9 U T

Developments in Payment
Systems in India, and Digital
Banking
The objective of this Unit is to understand
> Global payment systems
> Domestic payment systems - status and trends
> New Domestic Payment products such as
RuPay and RuPaySecure
Immediate Payment System (IMPS)
National Automated Clearing House (NACH)
Aadhaar Enabled Payment System (AEPS)
UPI based payments
BHIM

Cheque Truncation System (CTS)

National Financial Switch (NFS)
RTGS
NEFT
> Forex Settlements
> Securities Settlement
237
238 MODULE D: PAYMENT SYSTEMS

Innovative Banking and Payment System

> Payments, Digital Banking & Information Security
9.1Overview of Global Payment Systems
The global payments landscape has been undergoing constant transforma
tion ever since the first credit cards and ATMs came into existence in the
1950s and 1960s. While the pace of change was consistent in the latter
half of the 20th century, there has been exponential growch in payments
systems globally, since the turn of the 21st century.
Payments products have been traditionally viewed as utility products
that were transactional in nature. Payments systems and products were
developed and managed by Central Banks, Commercial Banks and a few
global card schemes and networks.
However, access to technology, evolving consumer expectations, increasing
urbanization, financial inclusion and domestic considerations have brought
about a revolution in the global payments landscape.
Payments were cheque based, and therefore the cheques were physically
(after receipt from payee) exchanged between the drawee bank and payee
bank (the organised structure being through the clearing house), cheque
geting debited to drawer's account (in his bank - called as drawee bank),
suitable credit provided to drawee bank/branch through accounts of both
ofthese banks mentioned with acommon authority (central bank, clearing
bank, or clearing house or similar). This is Debit Clearing.
Electronic conversion of cheque data, exchange of these electronic cheque
electronic posting for debit to issuer, credit to payee, and thereafter bank
to-bank settlement happens electronically these days. Clearing initiated by
presenting debit instruments to the payer (drawer of cheque) to his bank
where his account is mentioned, is common in India. But Europe and US
have more of outgoing credit advise or payment authorisation presented
by the paying entity (i.e., the same accountholder drawer of the cheque
in our scenario) to his bank, acting as the - the major initiation factor for
clearing. Again, very often this payment authorisation is written by the
 UNIT 9: DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 239

payer electronically, obviating the cheque ;the drawee bank effects aremit
tance based on that through the clearing house. This is Credit Clearing.
9.1.1 Practices : - Brief mentions of salient features only
A. USA :
(a) A major electronic credit clearing of big amounts, called Fedwire,
(owned by Federal Reserve Bank), that runs on RTGS principle
with online real-time final payment and sertlement - instrument
by instrument.
(6) Another online system CHIPS (owned by clearing house) that again
handles high value credit items are settled. Settlement was earlier
in batches, of Net Settlements; now batches are processed very
frequently, the process being called Continuous Net Settlement.
(c) The Cheque Payment system - debit clearing of paper cheques
() Automated Clearing House (ACH) -electronic payments ofbatches
ofdebit transactions, as also credit transactions, for smaller repetitive
payments - B2B, C2B, C2G, B2C, etc. The rules are by NACHA,
the National Association of ACH participants of various locations.
(e) ACH has expanded to include outgoing credit payments undertaken
by customers over cards and internet, by capturing such web
transactions (from gateways run by affiliated entities) and pushing
them to the recipient accounts.
B. UK :
(a) CHAPS-Sterling: An RTGS system for big payments, has no lower
limit, so small paymentsalso go through. It provides alink to 'manage'
payment queues, so the sending bank can prioritise among payments
sent (this is like TARGET - the pan-European RTGS); it also has
facility to consider more than one payment-pair together (called
circles') if the current payment is inadequate to clear the current
balance leading to gridlock, ie., stoppage of payment queue.
(6) BACS - being the ACH payments - electronic payments in large
number - one-to-many, many-to-one - both credit initiated, and,
debit initiated.
(c) Cheques & Clearing system - for paper instruments, i.e., cheques.
240 MODULE D: PAYMENT SYSTEMS
Other big and active payment systems also mostly have similar basic for
mats, apart from, additional tiers for country-specific situations.
Basically, global systems are marked by most oflall of -
1. one RTGS system for big amounts to be paid - where the paper
instruments have been replaced by online components.
2. one net settlement system, for somewhat lesser payments, debit
and/or credits, that reduces funding requirements for banks with
the clearing authorities.
3. a system for smaller regular payments - often being one- to many,
all of this electronic and automated and mandate-based.
4. paper-based instruments - the classic clearing model, and, may be.
5. one for small automated payments made at POS, or net etc., to be
settled among banks.
The variousstructures, administration, ownership, liquidity management,
funding, etc., of these systems vary from country to country. Most paper
based payment instruments have become electronic. However, paper -
based payments are stillsignificant.
Stored-value cards, e-Wallets, are newer payment related facilities. Tech
nology and social-media companies like Facebook, Google, Apple and
Amazon, are already into the payments space, and a few. The launch of
Google wallets, Apple Pay (NFC enabled payments) and Facebook's entry
into payments is testament to the strategic nature of payments services
for these companies. Payment services provide an opportunity for these
companies to monetize their large consumer base.
While regulations ensure that payments systems and players are adequately
monitored, the adoption and success of virtualcurrencies, like Bitcoin, in
some sections and payments in dispersed pockets, and the recent launch
of a clearing house of crypto currencies like Bitcoin, are pointers towards
greater disruption in the payments landscape.
Availability, interoperability, ease of use and cost reduction willbe key
elements that willdetermine the success of payment systems. All partici
 UNIT 9: DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 241

pants in the payments landscape will need to concentrate their efforts on

providing these key features to the consumers.
Data mining and analytics are expected to soon become a key aspect in
the payments industry. Payment service providers have huge volumes of
data related to the payments needs and requirements of their customers
and their ability to personalize and customize services and offerings will
result in greater customer-retention and increased revenues.
Payments present adynamic and fast-changing landscape, which provides
ample opportunities for disruptors to innovate and create. Banks and
regulators now consider payments as a strategic initiative, rather than a
utility service that needs to be offered as complementary to other bank
ing services. Investment in technology, identification of key markets and
customers, identifying the relevant use-cases, and exploring new avenues
of partnerships will be the key to leadership in the payments market.
9.2 Overview of Domestic Payment Systems
Reserve Bank of India, after setting-up of the Board for Payment and
Settlement Systems in 2005, released a vision document incorporating
a proposal to set up an umbrella institution for all the Retail Payment
Systems in the country. In 2007, the Payment and Setlement Act was
passed, AWorking Group of IBA formulated the details and NPCI was
formed, in December 2008 as anonprofit company (section 25 compa
ny), which was changed to a section 8 company later and the Certificate
of Commencement of Business was issued in April, 2009.
NPCI was handed over operations oftheNFS (National Financial Switch)
- the central switch of ATM networks-from IDRBT. Over a period of
time, various/payment systems were shifted to NPCI to govern. Thecore
objective was to consolidate and integrate the multiple Clearing systems
with varying service levels into nation-wide uniform and standard busi
ness process for all retail payment systems. The Vision Statement of RBI's
Payment Systems in India, Vision 2012-2015, stated To proactively en
courage electronic payment systems for ushering in a less-cash society
in ndiaand to ensure payment and settlement systems in the country
242 MODULE D: PAYMENT SYSTEMS

are safe, eficient, interoperable, authorized, accessible, inclusive and

compliant with international standards.'
India has traditionally been a cash-based economy, with paper-based in
struments like cheque being the primary alternative means of payment.
Over the past decade, RBI's intervention, proactive regulation and policies
have led to a more modern electronic payment system in the country.
Though cheque remains dominant, its share in all retail payments has,
reduced in volume terms. The share of electronic payments in non-cash
retail clearing rose.
Cash, however, remains the predominant payment mode in the country.
India has among the highest currency to GDP ratio, compared to other
developing and developed nations. Similarly, the number of non-cash
transactions per citizen is very low when compared to other emerging
economies.

The number of debit, credit and prepaid instruments has grown tremen
dously over the last few years. (By July, 2019, 50.26 million Credit Cards,
and 840.62 million Debit cards.
While the issuance and cardholder base has grown exponentially, the
electronic payments acceptance infrastructure has not kept pace. India
has approximately 206780 ATMs July, 2019.
The Point of Sale (POS) infrastructure in India is also insufficient to
facilitate movement to a less-cash society. The 4.25 million POS terminals
in India (as in July 2019, as per RBI statistics) are mainly in metros and
Tier 1 cities with concentration around large stores selling products and
services availed by the upmarket customer segment. Approximately, only
5% of the 14 million+ merchants in India offer POS based transactions.
Solutions such as micro ATMs and mobile POS offer innovative ways to
increase the acceptance network in India and will need support from all
stakeholders.
E-commerce and m-commerce platforms have also bcen growing expo
nentially and are attracting a significant amount of interest both from
consumers as well as institutional finance and venture capitalists. The
e-commerce market in India is estimated to reach Rs. 137 Bn by 2020.
 UNIT 9: DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 243

Similarly electronic bill presentment and payments involving insurance,

utility bills etc. present huge opportunities.
Financial Inclusion is an initiative backed by the Government ofIndia and
the Reserve Bank of India (RBI).The Pradhan MantriJan Dhan Yojana
(PMJDY) has expanded the BSBDA accounts base at the banks. Financial
benefits through Direct Benefits Transfer (DBT) will require them to seed
the accounts with Aadhar and also, keep them live for transactions.
Electronic payments in India is poised to witness exponential growth in
the coming years.
9.2.1The Payment and Settlement Systems Act, 2007
The PSS Act, 2007 received the assent of the President on 20th December
2007 and itcame into force with effect from 12th August 2008.
Two Regulations have been made by the Reserve Bank of India, namely,
the Board for Regulation and Supervision of Payment and Settlement
Systems Regulations, 2008 and the Payment and Settlement Systems
Regulations, 2008. Both these Regulations came into force along with
the PSS Act, 2007 on 12th August 2008.
Objectives
The PSS Act, 2007 provides for the regulation and supervision ofpayment
systems in India and designates the Reserve Bank of India (Reserve Bank)
as the authority for that purpose and all related matters. The Reserve Bank
is authorized under the Act to constitute a Committee of its Central Board
known as the Board for Regulation and Supervision of Payment and Set
tlement Systems (BPSS), to exercise its powers and perform its functions
and discharge its duties under this statute. The Act also provides the legal
basis for "netting" and "sertlement finality". This is of great importance,
as in India, other than the Real Time Gross Settlement (RTGS) system
all other payment systems function on a net settlement basis.
The Board for Regulation and Supervision of Payment and Settlement
Systems Regulations, 2008 deals with the constitution of the Board for
Regulation and Supervision of Payment and Settlement Systems (BPSS),
a Committee of the Central Board of Directors of the Reserve Bank of
244 MODULE D: PAYMENT SYSTEMS
India. It also deals with the composition of the BPSS, its powers and func
tions, exercising of powers on behalf of BPSS, meetings of the BPSS and
quorum, the constitution of Sub-Committees/Advisory Committees by
BPSS, etc. The BPSS exercises the powers on behalf of the Reserve Bank,
for regulation and supervision of the payment and settlement systems
under the PSS Act, 2007.
The Payment and Settlement Systems Regulations, 2008 covers matters
like form of application for authorization for commencing/ carrying on
a payment system and grant of authorization, payment instructions and
determination of standards of payment systems, furnishing of returns/
documents/other information, urnishing of accounts and balance sheets
by system provider etc.
9.3 New Domestic Payment Vehicles and platforms
NPCI is the new entity that is being kept at the centre of any new initia
tive for retailpayments- which are all electronic payments now. Aadhaar
is the new identifier that is being tried to be put as the key in most of the
new developments/products/processes in payment.
Afew new products, systems, etc., are discussed below.
9.3.1 RuPay and RuPaySecure
RuPay card scheme was developed in line with RBI's vision (2009-2012)
to come up with a domestic card scheme, act as a domestic price setter,
thereby obviating the need of routing domestic transactions (over 90%)
via international card-network owned switches.
RuPay, acard payment scheme launched by the National Payments Corpo
ration of India (NPCI), offers a domestic, open-loop, multilateral system
allowing allIndian banks and financial institutions in India to participate
in electronic payments.
"RuPay" is the coinage of two terms Rupee and Payment. The RuPay
Visual Identity is a modern and dynamic unit. The orange and green
arrows indicate a nation on the move anda service that matches its pace.
The color blue stands for the feeling of tranquility which is the people
 UNIT 9: DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 245

must get while owning a card of the brand 'RuPay'. The bold and unique
typeface grants solidity to the whole unit and symbolizes a stable entity.
RuPay Objectives
RuPay Card Payment System is aimed at:
Providing an alternative to international card schemes for banks in
India
> Making cost structure transparent and simple for banks
> Providing an opportunity for banks in India to actively participate
in governance of the scheme and todesign and develop products
eminently relevant to India
> Providing Universal Access to card payment system
> Making acquiring business attractive for banks
Advantages of RuPay Card
The Indian market ofers huge potential for cards penetration despite
the challenges. RuPay Cards will address the needs of Indian consumers,
merchants, and banks. The benefits of RuPay debit card are the flexibil
ity of the product platform, high levels of acceptance and the strength
of the RuPay brand-all of which willcontribute to an increased product
experience:
1. Lower cost and affordability: Since the transaction processing
willhappen domestically, it would lead to lower cost of clearing
and settlement for each transaction. This will make the transaction
cost affordable and will drive usage of cards in the industry.
2. Customized product offering: RuPay, being a domestic scheme is
committed towards development ofcustomized product and service
offerings for Indian consumers.
3. Protection of information related to Indian consumers:
Transaction and customer data related to RuPay card transactions
will reside in India.
4. Provide electronic product options to untapped/unexplored
consumer segment: There are under-penetrated/untapped
consumers segments in rural areas that do not have access to banking
246 MODULE D: PAYMENT SYSTEMS
and financial services. Right pricing of RuPay products would make
the RuPay cards more economically feasible for banks to offer to
their customers. In addition, relevant product variants would ensure
that banks can target the hitherto untapped consumer segments.
5. Inter-operability between payment channels and products:
RuPay card is uniquely positioned to offer complete inter-operability
between various payments channels and products. NPCIcurrently
offers varied solutions across platforms including ATMs, mobile
technology, cheques etc. and is extremely well placed in nurturing
RuPay cards across these platforms.
Features and Benefits of RuPay Card
> Complimentary Lounge AccessProgram -Domestic &International
> 24x7 Concierge Services
> Earn Cashback time after time
> Comprehensive Insurance Cover
> Exclusive Merchant Offers
Card variants of RuPay
1. RuPay Credit
2. RuPay Contactless
3. RuPay Debit
4. RuPay Prepaid
5. RuPay Global
What is RuPay Debit Product Offering?
RuPay Card is:
> SMS/DMS based Card product: The Dual Message System (DMS)
provides for the transmission of authorization requests and results
among issuers, acquirers and other transaction processors or networks.
The Single Message System (SMS) switches financial messages and
provides transaction and settlement reporting.
 UNIT 9 : DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 247

> Un-embossed: All account information -cardholder name, primary

account number (PAN),validity date, and security character - is
printed rather than embossed.
> X2X Service Code: Service codes are three-digit values which issuers
encode in the magnetic-stripe ofa card. These codes are used to
convey instructions to merchant terminals on how a card should be
processed."X2X" indicates that a transaction must be sent online
for authorization.
Magstrip/CHIP : Both types have been issued as per the RBI
directives and business environment.
> Aadhaar and Non-Aadhaar variants : Aadhar variant of a card
means, instead ofcustomer account, Aadhaar number of thecustomer
is integrated in the card which is being linked with the customer
account.

Supports PIN based/Signature based and Biometric Transactions

> Transaction can be done at ATM/Micro ATM/PoS/Online

Security features [Hologram/HiCoMagstrip/Signature Panel/pre

printed 4 digits of IIN (Issuer Identification Number)/CVD(Card
Verification Data - i.e., CV)]
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248 MODULE D : PAYMENT SYSTEMS

Insurance feature on RuPay cards was introduced as a USP for

encouraging banks and cardholders to adopt RuPay as their preferred
card product. Each RuPay card holder has personal accident insurance
coverage, which comes as an add-on feature of RuPay Debit Card.
The insurance feature is applicable to all the cards, irrespective of
the type of account or any government scheme. In case of a few
contingencies, like death or permanent disability due to personal
accident, the card holder's kin (for 'death case) or cardholder (in
disability' case) would be eligible to get the insured sum - Rs. 1 lac
for Classic Card holders, and Rs. 2 lacs for Premium' Card holders,
provided card has been used in preceding 90 days of the accident,
and a customer is insured for 1 card only. Eligible age-group for
Insurance is 18-70 yrs.
Similar insurance coverage is offered by a number of banks as part
of customer freebies.
RuPay Card Offerings :
> Competitive Pricing and no hidden cost of certification and
membership fees.
Fixed switching fees which is Re. 0.60 from issuing bank and Re.
0.30 from acquiring bank.
Premium Products like RuPay Platinum Debit Card and Non
Premium cards like RuPay Classic Debit Card
> Core proposition is PIN Based (supports Signature also)
> Has usage to link with Aadhaar number, like an account number.
> Supports biometric transactions in the interoperable domain
> Insurance - Personal Accident (Death and Disability).
9.3.2 RuPay PaySecure
e-Commerce has emerged as one of the fastest growing industries in India.
According to a leading investment banking irm, the size of the Indian
e-commerce market is estimated to rise from$11 Bn in 2013 to $137 Bn
in 2020. India ranks third, only after China and USA, in terms of internet
penetration. The potential for online payments is, therefore, huge.
 UNIT 9: DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 249

Recognizing the need of customers to conduct online transactions using

RuPay cards, NPCI launched the RuPay PaySecure solution. PaySecure is
a hosted solution for making safe and secure online transactions with the
RBI mandated 2FA (2 factor authentication), by acting as the e-storage of
the second password to be used in an online Card-not-Present transaction
(like Verified by Visa, or, Master Secure). In case of onlinetransactions, the
solution uses image selection' as a first factor of authentication and PIN
as a second factor of authentication for providing additional security to
each transaction. This innovative authentication methodology simplifies
and improves the existing e-commerce experience of the cardholder as
they do not need to remember complicated passwords.
Transaction ffow of RuPay PaySecure Solution is contained in Annexure
to this Module. Incidentally, the Verified by Visa or Master Secure work
on the same principles.
9.3.3 Immediate Payment Service (IMPS)
This happens to be another new method of payment. Details are covered
in para 4.3 and its sub-paras, which may be referred by the reader.
9.3.4 USSD Based Mobile Banking and the NPCI *99# service :
This is another new method in payments; the details have been covered
in paragraphs 4.2.2 and 4.2.3, which may be referred by the reader.
9.3.5 National Automated Clearing House (NACH)
NACH is a web based solution to facilitate interbank, high volume, small
amounts and repetitive electronic Payments, i.e. it is another ECS, but,
an improved one.
National Automated Clearing House handles the clearing and settlement
including returns among members on the same day. Charges to members
are low. Banks need to become members. Bank customers need register
mandates like standing instructions through their banks for payment to
or collection from other people for whom the account number, branch
code, MICR, etc. are submitted. As all mandates are stored, on the due
250 MODULED: PAYMENT SYSTEMS

dates the NACH system will trigger transactions and effect the electronic
debit/credits and settlement among banks in their accounts with NPCI.
The erstwhile ECS was in 89 local centres - 15 run by RBI, another 74
by other scheduled banks, followed rules and procedures which were dif
ferent at different centres, and settlement took up to 3-4 days. The scope
of payment was within the membership area of that ECS clearing house.
With NACH, all the ECS systems are expected to get subsumed in it, or
dropped over time.
Like ECS, NACH mandate can be for Debit (e.g., for an Electricity com
pany auto-debiting bills from many accounts against mandate), or credit
(eg., the same company distributing dividends.)
NACH's Aadhaar Payment Bridge (APB) System, uses the table of
Aadhaar No., and bank code, bank account number ofa customer; this table
is, called Aadhaar Map per, and NPCI maintains it. Banks daily update it
to NPCIfor changes if any. Govt. pays its DBT payment by sending afile
to its account-maintaining bank todebit Govt., and credit beneficiaries.
The govt. file has the customer Aadhaar number only, and the payment
amount. So the paying bank debis Govt., and sends credit to NPCI and
the payees 'Amount - vs- Aadhaar list. NPCIsystem, using the map per,
sendspayments through NACH to the variousbanks maintaining customer
accounts, providing customer bank, branch, account No., Aadhaar No.,
Amount, etc., so that automated postings can happen.
Schematic Representation
NACH Debit
> Used by an institution for pulling funds from large number ofpayers
across multiple banks
creates multiple debits to different destination bank accounts and
a corresponding single credit to Sponsor bank account, who sends
the debit file
> Examples - Direct Debit of Bill payment, Insurance Premium,
Mutual Fund SIP, Loan EMI, school fees etc., against previously
given mandates.
 UNIT9: DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 251

Destination Bank 1
ANKE

Destination Bank 2

Sponsor Bank Destination Bank 3

NACH Debit
NACH Credit
> Used by an institution for affording credit to a large number of
beneficiaries
Single debit to the sponsor bank's account and multiple credits to
different destination banks' account
Examples - Dividend Payments, Interest payments, Bonus,
Commision, Salaries, Pay-outs, etc.
Destination Bank 1

Destination Bank 2

Sponsor Bank Destination Bank 3

NACH Credit

9.3.6 APBS (Aadhaar Payment Bridge System)

> Used by an institution for disbursement of subsidies/government
benefits to a large number of beneficiaries
Single debit to the sponsor bank's account and multiple credits to
different destination banks' account
Examples - LPG Subsidy, Pensions, MNREGA etc.
252 MODULE D: PAYMENT SYSTEMS
This is mostly for Govt. use to disburse benefits/subsidies, etc.

Destination Bank 1

Destination Bar1k 2

Sponsor Bank Destination Bank 3

Aadhaar Payment Bridge System

9.3.7 Aadhaar Enabled Payment System (AEPS)
1. UIDAI (Unique Identification Authority of India) was established
by an Executive Notification in January, 2009 by the Planning
Commission
> To generate and assign Unique ID Numbers to Residents
> Define usage and applicability of UID for delivery of various
services
2. Enrolment - One time activity, to establish uniqueness. Enrolment
involves capture of biometrics that can be basis of identity for the
person.
3. Online Authentication -Transactional, at delivery of service
Aadhaar relevance
a. Provides a formal identity to access services/Govt. benefits.
b. Streamlines and standardize governmentexpenditure side referencing
of beneficiary to help aunified workflow for Govt. payments to flow
to people through banks.
Aadhaar Enabled Payment System (AEPS) is a bank led model which
allows online financial inclusion transaction at Micro-ATM through the
Business correspondent of any bank using the Aadhaar authentication.
This system is designed to handle both ON-US and OFF-US requests
 UNIT 9 : DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 253

seamlessly in an effective way by enabling authentication gateway for all

Aadhaar linked account holders.
Services Offered
Balance Enquiry
> Cash Withdrawal
> Cash Deposit
> Aadhaar to Aadhaar Fund Transfer
> Best Finger Detection (BFD)
> MiniStatement Aadhaar Authentication
Aadhaar authentication is the process where:
1. Aadhaar number, along with other attributes (biometrics, demo
graphics or OTP) is submitted to UIDA>'SCentral Identities Data
Repository (CIDR) for verification
2. CIDR verifies whether the data submited matches the data available
in CIDR
3. CIDR esponds with only "yes/no"
4. No personal identity information is returned as part of the response
Aadhaar Holders Authentication Devices Authentication User Agency (AUA)

Residents who have

Polnt of initiatlon of Aadhaar
authentication transaction Agency that uses Aadhaar
oblained theit Aadhaar utheoticalion to enable its
C.g, PCs, klosks, handheld
number services
devices etc

Aulhenticution Request

Aadhaar Holder Authentication Devices AUN ASA res/No UIDAI'S

RespoIse
CIDR

Servtce Delvery Necessary Updates

&Confirmotion

Authentication Service Agency (ASA) Unlque ldentification Authority of Sub Auth. User Agency (Sub AUA)
India

Agency that has secured Agencies that access

leascd line conncctivity with Offers onlinc authentication Aadhaar authentication
CIDR through an existing AUA
254 MODULE D:PAYMENT SYSTEMS
Roles in AEPS
Banks station BCs with Devices and build up their front-end, back
end and accounting system for customer. These BCs have and operate
the devices (micro-ATMs) for uploading transaction requests from
the micro-ATM devices with Finger-print scanners.
> On transactions at devices, bank system sends (off-us) transactions
to NPCI, or the fingerprint scans (for on-us transactions) Banks
are in the role of Authentication User Agency (AUA).
NPCIacts as an Authentication Service Agency (ASA) and KYC
Service Agency (KSA), i.e., they receive the data from the banks,
send to UID, send back the response to banks as per transaction
low (to sender or to customer account maintaining bank).
Blometlc and Encryption UIDAI
Standareds are Prescribed by
UIDAI issuer Bank's
CBS

NPCI
Acquirer Bank's Central Switch Issuer Bank's
FI Switch FI Switch
(AEPS)
8

10

Customer Inputs:
1.AADHAAR Nunber Authentication is done by UIDAl and
7.Amount Switching, Clearing and Settiement is
3.Finger Print Data performed by NPCI
 UNIT 9 :DEVELOPMENT'S IN PAYMENT SYSTEMS IN INDIA 255
AePS Inter-Bank Transaction
UIDAI

CBS

6 4
Bank NPCI
AEPS Central
Switch Switch
5 (AEPS)
1 8
Customer Inputs:
1.AADHAAR Number Biometric and Encryption
2.Amount Standards are Prescrlbed by UIDAI
3.Finger Print Data

AePS Intra-Bank Transaction

a. The ASA is connected to UID by leased lines. Similarly, AUA is
connected to ASA. There can be a sub-AUA, i.e., agencies/BC
organizations with their systems collecting the authentication data
from ield devices and exchanging with banks.
b. NPCI, as ASA, offers customer authentication gateway services
to banks and non-bank financial companies, as also clearing and
settlement activity (for OFF-US), and an AEPS DMS (Dispute
Management System) to handle interbank disputes.
9.3.8 UPI (Unified Payment Interface) Based Payments
UPI based payment is aplatform of NPCIwith its message structure, and
process flow. Allempowered (banks and other organisations like Payment
Banks etc.) entities can use it. It works on IMPS platform at UPI. An
organisation or a bank will have their own applications in their system,
where a person can register, get a virtual payment address (VPA) like
mraaa@ikwik, or 999@paytm etc., and get awallet with the provider. This
organisation will make its application available on mobile mostly by an
256 MODULE D : PAYMENT SYSTEMS

App. Fintechs and Banks are all doing it. An individual will download the
App, like say, Phonepay, mobikwik, XBankpay, etc. This part of software
will have customer credentials, take remittance request, store the registered
payees, and take remittance instruction, form payment request message
for NPCI who hosts UPI. The proposed Payee's details are registered with
bank account number, name, IFSC etc., one time and can be shown only
by name thereafter, so customer does not have to remember details. Now,
when a customer goes into his App on his mobile, fills money amount,
select payee and clicks to send remittance. This goes to the app provider
who checks wallet balance, if not ok sends decline message to customer,
and if ok, creates message and sends to UPI through the usual gateways
of bank/NPCI, as for other payments. The activities thereafter is the same
in NPCI that debits sender's account (fintechs open an account with a
bank for this) and credit payee bank, payee bank credits payee account
or wallet and confirms, NPCI sends SMS to remitter and payee. This
is instantaneous, convenient, lightweight. This has got huge response
immediately after launch and growing. The organisations build Apps to
connect to this UPI platform of NPCI, and they also link with shops,
services, etc., so that there are value additions in terms of shopping, utility
payments, etc., and some build loyalty schemes etc. These together, and
the strength of the software and connectivity, contribute to popularity
of the specific platforms. Definitely, all players are not equally savvy, and
market leaders have emerged.
9.3.9 BHIM (Bharat Interface for Money)
The BHIM application is another UPI based one, but hosted by NPCI
itself. Here, instead of puttingmoney in wallet, the app allows to link bank
account and/or Debit/Credit cards of the person downloading the App.
So, one can pay from account or card straightaway. It works on GPRS
as also USSD. One can download BHIM App, and use. This app is very
popular. Actually now, other Apps, like the erstwhile most popular Paytm,
have linked to it, offering BHIM as an option, and so, both possibilities.

9.4 Cheque Truncation System (CTS)

Truncation is the process of stopping the Aow of the physical cheque
 UNIT 9: DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 257

issued by a drawer at some point with the drawee (and so, in almost all
cases) presenting bank, to the drawee bank. In place of physical cheque an
electronic image of the cheque is transmitted to the drawee bank by the
clearing house, along with relevant information like data on the MICR
band, date of presentation, presenting bank, etc.
1. CTS' is the Process of stopping the physical movement of cheques
from Banks to clearing house.
2. The Electronic images of the cheques are captured for processing.
3. Three types of images, bearing the following standards are captured
> Front - Gray scale (Minimum DPI:100, Format: JFIF,
Compression : JPEG)
> Front - Black and White (Minimum DPI:200, Format: TIFF
Compression: CCIT G4)
Back - Black and White (Minimum DPI:200, Format :TIFE,
Compression: CCIT G4)
4. The MICR data in the Cheques will be captured as present on
MICR bnd.
5. Amount is captured manually using the capture solution.
6. Captured images along with the data are exchanged acrossthe banks,
at CTS facility in the clearing house.
7. The Images and Data are transmitted over a secured network.
8. The Settlement of the CTS happens based on MICR data captured
from the cheques.
9. Physical cheques are retained at the presenting bank itself.
258 MODULE D: PAYMENT SYSTEMS

NPCet
Data and Data and
Images Images

Data Data DB service branch

PB(IDBI) service
oranch
Returr cycle

PB(IDBI) DB branch
branch

Settlement Agent
Presentment Cycte
Return Cycle

Participation Model in CTS

1. Direct: Bank having its own Capture and Clearing House interface
(CHI) infrastructure and participates on its own.
Indirect: Bank having its own Capture infrastructure however it
uses the CHIinfrastructure of another bank.
2. Sub-Member: Sub-member is the one who is an extended branch
of another bank. They will not have their own MICR code and
identity in the clearing process. They will route all their transactions
through the sponsor bank and settlement will happen in the books
of sponsor bank.
3. Service Bureau: Capture infrastructure is established by the vendor
and they will have an arrangement with a third party bank for using
their CHI infrastructure.
GRID CTS

Grid-based Cheque Truncation System (CTS) has been launched in Chen

nai, Mumbai and Delhicovering several States/Union territories with the
objective of covering the entire area under a common CTS. A GRID is
like a region office in the countrywide CTS system.
Allthe States/Union Territories covered by the above grid follow different
schedule of holidays declared under Negotiable Instruments Act, 1881,
 UNIT9 : DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 259

by the respective Governments. As local clearing houses are gradually

being subsumed into the CTS, it has become necessary to devise a policy
of uniform holidays so as to ensure the smooth functioning of grid-based
CTS operations.
GRID Process flow
1. There will be only one CHIper bank in a Regional Clearing house
i.e. for the GRID.
2. The bank can connect to clearing house via one of the three GRID
clearing centers (e.g. the Southern states and Kolkata will be connected
via its Chennai center).
3. At the Bank, they have to set up scanners and Capture system at
their branches in different cities which is part of the GRID.
4. The files which are processed at the respective cities will be
consolidated at the bank level and the same will be sent to their
CHI, in Chennai in the above case.
5. There will be a single settlement for each bank in the GRID i.e. for
southern GRID the settlement will be generated at Chennai.
6. The 'Paper to follow' process, is one of the critical activities where
the Government cheques and IQA (Image Quality Assurance)-failed
cheques will be handed over physically to drawee bank.
[Incidentally, the CTS in India followmany features of theUS Cheque
21system of Cheque Truncation and Image Based Clearing. The
IQA and few other features belong to that system and is followed
in India. If image is not satisfactory, the drawee bank may need to
see the cheque physically even if it was debited, for recourse.
For Govt. cheques, the Govt. gets back the paid cheques and so,
these are to be handed over].
7. The banks that have opted for the centralized processing need to
have a process for confirming the 'Paper to follow instruments
received by their branches in the respective GRID city.
8. Banks should document complete process flow which comprises of
clearing process with respect to GRID learing. Such a document
260 MODULE D:PAYMENT SYSTEMS

should cove the outward clearing, inward clearing, returns processing,

P2F confirmation and the related reconciliation.
Br. DELHI PATNA
A-1

Sut 1. Direct Bank Br-1

M
Bank A
Bank A Dr-2
CHI
Service branch
(RANCHI)
Br. Br-3
B-1 NPC
DELHI CH
Br
B Bank B CHI
Br-1
Br.
B-3
Dank C
Bank C Service branch
2. Indirect Bank
Br
C-1
Br-2

Comparison between CTS and MICR clearing

MICR CTS
Image/ data capture at presenting Bank Image and MICR data capture by pre
is optional senting Bank
Physical cheque transport to CPC Images and MICR data transmited to
CPC
Endorsement at the time of processing Endorsement done at presenting Bank
done at Clearing House during MICR during capture process
Run
CPC captures MICR Data and does Pre Sorted images and data received
physical sorting of cheques from presenting Bank by CPC
Members collect their inward from theClearing House delivers softcopy inward
Clearing House files containing images and data
Since cheques are presented physically, IQA required and performed at the
Image Quality Assurance (IQA) not capture system and Clearing House
required Interface(CHI)
Payment processing on the basis of Payment processing on the basis of
physical instruments and MICR data MICR data and images
 UNIT 9 : DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 261

MICR CTS
Dishonored Items returned along with Only MICR Data lows back for dis
advice honored items with return code
Drawee Banks preserve paid cheques Presenting Banks preserve paid cheques
9.5 National Financial Switch (NFS)
The Institute of Development and Research in Banking Technology
(IDRBT), Hyderabad had been providing ATM switching service to banks
in India through National Financial Switch. IDRBT decided to have fo
cus on research and development activities. It was looking for a suitable
arrangement for shifting NFS business to some national level organization
for payment system. National Payments Corporation of India (NPCI),
after commencing business, considered this as an opportunity and started
discussions with IDRBT on the feasibility of taking over.
The Board for Regulation and Supervision of Payment and Settlement
systems (BPSS) at its meeting held on September 24, 2009 approved,
in-principle, to issue authorisation to NPCI for operating various retail
payment systems in the country. Reserve Bank of India also issued authori
sation to NPCI to take over the operations of NFSfrom the IDRBT on 'as
is where is basis' on October 15, 2009. NPCI took over NFS operations
from December 14, 2009.
What is an ATM Network?
A bank's ATMs are all connected to its ATM switch. An ATM network
is the bigger network formed by connecting the ATM switches of various
banks. There can be a 2-bank network, or a multi-bank network of many
banks.
If a particular bank is not part of any ATM network and if it does not
have any bilateral agreement with any other bank, then its customers will
be able to operate at its own ATM's only.
An ATM network brings 'Inter-operability for banks' customers by al
lowing them to be able to operate at ATMs of other Banks as well, which
are part of the network.
262 MODULE D: PAYMENT SYSTEMS

On-Us: It is a transaction in which a customer is using same bank ATM

and ATM Card, e.g. SBI cardholder using SBI ATM.
Off-Us: It is a transaction in which a customer is making use of different
banks' Card and ATM; e.g. SBI cardholder making use of ICICI Bank
ATM.

This Off-us can be transacted if these two banks' (1CICI and SBI) switches
have a direct connection (bilateral connection) or both are in a network
with more banks (say 3, 5, 10) with a common central switch.
On a larger scale now, all banks' ATM switches in India, are now con
nected to NFS, forming a country-wide single network, and all bilateral
connections have been discontinued:
a. The ASA is connected to UID by leased lines. Similarly, AUA is
connected to ASA. There can be a sub-AUA, i.e., agencies/BC
organizations with their systems collecting the authentication data
from field devices and exchanging with banks.
b. NPCI, as ASA, offers customer authentication gateway services
to banks and non-bank financial companies, as also clearing and
settlement activity (for OFF-US), and an AEPS DMS (Dispute
Management System) to handle interbank disputes.
Any ATM network, including NFS handles off-us transactions of Banks
only. On-Us transactions are handled by issuing bank only between its
ATM and own ATM switch.
ATM Transaction definitions:
> Approved: ATM has dispensed cash either fully or partial amount
> Declined: ATM has not dispensed cash. Transaction has been
declined switch, and CBS.
Business Decline: Declines based on the customer behaviour or
business logic e.g. Invalid Account, Invalid PIN, Exceeds Funds
Available, Exceeds Withdrawal Limit etc.
> Technical Decline: Declines due to technical issues i.e. Hardware/
Application/Network/Power failures.
 UNIT9: DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 263

NFS 24X7 Helpdesk team monitors and raises alerts to internal teams and
NFS members to ensure the service are resumed at the earliest.

9.6 Real Time Gross Settlement System (RTGS)

The Ad Hoc Study Group on RTGS was established by the Committee
on Payment and Settlement Systems (CPSS), Bank for international Set
tlements (BIS), Basle, at its meeting in December 1994 and was asked to
study various important issues relating to RTGS with a view to achieving
a clearer understanding of the design and operation of RTGS systems.
The Group of Ten (G-10) countries were constituted and submitted
their observations to CPSS. The Study Group examined a range of issues
including (a) liquidity issues, (b) queuing arrangements, (o) message flow
and information structures, (d) issues arising from the inter-relationship
berween RTGS systems and other settlement systems, (e) monetary policy
implications, and (f the distinctions between gross settlement systems
and net settlement systems.
The development of RTGS system is a response to the growing aware
ness of the need for sound risk management in large-value funds transfer
systems. RTGS systems can offer a powerful mechanism for limiting set
tlement and systemic risks in the inter-bank settlement process, because
they can effect final settlement of individual funds transfer transactions
on a continuous basis during the processing day. In addition, RTGS can
contribute to the reduction of settlement risk in securities and foreign
exchange transactions by providing a basis for delivery-versus-payment
(DVP)or payment-versus-payment (PVP) mechanisms. An understanding
of RTGS is thus essential when considering risk management in payment
and settlement systems. With the commencement of the live operations of
RTGS on March 26, 2004 in India, it has become a red-letter day in the
history of the development of Systemically Important Payment Systems
(SIPS) in the country. The RTGS system went live with the participation
of four banks- State Bank of India, HDFC Bank, Saraswat Co-opera
tive Bank and Standard Chartered Bank. Presently, there are more than
100,000 RTGS enabled bank branches in India.
264 MODULE D: PAYMENT SYSTEMS

Real-time Gross Settlement System (RTGS), is a real-time settlement of

funds transfer individually, on an order by order basis. The transfer is
done without netting at the point of receiving the funds transfer request.
Since the funds settlement is done in RBI's books, RTGS transactions are
considered as final and irrevocable.
Though both NEFT and RTGS are funds transfer settlement systems,
RTGS offers a real-time settlement while NEFT functions on a deferred
settlement mechanism. The speed of RTGS transactions can be gauged
from the fact that bank branches are expected to receive the funds in
real-time and the beneficiary bank is required to credit the beneficiary's
account instantaneously.
RTGS is primarily designed for large value transactions and RBI has man
dated a minimum amount of INR 0.2 Mn to be remitted using RTGS.
For receiving funds through RTGS, a bank-branch has to be RTGS en
abled. Currently more than 100,000 bank branches at more than 30,000
cities/town/talukas in India are RTGS enabled.
RTGS Value (INR Bn)
1600000
1356882
1400000

1200000

1000000
754032
800000

600000 484872
400000

200000

2011 2015 2019

RTGS Value (INR Bn) (Source: RBI)

 UNIT 9: DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 265

RTGS Volume (Mn)

160
136.6
140

120

100 93

80

60 4
40

20

2011 2015 2019

RTGS Volume (Mn) (Source: RBI)

The RTGS transactions has shown a tremendous growth over the years
since 2011. More than 150% increase is seen both, in value and volume
of RTGS transactions.
RTGS has displayed aggressive growth and its positioning as a real-time
tool for large value transactions has resulted in corresponding decline in
paper-based payments by corporates and firms.
Subsequently, RBI has launched the Next Generation Real Time Gross
Settlement (NG-RTGS) system, which not only places India comfortably
in meeting increasing payment volumes, but also provides a platform
that will enable advanced liquidity management services and future date
functionality. In carly 2011, it was felt that there was a need to adopt a
new Application with enhanced features. Accordingly, the ISO 20022
messaging standard was adopted for the (NG-RTGS) Next Generation
RTGS system.
The NG-RTGS System has several advanced features, such as liquidity
management facility, extensible mark up language (XML) based messaging
system conforming to ISO 20022 and real time information and trans
action monitoring and control systems.
266 MODULE D: PAYMENT SYSTEMS

9.7 National Electronic Funds Transfer (NEFT)

The objective of the NEFT System is to establish an electronic funds trans
fer system to relieve the stress on the existing paper based funds transfer
and clearing system. It was launched in November 2005.
Reserve Bank of India stated that the objective of NEFT system is to
establish an Electronic Funds Transfer system to facilitate an efficient,
secure, economical, reliable and expeditious system of funds transfer be
tween banks in the banking sector using Structured Financial Messaging
Solution (SFMS) backbone Unlike Real-time gross settlement (RTGS),
fund transfers through the NEFT system do not occur in real-time basis.
NEFT settles fund transfers in half-hourly batches with 23 settlements
occurring between 8:00 AM and 7:30 PM on week days and the lst, 3rd
and 5th Saturday of the calendar month. NEFT, launched in 2005 with
8 participating banks, has currently more than 160 banks live on the
system. As per the RBI, close to 130,000 bank branches are enabled for
NEFT transactions.
NEFTis a nation-wide payment system that facilitates one-to-one transfer
between two banking accounts (like RTGS, though settlement routines
are different). It allows individuals, firms and corporates to electronically
transfer money from any bank branch to another individual, firm or
corporate having a banking account with any other NEFT-enabled bank
branch in India.
NEFT has grown tremendously from its inception in 2005. The growing
popularity of NEFT is reflected in the value and volumes of business
during the last few years.
 UNIT 9 : DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 267

NEFT Value (INR Bn)

250000 227936

200000

150000

100000
59804
50000
9400
0

2011 2015 2019

NEFT Value (INR Bn) (Source: RBI)

Volume (Mn)
2500
2319

2000

1500

928
1000

500
132

2011 2015 2019

NEFT Volume (Mn) (Source: RBI)

In 2019, the value ofNEFT transactions has reached nearly INR 250,000
Bn and the total number of transactions is 2319 Mn. The volumes and
value of NEFT transactions have grown at a CAGR of approximately
50% since 2011 to 2019.
NEFT's increasing popularity is due to the various benefits that it offers
over other modes of The growth of NEFT up to now can be similarly
268 MODULE D: PAYMENT SYSTEMS

gauged by the same representative monthly igures; Feb 2017 had 148.2
million NEFTs valued at Rs 10877.9 billion, i.e., the monthly remittance
has crossed Rs 1 trillion mark comfortably. Funds transfer.
No
physical
cheque or
DD
SMS No need
based
to visit
confirmation
branch

NEFT
Benefits
No
Near loss/theft
real-time
of physical
transfer instrument

Cost
effective

Benefits of NEFT

NEFT has emerged as apreferred method for conducting account-to-ac

count transfer and local remittances. NEFT is now used for a variety of
purposes which include person to person remittance, salary, pension,
payment of credit card dues, payment of bank EMIs and utility bill pay
ment among others.
NEFT payments originate a message from CBS in the sending bank
branch, and is delivered from a central Gateway in the bank to (NPCI
operating for) RBI. For NEFT, RBI has provided client software to their
NEFT system to banks, and secured connections have been laid between
RBIand Bank's set-up. The bank collects data in batches at the Gateway
and it gets picked up by RBI system. Clearing among bank-wise batch
totals happens in RBI, on a net settlement basis, upon which, all credit
payments in that batch from all banks are good for payment; these then,
get bank wise sorted and pushed to banks for direct electronic credit to
target bank accounts. The settlement for banks are in RBI books.
 UNIT9: DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 269

9.8 National Electronic Toll Collection (NETC)

National Payments Corporation of India (NPCI) has developed the
National Electronic Toll Collection (NETC) program to meet the electronic
tolling requirements of the Indian market. It offers an interoperable
nationwide toll payment solution including clearing house services for
settlement and dispute management. Interoperability, as it applies to
National Electronic Toll Collection (NETC) system, encompasses a
common set of processes,business rules and technical specifications which
enable a customer to use their FASTag as payment mode on any of the
toll plazas irrespective of who has acquired the toll plaza.
FASTag is a device that employs Radio Frequency Identification (RFID)
technology for making toll payments directly while the vehicle is in mo
tion. FASTag (RFID Tag) is affixed on the windscreen of the vehicle and
enables a customer to make the toll payments directly from the account
which is linked to FASTag.
FASTag is also vehicle specific and once it is affixed to a vehicle, it cannot
be transferred to another vehicle. FASTag can be purchased from any of
the NETC Member Banks. If a FASTag is linked to the prepaid account,
then it needs to be recharged/ topped-up as per the usage of the custom
er. If adequate balance is not maintained by the customer, the FASTag
gets blacklisted at the toll plaza. In such a scenario if the customer travels
through a toll plaza without recharging then he won't be able to avail the
NETC services and would be required to pay the toll fare through cash.
FASTag offers the convenience of cashless payment along with benefits
like - savings on fuel and time as the customer does not has to stop at the
toll plaza.
Objectives of National Electronic Toll Collection system:
To create a composite interoperable ecosystem across the country
To increase transparency and cfficiency in processing transactions.
> Electronification of retail payments.
270 MODULE D: PAYMENT SYSTEMS

> To Reduce air polution by reducing the congestion around toll

plaza.
To Reduce fuel consumption.
> To Reduce cash handling.
> To Enhance audit control by centralizing user account.
9.9 Bharat QR
AQR code consists of black squares arranged in a square grid on a white
background, which can be read by an imaging device such as a camera.
It contains information about the item to which it is attached. BQR is
Person to Merchant (P2M) Mobile payment solution. This solution is
mutually derived among NPCI, Visa and Mastercard payment networks.
Payment Using BQR enabled Mobile banking Application/wallet:
Once the BQR codes are deployed, on Merchant locations, user can pay
the utility bills using BQR enabled mobile banking apps without sharing
any user credentials to the merchant. It is a quick method of payment.
Bharat QR transactions are different from POS transactions. In POS
transaction, POS terminal is required whereas in Bharat QR transaction,
QR Code is required. Using mobile banking app or wallet user will scan
the QR Code placed in merchant outlet and make the payment using the
RuPay Card linked to the BQR. Once the payment is successful, both
cardholder and merchant receive notification in mobile application for
successful transaction.
In order to enable Bharat QR on the smart phone, the cardholder should
follow the below mentioned steps: (a) Download the Bank's Mobile
Application, wallet which supports Bharat QR from google play store/
app store (b) Do one time registration for linking the debit/credit/pre
paid card with Bank sapplication (c) Go to the merchant store where
payments through Bharat QR code is accepted (d) Click on Bharat QR
icon from app to make payment through Bharat QR code.
 UNIT 9: DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 271

9.10 Bharat Bill Payment System (BBPS)

Objectives
The objective of the BBPS is to implement an integrated bill payment
system in the country that offers interoperable and accessible bill payment
services to customers through anetwork of agents, enabling multiple pay
ment modes, and providing instant confirmation of receipt of payment.
The Bharat Bill Payments system is a Reserve Bank ofIndia (RBI) concep
tualised system driven by National Payments Corporation oflndia (NPCI).
It is a one-stop payment platform for all bills providing an interoperable
and accessible "Anytime Anywhere" bill payment service to all customers
across India with certainty, reliability and safety of transactions.
Different Payment Channels
Bharat BillPay transaction can be initiated through multiple payment
channels like Internet, Internet Banking, Mobile, Mobile-Banking, PoS
(Point of Sale terminal), Mobile Wallets, MPoS (Mobile Point of Sale ter
minal), Kiosk, ATM, Bank Branch, Agents and Business Correspondents.
Key Participants
Bharat BillPayment Central Unit (BBPCU)
National Payments Corporation of India (NPCI) has been authorized by
RBI as the Bharat Bill Payment Central Unit (BBPCU) and is respon
sible for setting business standards, rules and procedures for technical
and business requirements for all participants. The BBPCU undertakes
clearing and settlement activities related to transactions routed through
Bharat Bill Pay.
Bharat Bill Payment Operating Unit (BBPOU)
Bharat BillPayment Operating Unit (BBPOU) is the entity that is autho
rized by Reserve Bank of India. It can be a Bank or a Non-Bank. BBPOU
may choose to integrate either with the customers, (COU: Customer OU)
or with the billers (Biller OU) or may wish to participate as both which
means such BBPOUwill be integrated with customers as well as billers.
272 MODULE D: PAYMENT SYSTEMS
Agent Institutions
Eligible Entities who wish to offer or those who are currently in bill pay
ment, collection and aggregation business would operate under a COU
(Customer BBPOU) on receiving authorisation from RBI. Customer BB
POUwill on-board Agent institutions which may further on-board agents
and/or set up customer service points in various regions and locations.
Agents
Agents are the customer touch points and service points in the Bharat Bill
Pay ecosystem available in the form of agent outlets, Business Correspon
dent outlets, Bank branches, Collection centres, Retail outlets.
Biller/Utility Company
Service providers, who shall receive payments from customers for services
rendered. By participating in the Bharat Bill Pay scheme, the biller will
be able to receive payments from third party channels for the services
provided to the customer. A biller may tie up with up to two BBPOUs
to access the entire universe of its consumers and all payment channels.
Category of Billers in Bharat Bill Pay: The category of billers eligible
to participate in Bharat Bill Pay will be specified from time to time by
Reserve Bank ofIndia (RBI). The current categories specified are as follows:
1. Electricity
2. Telecom (Mobile Post-paid, Landline Post-paid and Broadband)
3. DTH
4. Gas
5. Water

9.11 Forex Settlements

All Foreign Exchange Transactions are cleared and settled by the Clearing
Corporation of India Ltd. (CCIL). CCIL commenced settlement of forex
transactions from November 2002 covering inter-bank USD/INR spot
and forward rates. From February 2004, Cash (same day) and Tom (next
day) trades were also included for guaranteed settlement.
 UNIT 9 :DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 273

CCIL follows the netting by novation method. This means that the bilat
eral agreement between the two participants/members is substituted with
bilateral contracts between each participant and CCIL. Deal confirmation
files are transmitted to CCIL and the multilateral netting is applied. The
INR leg is settled through the members' current accounts with RBI while
the USD leg of the transaction is settled through CCILs account with the
Settlement Bank at New York.
The participants benefit in various ways by choosing to settle their trades
through CCIL.

Timely
sertlement
assurance

Reduction
Lower
operational in counterpart
CoSt
Operational
CCIL efficiency
Benefits

Easier
Improved account

liquidity reconciliation

Benefits of CCIL Forex Settlement

The large value and volume of transactions settled by CCIL is testament
to the value of the benefits provided.
274 MODULE D: PAYMENT SYSTEMS

Gross Value (INR Bn)

500000
474790
450000
400000
350000 325437
300000
250000
191601
200000
150000
100000
50000
0

2011 2015 2019

CCIL Forex Settlement - Value (INR Bn) (Source: CCIL)

No. of deals settled (Mn)
5 4.75
4.5
4
3.46
3.5

3
2.5 2.3
2
1.5
1
0.5
0

2011 2015 2019

CCIL Forex Settlement - No. of deals settled (Source: CCIL)

The gross value of deals settled and the number of deals settled in forex by
CCIL have increased by more than 100% from 2011 to 2019. The value
of deals settled by CCIL has increased from INR 191601 Bn in 2011 to
INR 474790 Bn in 2019. As for the number of deals settled by CCIL,
this has iincreased from 2.3 Mn in 2011 to 4.75 Mn in 2019.
 UNIT 9 : DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 275

9.12 Securities Settlements

Allsecondary market security transactions in Government Securities, are
settled through the Clearing Corporation of India Ltd. (CCIL).
Conducted under the DVP II(Delivery vs Payment III -amethod where
a bond purchased/sold today can also be settled in the clearing batch)
mode, multilateral netting is achieved for each settlement date. A single
funds settlement obligation for each member for a particular settlement
date is determined by netting the members' secondary market Government
securities transactions for that settlement date. The settlement is achieved
in the RTGS Settlement/Current Account maintained by the member in
RBI and for those members who are either not allowed to maintain or
operate a Current Account with RBI for settlement of their secondary
market transaction in Government securities, at the Designated Settle
ment Bank. Settlement in 2018-19 was INR 9341749 Crores outright
and 13566142 Cr. in Repos.
The key benefits for participants in the Securities Settlement process at
CCIL include:

CCIL as Central Guaranteed Lower Operational

Counter Party Settlement Cost

Multilateral Alleviation of Mitigation of

netting credit risk systemic risk

Short sale of
securities and Efficient funds
rollover of repo management
trades

Benefits of CCIL Securities Settlement

276 MODULE D:PAYMENT SYSTEMS

9.13 Innovative Banking and Payment Systems

Innovative digital payments solutions are the latest offerings in the
Indian banking and payments landscape. The number of digital payment
transactions in India touched 244.81 crore in August 2018, more than
three-fold rise from October 2016, underlining the massive adoption of
digital payment modes over the last two years.
New payment modes - Bharat Interface for Money-Unified Payments
Interface (BHIM-UPI), Aadhaar enabled Payment System (AePS) and
National Electronic Toll Collection (NETC) - have transformed digital
payment ecosystem by increasing Person to Person (P2P) as well as Person
to Merchant (P2M) payments.
Hence mobile banking applications have become a future distribution
channel for banks due to penetration of smartphones and high usage of
apps. Large private and public sector banks in India, despite having a
wide network of branches and ATMs, are foraying into digital solutions
for banking and creating a multi-channel customer interaction format
which is evolving as per latest social communication trends.
Banks are designing product offerings over social media platforms such
as Twitter and Facebook.
Indian banks are also launching innovative payment and banking solutions
across a wide range of platforms ranging from mobile apps to internet
banking to ATMs etc. They are packed with multiple banking services,
customer services, payment options. Payment services are also being
designed around social networking sites which facilitate splitting the bill
over the networking ite. Aligning products and technology closely to
consumer behaviour is one of the key trends emerging in digital payments.
Opening an account with self-invite, via Facebook or Email and Banking
over Twitter, has been introduced in India. Bank accounts offered over
Twitter provide banking services such as check book requisition, checking
last few transactions, net banking, etc. along with loyalty based reward
points.
#Hashtag offered by banks in India indicates a shift from digital banking
on social media platforms to a core capability.
 UNIT 9: DEVELOPMENTS IN PAYMENT SYSTEMS IN INDIA 277

Digital as a core
Digital
Vision value

Digital as a business
Digital as a project

Low Banking Digital Maturity High Banking

transformation transformation
roadmap roadmap

Another similar innovation launched by an Indian Bank lets customers

transact, check balances, make payments using Twitter.
Personalization options, offers and deals, creating deposits for goal based
banking, sending money to mobile numbers, email-ids, Google+ or Face
book contacts and customer service over live chat has virtually brought
the bank in your wallet.
Peer to peer lending is another offering that though in its infancy, can
disrupt the payments market. Algorithm-backed lending that rely on big
data and include social media interactions and profle are slowly gaining
ground in India.
India is on the threshold of a digital banking and payments revolution
that will be led by, both, banking and non-banking entities. Innovative
offerings that provide solutions to real-life problems will be akey to success
in the digital financial market in India.

9.14 Payments, digital banking, Information Security

Payments, by itself, is an important component of today's connected and
computerised society, featuring automated, cash-less movement of funds
on specific payment orders, or by agreed mandates and fixed routines.
Efficient and errorless payments with a very low time cycle and early full
finality of payments are desirable.
278 MODULE D: PAYMENT SYSTEMS

Digital Banking attempts to use technology, alternate channels, and bank

er's ideas to bind services to greater convenience and value for customers.
This may lead to new services, new service levels and performance, as also
new activity, routines both for the bankers and the customers.
Customer convenience, is often linked to simplicity of operation and less
rigour. Digital is on the other hand, associated with may Information
Security (IS) threats and controls. These two, at times, conflict.
Bankers should endeavour to provide secure services only and provide for
adequate safery, checks, and controls, and provide guidance to customers
for the same.
RBI issued comprehensive guidelines on Cyber Security Framework
in Banks. Through Circular No. RBI/2012-13/424 DPSS (CO) PD
No. 1462/02. 14.003/2012-13 dated 02.06.2016.
This circulars provides a good framework, based on which, the bank need
prepare its IS plan, articulate the issues and actions, in the area ofpayments.
Bankers should endeavour to provide secure services only, with adequate
safety, checks, and controls, and also, provide guidance to customers for
the same. The basic aim has to send out all payment data encrypted to
retain integrity of data, allow access to system by human or system en
tities under a monitored restricted access permission on need basis only,
provide sofrware for payment processing with roll-back, audit-trail and
log review controls. Forcing periodic credential changes, PKI for data
exchanges, digital signatures for all employees processing data files in the
payment cycle, etc., can be a few hygiene factors. For high value payments,
exchanges should be only in secure networks.
9.15 Let us sum up
Payments products have been traditionally viewed as utility products
that were transactional in nature. Payments systems and products
were developed and managed by Central Banks, Commercial Banks
and a few global card schemes and networks.
>However, access to technology, evolving consumer expectations,
increasing urbanization, financial inclusion and domestic