Transformation of Payment systems in India

The Payment and Settlement System (PSS) Act, 2007 provides for the regulation and supervision of payment systems in India and designates the Reserve Bank of India (Reserve Bank) as the authority for that purpose and all related matters. The rapid developments in Payment Systems and technology have led to the implementation of major reforms of payment systems to expedite the processing of payments, reduce the risk and uncertainty associated with noncash payments, facilitate the adoption of indirect instruments of monetary policy, and foster financial market development. The Reserve Bank of India lays down policies of the Payment and settlement System and providing a legal basis for multilateral netting and settlement finality, is of great significance.

Digital payment methods are a good alternative to traditional methods of cash payment and speed up transaction cycles from person to person, person to business, person to government, Government to person, business to business, business to Government, etc. “Faceless, Paperless, Cashless” is one of the professed roles of the Digital India programme. As part of promoting cashless transactions and converting India into a less-cash society, various modes of digital payments are available. The Global report of US-based payment systems company ACI on payment trends states that in the year 2020 transaction volume share in India stood at 15.6% and 22.9% for instant payments and other electronic payments, respectively, while paper-based payments had a considerable share of 61.4%. According to ACI Worldwide, digital payments in India are set to account for 71.7% of the total payments volume by 2025, leaving cash and cheques at 28.3%. It further said, that concerning real-time online transactions in 2020, India is ahead of the top 10 countries such as China, the US, South Korea, Thailand, the UK, and other countries. The National Payment Corporation of India (NPCI) states in its 2020 key findings that “Overall one-third of Indian households are using it in some form or the other”. Almost a quarter of the households in the bottom 40% income group are using digital payments as well and it has not remained a rich or well-educated person’s preserve 15% of households in the bottom and middle categories would like to adopt digital payments, it said.

The following are some of the important modes of digital payment facilities available in India. (Click each of them to read the details)

Bank cards (Debit cards, Credit Cards).

USSD,

AEP,

UPI,

RTGS and NEFT,

Bharat QR code payments,

e-Rupi

Banks Pre-paid Cards,

Point of Sale,

NETC-FASTag,

Internet Banking,

IMPS-Mobile banking,

Micro ATMs

ECS CREDIT/DEBIT System

Public Tech Platform for frictionless credit (Loan in minutes)

Direct Benefit Transfer (DBT)…….. and so on

(Now there are over 45 varieties of digital payment systems, digital enablers, and payment options available to consumers in India. To know about them click 45 TYPES OF DIGITAL PAYMENT OPTIONS AVAILABLE TO CONSUMERS IN INDIA)

Mobile wallets: A mobile wallet is a way to carry cash in digital format. You can link your credit card or debit card information in a mobile device to a mobile wallet application or you can transfer money online to a mobile wallet. Instead of using your physical plastic card to make purchases, you can pay with your smartphone, tablet, or smartwatch. An individual’s account is required to be linked to the digital wallet to load money in it. Most banks have their e-wallets and some private companies do. For examples, Paytm, Freecharge, Mobikwik, Oxigen, mRuppee, Airtel Money, Jio Money, SBI Buddy, Itz Cash, Citrus Pay, Vodafone M-Pesa, Axis Bank Lime, ICICI Pockets, SpeedPay, etc.

Customers can use other Bank ATMs:

Most Bank ATMs in India are connected through NFS (National Financial Switch), through which the ATM card of one bank can be used at another bank’s ATM. The Reserve Bank of India (RBI) has set a certain number of free ATM transactions per month. However, there is a limit to several free transactions that can be made at different bank ATMs.

Speed Clearing:

“Speed clearing” has been introduced to reduce the time taken for realisation of outstation cheques to a T+1 or T+2 basis. Speed clearing of a cheque is a mechanism that involves the collection of an outstation cheque (a cheque drawn on a non-local bank branch) through the local clearing. It facilitates the collection of cheques drawn on outstation core-banking-enabled branches of banks if they have a networked branch locally. Customers Presently in MICR locations will get credit for outstation cheques payable at the CBS branch of the Bank through local clearing i.e. on the 2nd day. It is also referred to as a ‘Grid-Based Cheque Truncation System’.

“Cheque Truncation System (CTS)”

Cheque Truncation System is an online image-based cheque clearing system where cheque images and Magnetic Ink Character Recognition (MICR) data are captured at the collecting bank. In the CTS scenario, the physical instrument is truncated at the presenting bank end (either at the branch level or service branch level). The images & data of collected instruments captured at the presenting bank would travel electronically to Drawee Bank for processing same day. The return cycle would be completed the next day. The return cycle would be completed the next day & settlement is completed on completion of the return cycle. The customer would get funds on completion of the settlement process. Further, all clearing locations are divided into 3 regional grids. All Clearing locations of a grid are settled together on a T+1 basis.

UPI payments:

In a span of just over three years, from April 2020 to September 2023, the Unified Payments Interface (UPI) has experienced remarkable growth. With a surge from 1 billion transactions per month to a staggering 10 billion, UPI has redefined the digital payment landscape, setting new standards for innovation and user-centric features. UPI introduced several groundbreaking features, each meticulously designed to cater to specific consumer needs. UPI AutoPay, for instance, caters to recurring payment needs, streamlining the experience for our customers. Furthermore, with the introduction of P2M Global transactions, Indian travellers now have the convenience of making UPI payments to foreign merchants, all through a single, familiar application. This advancement has revolutionized online payments for consumers and merchants alike. In the following year, 2021, UPI continued to innovate with the introduction of e-RUPI, 123Pay, UPI Plug-In, Aadhaar OTP onboarding, RuPay Credit Card on UPI, and UPI Lite. Further, NCPI launched Credit Line on UPI, Conversational Payments (Hello! UPI & BillPay Connect), and UPI LITE X in September 2023. Conversational UPI Payments and Conversational Bill Payments underscore the emergence of AI-enabled transactions which will further deepen the reach and use of digital payments in the country.

Each of these features has been meticulously designed to serve a range of customer needs. ‘Credit Line on UPI’ enables pre-sanctioned credit lines from banks via UPI and will revolutionize customer access to credit, fostering a more streamlined and digital banking ecosystem. With this, the process of availing, connecting, and utilizing credit lines will be significantly expedited, driving economic growth and progress.

All the above facilities have created a robust ecosystem for a digital finance economy. The transformations of the following financial markets have created a robust ecosystem for financial transformation in India.

Transformation of the banking sector in India

Transformation of the Money market in India

Transformation of Government securities market

Transformation of the Foreign exchange market in India

Transformation of the Capital market in India

Transformation of the Credit market in India

Transformation of Payment Systems in India