Vision for Payment Systems

1. Vision for Payment Systems General Manager State Bank of India June 11, 2010

2. Overview What is a Payment System Payment Systems across time Current Indian Landscape Tomorrow Challenges

3. What is a Payment System

4. What is a Payment System Financial system supporting transfer of funds from payers to payees. Paper-based mechanism (e.g. Cash, Cheques, Drafts etc.) Paperless mechanism (e.g. Electronic Funds Transfer)

5. Payment Systems Across Time

6. Payment Systems across time-India Yesterday Today CTS: Cheque Truncation SystemCTS: Cheque Truncation System

7. Current Indian Landscape

8. Current Indian Landscape Enabling legislation IT Act 2000 Payment and Settlement Systems Act 2007 Rapid growth in Indian economy India to become the world’s fifth largest consumer market by 2025 Aggregate consumption in India will grow in real terms from the current INR 17 trillion to INR 34 trillion by 2015 and INR 70 trillion by 2025- a nearly four-fold increase! (Source: McKinsey Global Institute)

9. Current Indian Landscape Growing middle class Approx. 50 million in 2005 and estimated to grow to 583 million by 2025 i.e. from 5% to 40% of the population (Source: McKinsey Global Institute) Fast growth in mobile telephony/other communication technologies (e.g. broadband internet, wi-fi etc.) 601 million mobile customers at the end of April 2010 Almost 50% growth in 2009-10 in mobile phones (Source: TRAI)

10. Current Indian Landscape Young upwardly mobile class Growing literacy and a tech-savvy generation Improving network and communications Broadband subscriber base (>= 256 Kbps download) is at 9 million at the end of April 2010 Almost 40% growth in 2009-10 for broadband subscribers (Source: TRAI)

11. Current Indian Landscape Large-scale automation in Government and Corporates Government projects: Online filing of Income Tax returns, Indian Customs Valuation Database (database on imports at all custom stations in India with valuation and classification) Corporates: ERP implementation, Internet Banking for Corporates Leadership in IT/ITeS sectors IT bigwigs like TCS, Infosys, Wipro etc.

12. Tomorrow

13. Tomorrow Mobile Payments Settlement Network– Solution to facilitate mobile-based inter-bank funds transfer It would switch the transactions from mobile switch of one bank to the mobile switch of another bank With this functionality, mobile banking customers of any Bank can transfer funds within regulatorily specified limits to an account held with any Bank through Mobile Banking

14. Tomorrow Mobile banking over POS – Today, just as debit cards, credit cards and other prepaid cards can be used to make a payment over a POS counter, a method could be explored whereby the POS machine could be modified to use Mobile Banking The biller could provide the bill details and customer mobile number on the POS machine and the customer could use the mobile application to make the payment Mobile Wallet - In this case, the pre-paid card concept could be extended to the mobile Virtual pre-paid mobile cards could be generated for the customers by a business correspondent as per regulatory stipulations Customer could spend this pre-paid card over POS, online or through mobile application

15. Tomorrow Voice Payment System: This is a Mobile Voice Banking System which authenticates voice input with the help of caller id and biometric voice authorisation and validate sregistered users Functionalities like balance enquiry, funds transfer and mini-statement could be made available

16. Tomorrow Automated Clearing House – An initiative by NPCI aimed to redesign the existing ECS/NECS system ECS is a bulk debit/credit system in India primarily used for repetitive payments like salary, pension, dividend, utility bills, loan installments and investments like SIP The ECS system has a highly decentralised set-up NECS by RBI is a centralised service only for credit transactions The existing ECS application accepts files from designated bank branches only

17. Tomorrow Automated Clearing House – NPCI proposes to implement a technology platform (ACH) which would allow sub-members and authorised users also to implement end to end straight through processing with scope for participants to design their own products to meet particular business objectives and to support financial inclusion measures by providing support to UID and Mobile based ACH transactions Creation of Centralized Mandate Management Repository System (CMMRS) with facilities like data and mandate validation, positive confirmation of credit and debit transactions from / to the remitting / destination Banks etc.

18. Tomorrow RTGS – RTGS as a cross-border settlement system The RTGS is envisaged as the centralised settlement system into which all the dispersed net settlement systems will flow Migration to an RTGS environment is the main objective of payments system reforms in most countries of the world In fact, access to cross border settlement systems such as the TARGET in Europe is conditional on the availability of a full fledged domestic RTGS for each of the participating countries Apart from providing a real time funds settlement environment, the RTGS is critical for an effective risk control strategy

19. Tomorrow RTGS – RTGS as a cross-border settlement system Payments system risks in a net settlement system are such that the default by one bank may lead to a 'knock-on' or domino effect on the system Gross Settlement reduces the risk significantly, as transactions are settled one by one on a bilateral basis in a real time mode In a cross border context, RTGS becomes even more relevant as cross country risks are more difficult to manage as compared to domestic transactions RTGS provides both the technology and process controls to manage these risks better

20. Tomorrow National Pay Card – The concept of a domestic payment card and a PoS switch network for issuance and acceptance of payment cards All card issuing banks would be members of this card association The card would be accepted by all domestic merchant establishments Efforts would be made to rope in merchant establishments abroad for acceptance of this card National Pay switch to be set up to route all domestic transactions within the country thus saving huge costs towards switching and other costs being paid in foreign exchange to Visa and Mastercard This would help promote financial inclusion efforts

21. Tomorrow India MoneyLine – The existing NEFT system operates during weekdays from 9 am to 5 pm and on Saturdays from 9 am to 12 noon India MoneyLine is an effort by NPCI to make NEFT to function on a 24x7 basis or to develop a new system akin to the Faster Payments Service in the UK which operates on a 24x7 basis Faster Payments is a banking initiative in the UK to reduce the time taken for ‘low value’ payments both person to person and business to business payments, essentially to a time as if the two accounts were in the same bank

22. Tomorrow Cheque Truncation System (CTS) by NPCI - Although electronification of payments is the objective, prevalence of paper-based payments will continue to have a substantial volume (Cheque clearing statistics) CTS has already been implemented in NCR, Delhi and has stabilized It is proposed to introduce four regional grids i.e. Delhi, Chennai, Mumbai and Kolkata to streamline the clearing operations All MICR centres will be migrated to CTS eventually

23. Tomorrow Electronic presentment – Electronic presentment of images of cheques by payee will substitute physical delivery of cheques This combined with centralized signature storage and retrieval system will eliminate several destination points and reduce clearing time very substantially By using data communications the slow physical movement would be eliminated

24. Tomorrow-Technology Smart Card - Cards with embedded integrated circuits which can process and store data which may/ may not require (contactless cards) physical contact with the POS equipment Biometrics -Identification technology based on measuring human body characteristics like fingerprints, retina, voice patterns etc. Near Field Communication - NFC technology is an extension of RFID that combines a smart card interface and reader into a single device. NFC in mobile phones is likely next in line in the evolution for mainstream payment systems.

25. Challenges

26. Challenges Ecosystem should be conducive to the success of new products/technologies Mandate management (ECS/ACH) Popularising new products amongst the masses Security Threats: Hacking/Phishing/Vishing/Money Laundering/Terrorism Enforcing standards for strong encryption and decryption

27. Vision 2025 We need to move towards complete electronification of payments and minimise paper-based transactions This could be achieved if the payment systems are made completely secure, reliable, real-time, efficient and accurate (with 100% reconciliation) Implementation of such systems increases transparency, lower transaction costs, improve operational efficiency of trade and commerce and provide support to globalization of economy

28. Vision 2025 Efficient payment systems help in the smooth flow of money in the economy thus increasing the liquidity in the hands of the customer enhancing his purchasing capacity These would also help minimise cases of fraud, use of counterfeit notes and black money Last but not the least, by implementing paper-less payment systems, we will be making a significant contribution towards a greener planet!

29. Thank You

30. Cheque clearing statistics

31. IT Act 2000 Provides legal recognition for transactions carried out by means of electronic data interchange and "electronic commerce“ that refers to use of alternatives to paper-based methods of communication and storage of information, to facilitate electronic filing of documents with the Government agencies Specifies that electronic records can be authenticated through Digital Signatures Confers legal recognition of Electronic records, Digital Signatures

32. Payment and Settlement Systems Act 2007 Designates RBI as authority for Regulation and Supervision for Payment Systems in India RBI to issue guidelines prescribing the format of payment instruction, timings, manner of transfer of funds, criteria for membership etc. Rights and duties of system provider defined Guidelines for Settlement of Disputes provided