centres, the plans for the immediate future would see the opening of 10 more MICR processing
centres, thereby brining almost more than 70% of the country's cheque volumes to be cleared through the MICR process.
(ii) Imaging and Cheque truncation. While MICR based processing would benefit the banks in
terms of better control over the clearing process and in better reconciliation, the benefits to
customers would accrue only if the cheques deposited by payees are credited quickly. The
demand for quick cheque collections has been for long a requirement, especially for outstation
cheques. To take care of this requirement using the latest advancements in technology, cheque truncation based on imaging
is being implemented by the Reserve Bank. The project would be a pilot project in the initial
stage covering the National Capital Region of Delhi and would be extended to other cities after stabilization.
| (iii) National EFT : In order to expand the coverage of
EFT, a National EFT using SFMS as a standard message interfacing system is to be introduced by the Reserve Bank.
(iv) E-Cheque : The electronic cheque is a new payment instrument combining the security, speed
and processing efficiencies of all electronic transactions with the familiar and well
developed legal infrastructure and business processes associated with paper cheques.
ECheque leverages the cheque payment system, a core competency of banking industry. It fits within
current business practices, eliminating the need for expensive reengineering. It works like a paper
cheque, but it does so in a purely electronic form, requiring less manual process. IDRBT has taken up a pilot project on
(v) Point of Sale transactions : Today there are many online POS terminals for credit
authorisation. A point of sale system can eliminate float, reduce credit risk, and require the merchant to keep less cash on hand. The POS
system enables merchant to verify the availability of funds in a customer's account or his access to credit before completing the sale.
All these would ensure that a wide array of products and services are available for the common man to use electronic based payments. The major impact of e-payments would,
however, be felt for small value, retail payments. While
Automated Teller Machines (ATMs) have provided relief to customers for cash withdrawals on an 'anytime, anywhere' basis,
thanks to sharing of ATMs by banks, the future however, lies on low cost but large penetration oriented technologies. Smart cards hold the key to the future in this area.
The usage of smart cards for financial transactions is a safe, secure and efficient
method to perform transfer of value for small value transactions. It was with this objective that
the Reserve Bank partnered a pioneering effort towards use of smart cards for financial transactions, way back in 1998 in the form of a pilot project at the
IIT, Mumbai, which resulted in the development of standards. With technological advances in the area of smart cards, a new Multi Application
Smart Card project has been launched. This time too, the project is being conducted at the IIT
Mumbai, and is jointly conducted by the IDRBT, banks, industry players and by associating the Ministry
of Communications and Information Technology of the Government of India. The multi application smart card project
aims at the usage of smart cards for multiple applications such as for national id, driving
license, health card, insurance, e-cash transactions and as an e-purse for storage and
transfer of value. The initial reports on the progress of this project have been very encouraging and
I am sure that this would be the future for the country, where paper based transfer of money would be replaced by
transfer of funds using low cost yet secure smart cards across the length and breadth of the country. This I feel, would be a path breaking
innovation which would change the very way of transfer of value by consumers.
In all the initiatives for e-payments, standardization is the key to the long-term benefits of efficient electronic payment
systems. The goal should be to allow products and services from different vendors to work together, by means of inter-operable and
seamless interfaces. This will allow for competition and reduce uncertainty in the market place and enhance easy acceptability.
There isalso the need to define privacy rules since transaction trails could pose other risks to consumer.
Banks are increasingly developing Internet banking applications for better customer service
and to cut operation cost. No queue, no holidays, any time/any where banking operation.
Pay electricity bill, telephone bill, credit card bill, and insurance premium. Check account status,
transfer of funds etc. However, there is a critical concern on security
when Internet is used for business communication/transaction. The security feature need to be built into the system,
application level as well as network level with effective use of secure socket layer protocol
(SSL), encryption/decryption, digital signature, data integrity etc.
Banks in India started to take full advantage of IT in the early nineties. In the last 15 years
or so there have been systematic improvement and up-gradation of IT infrastructure for modernizing business operations.
It is the high-speed real time processing, high volume processing and
analytical capabilities that have helped in operational efficiency.
Reserve Bank of India has taken up an important role as facilitator of payment system
developments. Also RBI is the catalysts for e- and m-commerce (through e-government: e- and
m-payment), stimulating further migration of cash (bank notes and coins) to digital payment
instruments, increasing the efficiency of payment systems, Governance of e-commerce -
customer protection, security of transactions, privacy of records and oversight of payment systems.
The advantage of electronic payments system is that the transactions can be processed quickly, more cheaply and they also offer a much more convenient method of effecting
settlement of transactions. The introduction of e-payment products in India has brought a number of issues of regulatory and supervisory concern viz.
- Impact on the conduct of monetary policy
- The need for adequate transaction clearing and settlement agreements
- Technical security of the products
- Money laundering and other financial crimes
- Consumer protection
- Potential risk to the issuer such as operational, reputation, security, legal and liquidity etc.
I strongly believe that banks have much to contribute to the evolving world of e-banking
including e-payments in the country.