A Brief Guide to Payments in India
Regulatory Bodies and Payment Schemes
This article will summarize the evolution of payment systems in India, and give a brief overview of the key regulatory players involved in facilitating these systems.
Regulatory bodies
Reserve Bank of India
The Reserve Bank of India was incorporated as the apex banking institution in India in 1934 through the RBI Act. Its preamble defines its overarching objectives: regulating the issue of banknotes, maintaining reserves, ensuring monetary & price stability and operating the currency and credit systems of the country.
Today, the RBI also subsumes the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS). This is the highest policy making body for payment systems in India.
National Payments Corporation of India
In 2007, with the passage of the Payment and Settlement Systems Act, the National Payments Corporation of India (NPCI) was set up. Conceptualized by the RBI, NPCI is a not-for-profit umbrella organization for the operation of retail payments and settlement systems in India.
Since it became functional in 2007, it has taken on several roles including but not limited to — operating the National Financial Switch (our national ATM network), launching the domestic RuPay card network and creating, evangelizing and operating the Unified Payments Interface since 2016.
For as long as trade and commerce has existed, payments have been around to facilitate them. In India, this dates back to some of the earliest civilizations such as the Indus Valley Civilization. India was also amongst the first countries in the world to issue coins around the 7th century BC! Paper currency was introduced in India through European traders arriving in the 17th and 18th centuries.
Paper Instruments
The role of money and paper instruments were formalized and nationalized during the British Raj (18th — 20th centuries). Europeans brought paper currency to India and the British started actively printing currency notes after the enactment of the Paper Currency Act in 1871. The Negotiable Instruments Act of 1881 defined the use of promissory notes, bills of exchange and cheques (see our article on the history of money for origins of these instruments).
Paper instruments today like cheques and drafts constitute about 60% in transaction volume, but only 11% in terms of value. [1]
Rise of Digital Payments
After Indian independence, business transactions were mainly conducted using cash and cheques. It was only in the 1980’s, backed by the dual tailwinds of international technological progress and the demonetization of high-value banknotes in 1978, that electronic payments in India took off.
Electronic Cards and ATMs
While the United States saw electronic cards being introduced as early as the 1950s. Andhra Bank in 1971 issued the first electronic credit card in India. Soon many banks began to offer credit and debit cards. ATMs began to appear by the end of the decade, and today there are about 2,50,000 ATMs in India in the National Financial Switch (NFS). This is an ATM network managed and run by the National Payments Corporation of India (NPCI). It provides interoperability between member banks such that transactions done at any ATM in the network can be routed to any of the participating banks.
In 2011, the domestic RuPay card network was launched in India by the NPCI. It functions in the same way as other card networks like Visa and MasterCard, but has the advantage of not being routed to expensive international card switches for domestic transactions. To promote adoption on the network, RuPay offers benefits like lower transaction fees for merchants and banks. [2]
Online Payment Systems
With the advent of the Internet in the 90s, many online payment processing systems came into play, such as the Electronic Clearing System and Payment Gateways for e-commerce websites. Innovation in electronic instruments was further spurred by the inception of the first private banks in the ’90s & ’00s.
ECS and NACH
The Reserve Bank of India introduced the ECS Credit (Electronic Clearing System) in the 1990s to facilitate bulk payments like payroll and dividends for corporates. This allowed corporates to make multiple payments to their employees through online fund transfer.
The converse ECS Debit (named so because it allows pulls or debits on the customers account) was implemented to facilitate collection of utility bills, periodic investments, etc. This allowed corporates to set up bank mandates that could be used to directly pull money from a customer’s account at periodic intervals.
The ECS Debit and Credit systems are subsumed and expanded by the NACH (National Automated Clearing House), introduced by NPCI in 2017. NACH combines several regional ECS systems and improves upon them by offering infrastructure improvements and a more streamlined process. An example of this is the implementation of eNACH/eMandate in 2019, which allows customers to set up auto-debit for bill payments using just their debit card or netbanking authentication.
Payment Gateways
In the early and mid 90’s, e-commerce arrived on the Indian payments scene and there was a need to allow transactions over the internet. In 1996, ICICI Bank started internet banking services for its customers for the first time. With the platform for online banking set, Billdesk set up the first payment gateway in India in 1999.
In simple terms, a payment gateway allows a merchant (like Amazon or Nike.com) to accept payments online by connecting the customer to the merchant’s bank through various payment modes. Today there are several payment gateways in India, including but not limited to CCAvenue, RazorPay and InstaMojo. They offer the ability to pay via credit and debit cards, mobile wallets, netbanking and UPI.
NEFT & RTGS
In November 2005, NEFT (National Electronic Funds Transfer) was introduced for facilitating online one-to-one transfer of funds for individuals and corporates. NEFT works using batch settlement, where funds are cleared (i.e., accounted for) immediately but settled at the end of every period — usually 30 minutes. Any transferred funds are available for use by the creditor by the end of the settlement cycle. Since December 2019 this service is available 24x7.
RTGS (Real Time Gross Settlement) is another payment system but for high value fund transfers — over Rs. 2 lakhs. Here, the transfer of funds is carried out in real-time and funds are settled between all parties immediately (hence, gross settlement). As a result, funds are available for use at the creditors account immediately. RBI provides an 11-hour window (7 AM — 6 PM) and banks operate within this period.
IMPS & UPI
In 2010, NPCI launched the IMPS (Immediate Payment System) to enable real-time funds transfer all-day every-day. It had the additional benefit of needing only the beneficiary mobile number in order to make the payment.
IMPS saw only moderate pickup until 2016, when UPI (Unified Payments Interface) was launched by — you guessed it — NPCI!
UPI is a wrapper around the IMPS network that offers several improvements. It provides a simplified interface for accepting merchant payments, peer-to-peer transactions and pull (or collect) functionality. One of the key features of UPI is its interoperability between bank accounts and the ability to initiate payments from any UPI enabled account through any UPI application. Over 150 applications have been developed to offer UPI payments. Some of the most prominent among these are Google Pay, PhonePe, Paytm and NPCI’s own application — BHIM UPI.
June 2020 was a landmark month for UPI, which recorded an all-time high of 1.3 billion transactions.
Other Payment Systems & Financial inclusion
Apart from the payment systems mentioned above, there are several other NPCI led initiatives for making payments widely available in India in 2020.
*99#
This is a USSD based service that allows all phone users to directly make payments from their mobile phone by dialing *99# (try it!). It works by using an underlying UPI interface, and has the additional benefit of being accessible to feature phone users (Less than 20% of Indians own smartphones).
APBS & AePS
The Aadhaar Payment Bridge System (APBS) was launched starting in 2013 to enable transfer of funds to Aadhaar seeded bank accounts from the government and government related entities. Via this system, Direct Benefit Transfer (DBT) schemes such as LPG subsidy, MNREGA, etc. are implemented for provision of government subsidies and welfare to the population.
In 2016, NPCI along with CSC E-Gov also launched the Aadhar Enabled Payment System (AePS). This allows people in underserved communities to make payments with their Aadhaar-linked bank accounts. It uses biometric information associated with the Aadhaar of a person to authenticate her, enabling secure availability of basic banking services like funds transfer, balance enquiry and mini-statements. Here’s a quick video that explains the AePS (in Hindi!).
Together, the APBS and AEPS are instrumental in the financial inclusion initiatives of the country.
BBPS
The Bharat Bill Payment System (BBPS) is an integrated bill payment system in India offering interoperable and accessible bill payments to customers through a network of registered members.
BBPS seeks to combine physical and digital delivery channels from a fragmented ecosystem of agents and billing companies into an integrated system with common standards and operational infrastructure provided by NPCI.
In future issues we will deep dive into each of these systems and how they affect the world around you.
Watch this space!
About DICE India
DICE (Digital India Collective for Empowerment) is an industry body focused on the Indian Digital Payments ecosystem. DICE takes an India first approach to creating collaborative industry-regulator relationships in the thriving ecosystem. Follow us at @indiadice on Twitter.
