Payment systems in India

Payment systems in India

Payments are an indispensable part of our daily transactions, be it a consumer to a business, a business to a consumer or a business to a business. Payments raise the GDP of a country thus it is mandatory that the payment systems of the country are safe, secure, sound, efficient, accessible and authorize, as states the mission statement of the Reserve Bank of Indias publication on Payment Systems in India (200912). The Reserve Bank of India continually strives towards ensuring the smooth progress of the payments system. In India it is the BPSS (Board for Regulation of Payment and Settlement Systems) which is in charge of regulating these systems. Payment systems in any country are the most essential part of the economic system of that country. Efficiency in these is required to guarantee the timely completion of all transactions. As the payment system is one of the most important components of the financial system, innovative ways of making payments which are less hasslesome are being focused upon. The BPSS is trying to effect a change in the mode of payments in India, from paper to electronic. Since electronic means are both safer and more efficient efforts are continuously being made to change the mindset of people and make them shift to electronic-payments. An efficient payment system forms the backbone of economic well-being of a nation.[1]

Traditional methods of making payments

Traditional methods dominating the Indian payments market have been cheques and cash. Cash is the most popular modes of payment especially when it comes to retail transactions because it gives the customer a sense of completion once the amount is paid in cash. However, if we look at the flip-side, it poses a security- risk for the customer if he is carrying too large an amount of cash. So, it is here that cheques make things simpler and hence they are the second most popular mode of payment. When it comes to a question of bill payments and fund transfers the most commonly used method of payment is cheques.[2]

Payments in India going the e-way

The Reserve Bank of India is doing its best to encourage alternative methods of payments which will bring security and efficiency to the payments system and make the whole process easier for banks. The Indian banking sector has been growing successfully, innovating and trying to adopt and implement electronic payments to enhance the banking system. Though the Indian payment systems have always been dominated by paper-based transactions, e-payments are not far behind. Ever since the introduction of e-payments in India, the banking sector has witnessed growth like never before. According to a survey by Celent, the ratio of e-payments to paper based transactions has considerably increased between 2004 and 2008. This has happened as a result of advances in technology and increasing consumer awareness of the ease and efficiency of internet and mobile transactions.[3] In the case of India, the RBI has played a pivotal role in facilitating e-payments by making it compulsory for banks to route high value transactions through Real Time Gross Settlement (RTGS) and also by introducing NEFT (National Electronic Funds Transfer) and NECS (National Electronic Clearing Services) which has encouraged individuals and businesses to switch to electronic methods of payment. With the changing times and technology so have changed the methods of payments in India. E-payments in India have been growing at a fast rate of 60% over the last 3 years. In India plastics have been fast over-taking papers. With 130 million cards in circulation currently, both credit and debit, and an increasing consumer base with disposable income, India is clearly one of the fastest growing countries for payment cards in the Asis-Pacific region. Behaviourial patterns of Indian customers are also likely to be influenced by their internet accessibility and usage, which currently is about 32 million PC users, 68% of whom have access to the net. However these statistical indications are far from the reality where customers still prefer to pay in line rather than online, with 50% payments still being made in cash. E-payments have to be continuously promoted showing consumers the various routes through which they can make these payments like ATMs, the internet, mobile

Payment systems in India phones and drop boxes.[4] The Indian payments systems have however undergone a change with respect to methods of payments, there now being card-based payments, Electronic Funds Transfers, Electronic Clearing Services and ways to pay via the mobile and internet. In India payments can be divided in two ways- firstly, large-scale payments and small-scale payments and secondly, paper-based and electronic. Most large-scale payments concern corporates or government payments and are settled by the RBI. Small-scale payments are mainly retail payments concerning individuals which are generally paper-based transactions. Most large-value payments are handled electronically. However, even the retail payments are showing a tendency of shifting to the e-payment mode, mainly because of consumer awareness and regulations by the RBI.[5]

Electronic payment systems in India

Due to the efforts of the RBI and the BPSS now over 75% of all transactions are made in the electronic mode, including both large-value and retail payments. Out of this 75%, 98% come from the RTGS (large-value payments) whereas a meagre 2% come from retail payments. This means consumers have not yet accepted this as a regular means of paying their bills and still prefer conventional methods. Retail payments if made via electronic modes are done by ECS (debit and credit), EFT and card payments.[6]

Types of e-payments
Electronic Clearing Service (ECS Credit)
Known as Credit-push facility or one-to-many facility this method is used mainly for large-value or bulk payments where the receivers account is credited with the payment from the institution making the payment. Such payments are made on a timely-basis like a year, half a year, etc. and used to pay salaries, dividends or commissions. Over time it has become one of the most convenient methods of making large payments.

Electronic Clearing Services (ECS Debit)

Known as many-to-one or debit-pull facility this method is used mainly for small value payments from consumers/ individuals to big organizations or companies. It eliminates the need for paper and instead makes the payment through banks/corporates or government departments. It facilitates individual payments like telephone bills, electricity bills, online and card payments and insurance payments. Though easy this method lacks popularity because of lack of consumer awareness.

National Electronic Funds Transfer (NEFT)

NEFT is a facility provided to bank customers to enable them to transfer funds easily and securely on a one-to-one basis. It is done via electronic messages. In order to speed up the transactions there are up to 6 transactions in one day. Even though it is not on real time basis like RTGS (Real Time Gross Settlement), NEFT facilities are available in 30.000 bank branches all over the country and work on a batch mode. NEFT has gained popularity due to it saving on time and the ease with which the transactions can be concluded. This reflects from the fact that 42% of all electronic transactions in the 2008 financial year were NEFT transactions.

Payment systems in India

Credit cards and Debit cards

As mentioned above India is one of the fastest growing countries in the plastic money segment. Already there are 130 million cards in circulation, which is likely to increase at a very fast pace due to rampant consumerism. Indias card market has been recording a growth rate of 30% in the last 5 years. Card payments form an integral part of e-payments in India because customers make many payments on their card-paying their bills, transferring funds and shopping. Ever since Debit cards entered India, in 1998 they have been growing in number and today they consist of nearly 3/4th of the total number of cards in circulation. Credit cards have shown a relatively slower growth even though they entered the market one decade before debit cards. Only in the last 5 years has there been an impressive growth in the number of credit cards- by 74.3% between 2004 and 2008. It is expected to grow at a rate of about 60% considering levels of employment and disposable income. Majority of credit card purchases come from expenses on jewellery, dining and shopping. Another recent innovation in the field of plastic money is co branded credit cards, which combine many services into one card-where banks and other retail stores, airlines, telecom companies enter into business partnerships. This increases the utility of these cards and hence they are used not only in ATMs but also at Point of sale (POS) terminals and while making payments on the net.[7]

Channels of e-payments
In their effort to enable customers to make payments the electronic way banks have developed many channels of payments viz. the internet, mobiles, ATMs (Automated Teller Machines) and drop boxes. The internet as a channel of payment is one of the most popular especially among the youth. Debit and credit payments are made by customers on various banks websites for small purchases,(retail payments) and retail transfers( ATM transfers). ATMs serve many other purposes, apart from functioning as terminals for withdrawals and balance inquiries, such as payment of bills through ATMs, applications for cheques books and loans can also be made via ATMs. Banks also provide telephone and mobile banking facilities. Through call agents payments can be made and as the number of telephone and mobile subscribers are expected to rise, so is this channel of payment expected to gain popularity. Drop boxes provide a solution to those who have no access to the internet or to a telephone or mobile. These drop-boxes are kept in the premises of banks and the customers can drop their bills along with the bill payment slips in these boxes to be collected by third party agents.[8]

Role of the RBI in encouraging e-payments

As the apex financial and regulatory institution in the country it is compulsory for the RBI to ensure that the payments system in the country is as technologically advanced as possible and in view of this aim, the RBI has taken several initiatives to strengthen the e-payments system in India and encourage people to adopt it. The Payment and Settlement Systems Act, 2007 was a major step in this direction. It enables the RBI to regulate, supervise and lay down policies involving payment and settlement space in India. Apart from some basic instructions to banks as to the personal and confidential nature of customer payments, supervising the timely payment and settlement of all transactions, the RBI has actively encouraged all banks and consumers to embrace e-payments. In pursuit of the above-mentioned goal the RBI has granted NBFCs (Non-Banking Financial Companies) the permission to issue co branded credit cards forming partnerships with commercial banks.

Payment systems in India The Kisan Credit Card Scheme was launched by NABARD in order to meet the credit needs of farmers, so that they can be free of paper money hassles and use only plastic money. A domestic card settlement company known as Indiapay has recently been started by the RBI, inspired by Unionpay in China, which will be promoting the use of cards ie. plastic money. Initially functioning as an NGO, Indiapay will focus on potential customers from rural and semi-urban areas of India. Indiapay will have a much wider coverage than Visa, MasterCard or American Express cards which have always been used for card-based settlements and might even pose a threat to them. The NREGA (National Rural Employment Guarantee Scheme) introduced by the Government will ensure rural employment in turn ensuring that the employees get wages. Each employee will have a smart card functioning as his personal identification card, drivers license, credit card which will also function as an electronic pass book, thus familiarising the rural populations with e-payments.[9] However, the Indian banking system suffers from some defects due to certain socio-cultural factors which hampers the spread of the e-payments culture even though there are many effective electronic payment channels and systems in place. Despite the infrastructure being there nearly 50% of all payments are still made in cash. A relatively small percentage of the population pays their bills electronically and most of that population is from urban India-the metropolitans. Also in some cases the transaction is done partially online and partially offline. The main reason for this apathy t switch to e-payments comes from lack of awareness of the customer despite various efforts by the Government.

References
[1] [2] [3] [4] [5] [6] [7] [8] [9] http:/ / www. pwc. com/ in/ en/ publications/ payments-business-indian-banks-2009. jhtmlPayments Business in Indian Banks 2009 p.1. http:/ / www. celent. com/ reports/ payments-india-going-e-way Payments in India Going the e-Way | Celent p.2. http:/ / www. celent. com/ reports/ payments-india-going-e-way Payments in India Going the e-Way, pg3 | Celent p.3. http:/ / www. celent. com/ reports/ payments-india-going-e-way Payments in India Going the e-Way, pg 4 | Celent p.4. http:/ / www. celent. com/ reports/ payments-india-going-e-way Payments in India Going the e-Way, pg 5 | Celent p.5. http:/ / www. celent. com/ reports/ payments-india-going-e-way Payments in India Going the e-Way pg 6| Celent p.6. http:/ / www. celent. com/ reports/ payments-india-going-e-way Payments in India Going the e-Way pg 7 | Celent p.7. http:/ / www. celent. com/ reports/ payments-india-going-e-way Payments in India Going the e-Way pg 14| Celent p.8. http:/ / www. celent. com/ reports/ payments-india-going-e-way Payments in India Going the e-Way pg 10,11| Celent p.9.

Article Sources and Contributors

Article Sources and Contributors

Payment systems in India Source: http://en.wikipedia.org/w/index.php?oldid=502650306 Contributors: Ashliveslove, Bearcat, Brianhe, Debastein, Delusion23, Download, Edgar181, Katharineamy, LindsayH, Mark Arsten, PKT, Rangilo Gujarati, Sanjana21

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