Last Mile Payment System

Over the centuries, money has morphed in form while retaining its essential function as a store
of value. From goods on barter, to coins, to promissory notes, to currency notes and plastic,
money is first & foremost a payment mechanism.

The digital revolution has affected many well-established businesses, for better & for worse.
Analog has been ceding ground to digital in almost every sector one can imagine. From travel to
photography, from newspapers to running shoes upstarts are challenging the legacy players.
Why should payments be any different?

Payments are ubiquitous. Everybody, everywhere has to pay bills. Everybody has had to borrow
or repay a small sum from a friend. Everybody has to buy something from a merchant. A farmer
or a villager in our country purchases grocery, shoes, visits picture hall with his family, travels
in buses in addition to purchasing fertilizers/manures , making payments to suppliers of
machinery, paying installments of his loan, receiving subsidy, paying school fee for his children
etc.

Besided large value transactions, small payments play a big role in the life of rural masses.
Cash is the preferred mode of payment for them as they do not have access to formal payment
system. T he penetration of modern electronic payment products and services is
concentrated to a large extent in metro/urban and to some extent semi-urban centers of the
country and caters to the need of those citizens who already have access to the formal
banking channels.

A safe, efficient, accessible, inclusive, interoperable and authorised payment and

settlement systems with ease of use and access can convert the society into a less cash/cash
less society. Regulation can be channelised to meet technology requirements and international
standards/ best practices.
Payment systems prevalent in our country are either paper based (e.g. Clearing Houses, MICR
codes, Speed Clearing, Cheque Truncation etc.) or technology based like RTGS, NEFT, ECS,
NECS etc. These systems are suitable to the requirements of the exclusive masses but are not
ready for facing the challenge of transforming cash based society living in unbanked areas to a
cash less society with the inclusive growth object.

The challenges and opportunities for last mile payment system are obvious from the
following data :

Rural Population 8330 mio as per Cencus 2011 (Provisional

Figures)
No of Bank Branches(Rural) 34208*
No. of ATMs(Rural) 7881*
Post Offices(Rural) 1.20 lacs
Micro Branches Negligible
Banking Facility per person 0.00002
*Source http://www.rbi.org.in

The availability of the banking facility is 0.00002 per person in the rural areas. One Banks
Branch or ATM or Post Office for 50,000 people living in rural area is the availability ratio of
banking facility today. The gap is wide specially with the targets fixed by the Government of
India to cover 1000 people in Rural Area by providing a Banks Branch or facility of banking
through a Business Correspondent or Ultra Small Branch or installation of ATM ( Mini ATM,
White Label ATM, White Label Mini ATM, point of sale terminals or Mobile Banking may be
other sources of providing Banking facility ). The Banking network needs to be expended by 50
times in the rural areas.This is an opportunity Banks should not miss.

Potential for electronic transactions is also be underlined by the following indicators:

1.Electronic Payments of Govt Subsidy 4.13 billion Electronic Transactions per year.
(Estimated)
2 Retailers in India 10 million (Approx.)
3.e-Commerce and m-Commerce More than Rs.465 billion
4.Non Cash Transactions (Assuming one More than 14.4 billion
transaction per person per month)
5.Credit Cards (as on Aug 2012) 18237281
6.Debit Cards (as on Aug 2012) 298572426
No of transactions Amount in Million Rupees
7.ATM Transactions(as on Aug 2012) 446097190 154,738.31
8.POS Transactions(as on Aug 2012) 70738395 1,326,945.22

In the vision document Payment Systems in India: Vision 2012-15 RBI has identified the
Business Correspondent model of branch-less banking, which holds the key to smooth
delivery of Banking facilities to the financially excluded population. The dimension of payment
for subsidy through EBT/DTS model (Electronic Benefit Transfer /D i r e c t T r a n s f e r o f
S u b s i d i e s ) c a n b e u n d e r s t o o d by the fact that it in the range of Rs.2.93 trillion per year
through 4.13 billion electronic transactions..

Simultaneously achieving financial inclusion in order to cover 2.25 lakh Gram Panchayats
containing 6 lakh villages, and to serve the urban poor, a Task Force set by RBI envisiages the
creation of an interoperable network of 10 lakh Business Correspondent agents using the
combined infrastructure of India Post and Banks.

The payment system architecture for the length and breadth of a country like ours with an object
to serve the last mile can be built on the unified platform of integrating various systems through
technology innovations and setting up the desired infrastructure where all the players work
together. Reserve Bank of India can assume the role of mentor/ motivator/ mediator amongst
the players of the related field.

The electronic payment and settlement system prevailing in our country can be summarised in
the following table :

1.National Electronic Offers eleven hourly near real-time settlements on week days and five
Fund Transfer (NEFT) settlements on Saturdays with providing Positive Confirmation to the
originator that beneficiaries account has been credited.
2.Electronic Clearing The ECS consists of Local, Regional and National ECS. Both RECS
Service (ECS) and NECS facilitate STP-based processing of bulk payments in a
centralised manner in all core-banking enabled bank branches within
their jurisdiction. Average monthly volumes are 8.05 million
transactions (ECS Credit -NECS, Regional and local) and 13.40
million transactions (ECS Debit Regional and local), while monthly
values are averaging about Rs.126.43 billion and Rs.60.60 billion for
ECS Credit and ECS Debit respectively.

3.Real Time Gross The RTGS system was introduced in March 2004 and now extends to
Settlement 84638 branches as at the end of May 2012. RTGS settles gross inter-
bank and customer (Rs.2 lakh and above) transactions. On an average
RTGS settles 1.8 lakh transactions with a value of Rs. 4 trillion on a
daily basis. Considering the importance of RTGS for settling large value
 payment systems, action has been initiated for putting in place a Next-
Gen RTGS.

4.Credit Debit Cards One of the fastest growing segments is the card segment with 18
million outstanding credit cards and 298 million debit cards.
5.Prepaid Instruments The pre-paid instrument issuers universe is populated by both banks
and non- banks. After the enactment of PSS Act, most of the non-
bank entities who have received authorisation to operate a payment
system are in this business segment.
6.Mobile Banking The operating guidelines for mobile banking issued in October 2008
which were later relaxed in December, 2009, facilitating mobile
banking transactions up to Rs. 50,000, both for e-commerce and
money transfer purposes. Banks have also been permitted to provide
money transfer facility up to Rs. 5,000 from a bank account to
beneficiaries not having bank accounts with cash payout facility at an
ATM or Banking Correspondent. 50 banks have been permitted to offer
Mobile Banking transactions, of which 38 have started operations. The
NEFT platform is used for settlement of all interbank mobile banking
transactions.
7.Inter-bank mobile The IMPS is a service operated by NPCI which provides an instant,
payment system 24X7, interbank electronic fund transfer service through mobile phones.
This system facilitates customers registered with their banks for this
service to use mobile instruments as a channel for interbank fund
transfers in a secured manner with immediate confirmation features.
8.National Financial The National Financial Switch is a national infrastructure with pan-
Switch (NFS) Indian presence provides a switching service for connectivity across
ATMs of banks. The NFS enables customers to perform their
transactions (both financial and non-financial) using ATMs under the
NFS network without reference to the card issuing banks. NFS which
is the largest ATM switching network connects 80,000+ ATMs with an

average daily volume of transactions standing at 4.7 million (both

financial and non-financial) and a value of Rs. 2.5 billion. NFS is a
service offered by NPCI.

Last Mile Payment Systems

Banks in India face unique challenges in fulfilling the goals of greater financial accessibility
and affordability for the poor. In interiors of rural India, unbanked regions are those that are
sparsely populated, which lack basic infrastructure, and where large numbers of small
transactions is common. As a result, banks face high costs of customer acquisition, high
potential transactions costs of micro-payments and large expenditures on infrastructure and
IT.

The solution to the last mile payment problems has been found by many countries through
integrated technology solutions but with a limited utility .

Current macro-payment systems used by most E-commerce sites are not suitable for high-
volume, low-cost produce or service purpose. These payment technologies suffer from use of
heavyweight encryption technologies and reliance on always on-line authorisation servers. Micro-
payment systems offer an alternative strategy of pay-as-you-go charging, even for very low cost,
very high-volume charging. However, several different micro-payment schemes exist, not all
suitable for all E-commerce uses. Major micro-payment systems used globally are briefed below:

Millicent Millicent introduces a new kind of currency - scrip, which is digital money
that is issued by a single vendor. Scrip has a value, just as cash does,
but it has value only when spent with specific vendor. Scrip consists of a
signed message attesting that a particular serial number holds a
particular value. In addition to the necessary contents of electronic
cash the scrip will also hold an expiration date and information on the
particular vendor with whom the scrip can be redeemed.
Mpay This micropayment system proposal from IBM was previously named
MiniPay. Mpay is very similar to the
billing mechanism of the third party value added services of the phone
networks. The customer deals with his issuer, the
vendor deals with his acquirer and the issuer and the acquirer settles
the accounts. The system is suitable for selling
inexpensive information and other similar services that are usually
delivered on-line.
PayWord PayWord micropayment protocol proposed by Ron Rivest (MIT
Laboratory for Computer Science, MA, USA) in 1996 . The protocol aims
to reduce the number of public key operations required per payment
by using hash functions, which are faster. In PayWord customers
generate their own coins, or paywords, which are sent to vendors and
then verified by brokers.
NetPay We present a new protocol called NetPay that allows customers to purchase
information from vendors on the WWW
NetPay, a secure, cheap, widely available, and debit-based protocol of a
micropayment system, will be introduced for
the WWW. NetPay differs from previous protocols in the following
aspects: NetPay uses touchstones signed by the
broker and Indexs signed by vendors passed from vendor to vendor.

An efficient, cost effective payment solution is a dire necessity for promoting

financial inclusion. If a countrys growth is to be truly transformational, it must come with
economic access for the poor. However, enabling access for poor residents to the
economy, its infrastructure, and its institutions has been a challenge in rural areas.
Financial inclusion gives the poor the resources to migrate for better jobs, invest in
entrepreneurship, and insure themselves against bad times and economic shocks. Without
this, they often find themselves trapped in their circumstances.

Few models of micro payment systems which have been introduced or are in the various
stages of implementation along with new suggestive mechanisms are envisaged in the
following paragraphs.

1.UID enabled Micro Payment System/ Business Correspondent Model

A stable and secure channel for the delivery of micropayments is a UID-enabled Bank
Account (UEBA) linked to a UID number. A customer can access their UEBA through a BC
operating a handheld microATM device.1 A UEBA provides four basic banking features:

1. It provides a convenient store of cash for savings, with a facility for making electronic
deposits and withdrawals in micro-amounts,

2. It is a convenient way to make payments,

3. It works as a fast channel for sending and receiving remittances,

4. It allows balance queries, and provides a history of transactions,

Transactions on the UID-enabled bank account function essentially as a prepaid system,

similar to that used by mobile operators. This enables local BCs such as self-help groups
and kirana shops to offer basic banking services at low risk to the bank. The customers
are already familiar with this model and comfortable with paying for talk-time, an electronic
good.
The key features of UID-enabled Micro-payment Model

1.UID KYR sufficient for KYC: Banks in India are required to follow customer identifi-
cation procedures while opening new accounts, to reduce the risk of fraud
and
money laundering. The strong authentication that the UID will offer, combined with
its KYR standards, can remove the need for such individual KYC by banks for basic,
no-frills accounts. It will thus vastly reduce the documentation the poor are required
to produce for a bank account, and significantly bring down KYC costs for banks.

2.Ubiquitous BC network and BC choice: The UIDs clear authentication and verifi-
cation processes will allow banks to network with village-based BCs such as self-help
groups and kirana stores. Customers will be able to withdraw money and make
deposits at the local BC. Multiple BCs at the local level will also give customers a
choice of BCs. This will make customers, particularly in villages, less vulnerable to
local power structures, and lower the risk of being exploited by BCs.

3.A high-volume, low-cost revenue approach: The UID will mitigate the high customer
acquisition costs, high transaction costs and fixed IT costs that we now face in
bringing bank accounts to the poor.

4.Electronic transactions: The UIDs authentication processes will allow banks to verify
poor residents both in person and remotely. Rural residents will be able to
transact
electronically with each other as well as with individuals and firms outside the
village. This will reduce their dependence on cash, and lower costs for
transactions.
Once a general purpose UID-enabled micropayments system is in place, a variety
2.Mobile Banking Model
Mobile as a technology, is low-cost, ubiquitous and efficient with a potential to
achieve the goal of deeper financial inclusion. Different countries are following
different mobile banking models depending upon their requirements and availability
of infrastructure.
Indias telecom sector, one of its flagship domestic industries has played a pivotal role in
Indias growth story. There has been a dramatic rise in mobile phone penetration over the last
few years.

Trends in telephone subscribers and teledensity

June 2011 Sept 2011 Dec 2011 Mar 2012 June 2012
Subscribers (In 885.99 906.93 926.53 951.34 965.52
millions)
Teledensity (%) 73.97 75.48 76.86 78.66 79.58

Sectoral Teledensity (as on 30.06.2012)

Total Subscribers Teledensity
Total Subscribers 965.52 million 79.58%
Urban 621.76 169.03
Rural 343.76 40.66*
*91.30% of the total additions have been in rural areas as compared to 62.39% in the previous quarter.

Reserve Bank brought out a set of operating guidelines on mobile banking for banks in October
2008, according to which only banks which are licensed and supervised in India and have a
physical presence in India are permitted to offier mobile banking after obtaining necessary
permission from Reserve Bank. The guidelines focus on systems for security and inter-bank
transfer arrangements through Reserve Bank's authorized systems. On the technology front the
objective is to enable the development of inter-operable standards so as to facilitate funds
transfer from one account to any other account in the same or any other bank on a real time
basis irrespective of the mobile network a customer has subscribed to.
The Report of the Inter-
Ministerial Group on
Delivery of Basic
Financial Services
through Mobile Phones
has provided a
comprehensive
framework for mobile
banking and mobile
payments . The
framework envisages
creation of Mobile and Recommendations from the Report of the Inter-Ministerial
Aadhaar linked Group:
Accounts by Banks.
The basic financial
transactions on these
Majority of interbank mobile fund transfer transactions are
accounts (cash deposit,
credit customers channelized through NEFT mechanism. Under NEFT, the
mobile linked no- frills transactions are processed and settled in batches, hence are
account, cash not real time.
withdrawal, peer to peer
transfer & balance In the above context, NPCI has carried out a pilot on mobile
inquiry) can be payment system initially with 4 member banks viz State Bank of
executed through a
India, Bank of India, Union Bank of India and ICICI Bank in
mobile based PIN
system using Mobile August 2010. Yes Bank, Axis Bank and HDFC Bank have joined
Banking POS or this pilot in month of September, October and November 2010
through biometric respectively. Interbank Mobile Payment Service (IMPS) public
based microATMs" launch happened on 22nd November 2010 by Smt. Shyamala
deployed by Business Gopinath, DG RBI at Mumbai and this service is now available
Correspondents.. to the Indian public.
The framework
envisages sharing of the IMPS offers an instant, 24X7, interbank electronic fund transfer
following elements: service through mobile phones. IMPS facilitate customers to use
mobile instruments as a channel for accessing their bank
1. A simplified accounts and put high interbank fund transfers in a secured
common template manner with immediate confirmation features.
for the KYC
requirements for
the Mobile and
Aadhaar linked
Accounts which is
acceptable to all
service providers; 3.NFC

2. Cash-in / cash-out Near Field Communication (NFC) technology makes life easier
operations at the and more convenient for consumers around the world by making
front end involving it simpler to make transactions, exchange digital content, and
deposits and connect electronic devices with a touch. A standards-based
withdrawals into connectivity technology, NFC harmonizes today's diverse
Mobile and contactless technologies, enabling current and future solutions
Aadhaar linked in areas such as:
Accounts. BCs (or Access control
the sub-agents of Consumer electronics
BCs) undertaking Healthcare
these operations
will perform them
on behalf of all
Banks;

3. An Account
 Information collection and exchange
Loyalty and coupons
Payments
Transport
NFC provides a range of benefits to consumers and businesses, such as:

Intuitive: NFC interactions require no more than a simple touch

Versatile: NFC is ideally suited to the broadest range of industries, environments, and
uses

Open and standards-based: The underlying layers of NFC technology follow

universally implemented ISO, ECMA, and ETSI standards

Technology-enabling: NFC facilitates fast and simple setup of wireless technologies,

such as Bluetooth, Wi-Fi, etc.)

Inherently secure: NFC transmissions are short range (from a touch to a few
centimeters)

Interoperable: NFC works with existing contactless card technologies

Security-ready: NFC has built-in capabilities to support secure applications

Extending the ability of the contactless card technology, NFC also enables devices to share
information at a distance less than 4 centimeters with a maximum communication speed of
424kbps. Users can share business cards, make transactions, access information from smart
posters or provide credentials for access control systems with a simple touch.

NFCs bidirectional communication ability is ideal for establishing connections with other
technologies by the simplicity of touch. For example if the user wants to connect their mobile
device to their stereo to play media, they can simply touch the device to the stereos NFC touch
point and the devices will negotiate the best wireless technology to use.
 UTILITY of NFC

In rural areas NFC enables Mobile phones can change the pattern of small value
transfers(From cash to without cash). At least for a cap limit fixed by Banks,customers can pre
charge their NFC enabled mobile phones and transfer value in the local transactions with a
facility to unload the value collected to their Bank account at periodical intervals or when BCs
visits their village.The pre charge of the mobile can also be done likewise.

In our country there have been a few test runs with NFC payments. Challenge with NFC
is finding an ideal solution to host multiple cards in the same NFC handset. Further, use
of NFC would require changes in payment processing, upgrading the PoS terminals at
the merchant ends. Additionally, success of NFC contactless payments would also depend
upon developing an open standard for all contactless / NFC transactions / systems
independent of the payment system operators.
 NFC : Nearness comparison for data transfer

4.Ecosystem (carriers + devices + social networks + banks ) as an

alternative payments mechanism

A slew of players popmoney, obopay, zong, to name but a few are creating partnerships which
make existing bank accounts mobile. They typically leverage the mobile operators services
using the bill as a store of value or simply as a conduit. The bank-led partnerships work a bit
differently than the mobile operator-led businesses.

From credit card companies, to Google, to banks & payment service providers, there are
several digital wallet initiatives being launched.

Google Wallet, currently being rolled out in the US, is an NFC (near field communication)
enabled proximity payment system. It is an app that stores credit card information, pulls in offers
& deals and is a proximity payment system.
5.Consumerization of acceptance devices:

Devices such as smart phones and tablets are being rapidly adopted by consumers. Firms are
designing innovative accessories for these devices to accept card payments and other forms
of electronic payments.

While there are quite a few players in this space, for most people Square is the defacto
category. Jack Dorsey, co-founder of Twitter & widely touted as the next Steve Jobs, started
Square. Square has two components a card reader that can be plugged into the audio port of
an iPhone, iPad or Android device & an app that takes care of card authorization. The card
reader is shipped free of charge.

Once you have a card reader, one can start accepting payments. Whether you are a second-
hand bookseller or hobbyist-chocolatier, a credit card payment is suddenly possible. Of course,
there is that small matter of the iPhone, iPad or perhaps a cheaper Android.

While it can be argued that M-banking may not be the most necessary factor for an improved
banking service in our country, it is, however, certain that traditional banking service alone may
not result in any significant improvement in providing the un-banked community with access to
the financial sector. The speed and efficiency with which money can be transferred and
monitored, through such mobile platforms, is likely to be far greater and higher as compared to
a cash-based system. Apart from extending customer reach, financial institutions will be able to
reduce operational costs, which would have otherwise incurred on disbursement and loan
collection. By leveraging operator's retail ecosystem comprising distributors, retailers, and street
resellers, they will be able to streamline operations. The customers will also benefit by having
better access to loans and lower borrowing costs.

The day is not far when Garib Bapat pays his milkwala through his mobile,gets manure retailer
by transferring through his digital purse, receives the subsidy in his account directly with UID
enabled Bank account,purchase vegetables by paying digital coins and in case any of these
devices or single integrated device is lost or stolen immediately informs the Bank or Operator to
stop the device.

Best wishes for poor Bapat for cash-less transactions to become cash-rich.