Towards payment inclusion

By Jaikrishnan G

Disparities in access to technology and digital solutions necessitate different layers of payment infrastructure. While QR codes, digital wallets and UPI have made retail digital payments popular, adoption continues to be a challenge for certain segments of population. Many areas in the country still face internet connectivity challenges. About 44 crore still use feature phones, with resulting difficulties in accessing prevailing digital payment options. This is no small number, and thus it is imperative for the regulator and the government to have a more inclusive digital payments ecosystem. Without a guiding framework, payment companies found it unviable to invest at scale to solve this problem. Our real-time payment infrastructure, facilitated by government-sponsored digital technology, is still a cost-centre for many with its zero charge-out regime. RBI’s proposed offline payments framework can be a game-changer in fixing this challenge to financial inclusion in payments.

RBI has laid down the guidelines for financial institutions and payment systems providers to participate in the offline payments system. Offline payment essentially means that a customer can complete a transaction without being connected to the internet. There is no need for transactions to be processed via the internet, thus avoiding an immediate need for connectivity to switches and clearance mechanisms. This will necessitate recording of transactions offline and updating them in corresponding bank records later. A payment-service provider will, therefore, have to manage these offline records for a specific period till the transaction data can be passed on to the clearing and settlement mechanisms. To avoid massive reconciliation issues that might occur from the result of such offline transactions, RBI has proposed limits for such offline transactions. As per the current guidelines, each transaction can be of an amount up to Rs 200, with a total of Rs 2,000 cumulatively, in the offline mode. A customer is allowed to exhaust the limits till the offline records are updated online. This requires only intermittent connectivity and small-value transactions can seamlessly be operated by users in the offline mode.

While the limit may sound as a constraint, a lower limit will ensure that participants are not exposed to large risks or damages, especially when there is no requirement of a second-factor authentication. Such offline payments shall currently be limited to face-to face/proximity mode, which means the transaction requires the physical presence of the payer and the payee. This means, the offline digital payments shall not be extended to remote transactions such as ‘card not present’, wallet-based transactions prevalent in e-commerce and mobile app purchases. Issuer banks are asked to obtain prior consent from the instrument-holders for enabling offline payment mode. Since these transactions do not involve live authentication or balance verification, this would entail the financial institutions and intermediaries to undertake substantial process control, technology upgradation and customer awareness initiatives to deliver the offline payment transactions.

While the operating model of offline payment mechanism is yet to evolve, it is highly likely to mirror the operations of pre-approved credit or a prepaid card. A customer would pre-approve and set an amount to be kept aside for funding offline transactions from his wallet, savings bank account or credit limit. This limit will remain blocked until it is released for any other transactions. The release of the amount for transactions would be restricted till knocking off and settling of any open offline transactions happen. It is yet to be seen if the financial institutions and PSPs will innovate to proactively bring about offline payment features in feature phones and other devices. Further, designing a customer journey that is seamless, keeping in mind the segment of customers using this mode of payment is also of utmost importance for mass adoption. RBI had been piloting the offline payments for at least a year before the guidelines were brought out, which means the concept addresses many of the visible and invisible challenges.

The scope of offline payments is not limited to remote areas where connectivity is a challenge. This is also relevant in urban centres, where the failure rate due to signal or internet outages is a serious issue. The elimination of additional factors of authentication also opens up an opportunity to fast-track small-ticket payments for existing digital payment users. Along with the advent of NFC phones, contactless cards, NFC wearables like smartwatches, the customer journey can become all more convenient. The transaction upper limit of Rs 200, might be restrictive for the users, but we can expect this limit to be revised upwards once the regulators gain confidence on the model.

The timely introduction of RBI’s guidelines from RBI opens up opportunities for fintechs and startups working in the payment space to further innovate and build products. The sheer volume of small value payments that happens in the Indian market is good enough for any fintech to evaluate and explore revenue models based on the new payment framework. It will be interesting to see how offline payments will evolve and find its place in the larger canvas of payment innovations happening in the country.

The author is Partner (financial services consulting), Grant Thornton Bharat