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Tuesday, September 19, 2017

How NPCI is silently transforming Indian payments ecosystem

Quick. Name a major Digital/Skill India/Make in India success story of the public sector, other than IRCTC. Hint, this is related to banking. Given up guessing? Its NPCI.

Last week, Google made the news again in India when it introduced a payment system. However, unlike other players, it chose a different route. Tez is neither a mobile wallet nor a modified version of Android Pay. It is built on UPI. Ever since demonetization(aka withdrawal of specified bank notes), the acronyms UPI, BHIM, Rupay, Aadhar Pay have all entered the general lexicon. What is common between these? All these are  brands/products of the National Payments Corporation of India (NPCI), an umbrella organisation for operating retail payments and settlement systems in India. It is the payments utility of the Indian financial system, which aims to innovate retail payments for achieving greater efficiency in operations and widening the reach of payment systems. L ike India leapfrogged the landline to mobiles, and cards to wallets, payments systems are similarly seeing digital first viz online players becoming mainstream and digital natives. For instance, across smartphones, fully secure, encrypted, virtual payment addresses, etc. 

 It is a Section 25 company (Like GSTN) which has broad-based shareholding across all sectors. The payments system globally has been an oligopoly between Visa, Mastercard and Amex. The developing world however has resisted this, with China locking out these majors and leapfrogging to Alipay, while India has not explicitly resisted them, but imposed limits/caps on their fees. So for these global players, India remains the last virgin frontier.

However, this was not reflected in the pricing which was high, viz anything between `5 to `8 per transaction as switching fee, which allowed NPCI to disrupt the market by charging around 5% of the other, and still earning a profit.

NPCI was created along with UIDAI, and has leveraged the identity/digital revolution to establish itself across debit, credit, contactless and prepaid, with flagship products of National Financial Switch, Cheque Truncation Systemand Aadhaar Enabled Payment System. While these target the bigger value transactions, smaller value transactions are enabled via Bharat Bill Pay, National Common Mobility Card and National Electronic Toll Collection. And of course, the USSD enabled BHIM.

Lets understand these acronyms a bit better
-UPI: 24*7 instant money transfer, with value added facilities of customer ID like email address, Scan and Pay/Collect and Receive/QR Code/free of charge notifications and multi lingual, the last part being vital for financial inclusion. The ‘instant’ credit allows it to substitute ATM, however customer security(via 2FA and PIN)/dispute handling/fraud treatment will be critical to its replacing credit cards

BHIM- Launched in December 2016, the BHIM app is essentially a rebranded version of UPI and Unstructured Supplementary Service Data (USSD). Available on the Android app store, the app allows users to send money, receive from friends, family and customers through a mobile number or payment address. For that, one has to register his bank account with BHIM, and set a UPI PIN for the bank account.

-One may wonder why UPI when IMPS already offers instant credit. However, the features of single APP(across all banks) and P2P give it an edge.

-NPCI being a bank owned utility reflects in their ability to retrieve account details in a masked manner, which is passed to BHIM via encryption to the extent required. However, it is not neutral in the sense that wallets are not linked to UPI so far-it is unlikely they would want it, as it’s a competing tool anyways.

-Rupay-This is India’s answer to VISA/MasterCard/Amex. It has 380+ MnRupay cards issued by 800+ participating banks, driven by Kisan Cards and PSU banks mainly. However, private sector is also issuing these cards(eg PAYTM virtual Rupay card), due to the advantages of no need for hedging Forex risks, low fees(switching fees nearly 1/3 of global peers) etc.  Also, for the less tech savvy banking segment such as RRB/Cooperatives, Rupay  has allowed them to enable their customers with good technology. Interestingly, the global tie ups for cards are not with the biggies, it is with Discover Financial Services and Japan Credit Bureau.
For more information, the below links are useful:
Of course, such initiatives are not without their detractors. The government announced an outlay of nearly 495crores to encourage BHIM transactions. The private wallet players felt this was not neutral. Ironically, it’s the private sectors who have lagged behind neutrality, for instance, the ability to read all 5 payment constitutes(Mastercard, Visa, American Express, RuPay ,UPI) in one QR code was only within BHIM. Other UPI apps had not followed suit. So now the government mandated it.

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