Excitement in electronic payments

by Viral Shah.

Frictionless payments are an important contributor to India's growth story. Cash is costly for everyone in the system: for the central banker, banks, businesses, and individuals. Yet, we are far away from a mass adoption of electronic payments.

For electronic payments to take off, it is essential to have a bridge between the world of physical and electronic money, allowing seamless conversion between the two. Until recently, this could only be done at banks or ATMs. Various developments over the last year have greatly expanded the number of entities that can now offer such services:

1. July 2009, Cash withdrawal at point-of-sale guidelines: As a step towards enhancing customer convenience, RBI allowed cash withdrawals at point-of-sale terminals with debit cards.
2. April 2010, Report of the Inter Ministerial Group on the Delivery of Basic Financial Services using mobile phones: This group chaired by the Secretary, DIT and included, among others, representatives from Department of Financial Services, Department of Posts, Ministry of Rural Development, Planning Commission, UID Authority of India, TRAI, RBI, Department of Telecom and the Home Ministry. It suggested a nationwide payments architecture that consisted of a simple centralized account hosting platform as a national infrastructure, full interoperability among payments providers, standards based biometric point of sale terminals, and standards based mobile payments.
3. April 2010, From Exclusion to Inclusion with micropayments: The UIDAI published a strategy document on micropayments, which provides a detailed framework for biometrically authenticated transactions, as recommended by the IMG. The National Payments Corporation of India has developed an interoperability switch for Aadhaar and mobile based transactions as recommended in the IMG report. Both, Visa and Mastercard have also adopted this framework.
4. June 2010, Harnessing the India Post Network for financial inclusion: This report was jointly commissioned and produced by Department of Posts, Department of Financial Services, Department of Economic Affairs and Invest India Economic Foundation. It recommended a framework similar to that recommended by the IMG; that of a low-cost account hosting platform and cultivating a payments ecosystem by allowing partners to access its physical and electronic payments network for a fee.
5. September 2010, Financial Inclusion by Extension of Banking Services - Use of Business Correspondents (BCs): BC guidelines have existed for a while, but RBI recently relaxed the rules for the entities that can act as BCs. These new guidelines allow for-profit companies (except NBFCs) also to become BCs. This appears like a small change but it has had far-reaching consequences.

Over these two years, we have a vivid sense about electronic payments making the grade, from a vaguely posed idea for the deep future to something that is tangibly around the corner. Each of these elements appears to be small in isolation, but the link from public policy developments to outcomes is like a butterfly effect.

These developments have important ramifications for mass adoption of retail electronic payments and financial inclusion. Banks, recognizing the importance of new regulation, have partnered with telcos with retail networks. This allows for the telco to leverage its network of talk-time retailers as BC sub-agents, and to also offer mobile payments between bank accounts. A flurry of announcements has happened recently: SBI-Airtel, ICICI-Vodafone, Axis-Idea, and more will certainly follow.

As much as these announcements are exciting, they raise some worrisome questions. The biggest question is interoperability. If the country is going to have a network of a million BC outlets, shouldn't a customer of any bank be able to use any outlet, much like they can use any ATM? Shouldn't a customer of one bank-telco partnership be able to send money to a customer of another bank-telco partnership effortlessly? Network effects are essential for mass adoption of electronic payments. After all, regulations today allow a person with a debit card to withdraw cash over an interoperable network of point-of-sale terminals.

Banks and telcos are unlikely to want interoperability; to justify investments, gain customers, and want them to stick. Perhaps the regulator ought to take a firm stand on the issue. A good balance may be to ensure that the products are designed to be interoperable with some uniformity of customer experience, but offer an interoperability holiday for the first two years.