Payment and settlement systems employed in an economy play a vital role in economic development. These systems basically consist of the various and diverse arrangements that we use to systematically transfer money i.e, currency, paper instruments (such as cheques, drafts) and various electronic channels.
When any person or entity enter into economic transactions, i.e. to purchase and sell goods or services, the value thereof needs to be settled by money or currency. During the developmental stage of human beings living as a society, the settlement happened through exchange of goods and / or services and it was called the barter system. After the concept of money rooted in the economy, the sale and purchase of goods and services are being effected or settled by payment of money.
Since then various forms and styles of payment and settlement system have evolved in course of time. India has also been an active participant in this evolution or rather revolution. Through this article we are trying to chronologically trace the evolution of payment and settlement system in India.
Payment instruments and mechanisms are long established in India. The earliest payment instruments that are known to have been used in India were coins, which were either punch-marked or cast in gold silver and copper.While coins were representing a physical equivalent, credit systems involving bills of exchange were also existing in medieval India.
In ancient India a kind of loan deed forms which were called as‘rnapatra’ or ‘rnalekhya’ were in use. These instruments contained details of the amount of loan, the rate of interest, the condition of repayment, the time of repayment and information such as the name of the debtor and the creditor. These Loan deeds were witnessed by a person of respectable means and endorsed by the loan-deed writer. Execution of such kind of loan deeds were found continued during the Buddhist period also, when they were called as ‘inapanna’.
In the Mauryan period, an instrument called adesha came into use, which was a kind of order on a person desiring him to pay the money of the note to another person, which corresponds to the concept of a bill of exchange as we understand it today. Considerable use of these instruments were found during the Buddhist period also. There are references of merchants in large towns using similar instruments that like of letters of credit and promissory notes.
Similar loan deed were found to be existing in the Mughal period which were known as‘dastawez’ and were of two kind: ‘dastawez-e-indultalab’ which was payable on demand and ‘dastawez-e-miadi’ which was payable after a stipulated time.We have the testimony of foreign travellers regarding the use of bills of exchange in the then great commercial centres of Mughal era.
From their writings, it is established that a kind of banking system existed and bankers also issued bills of exchange on foreign countries, mainly for financing sea-borne trade. These bills were widely accepted and were traded at discounts. Another instrument that was in use during the Mughal period was the Pay order. These orders also known as ‘Barattes’were issued from the Royal Treasury on one of the District or Provincial treasuries and were akin to present day drafts or cheques.
During these developments, the most important class of credit Instruments that evolved in India and was in most widespread use in the twelfth century were‘Hundis’. They have continued till today and in a sense represent the oldest surviving form of credit instrument. Hundis were of various types and each type had certain distinguishing features. Hundis had a widespread use as a remittance instruments (to transfer funds from one place to another), as a credit instruments (to borrow money) and for trade transactions (as bills of exchange).
In the 20th and 21st century, as the banking system evolved, it became easier, safer and even remunerative to keep one’s money in a bank account. To use ‘transfer of money in bank accounts’ for making payments for the economic transactions became a secure option.
The central bank of any country is usually the authority and a driving force in the development of national payment systems. In India Reserve Bank of India is the sovereign authority and is responsible for Safe, Secure, Sound, Efficient and Authorised payment systems in the country.
The highest policy making body on payment systems in the country is ‘The Board for Regulation and Supervision of Payment and Settlement Systems’(BPSS), a sub-committee of the Central Board of the Reserve Bank of India. The BPSS is the regulating and supervising authority empowered by RBI for prescribing policies and setting standards for all the payment and settlement systems in the country.
The payment and settlement systems in India are regulated by the Payment and Settlement Systems Act, 2007 (PSS Act) which came into being in December 2007. The PSS Act as well as the Payment and Settlement System Regulations, 2008 framed there under became effective from August 12, 2008. Section 4 of the PSS Act states that no person other than the Reserve Bank of India (RBI) can commence or operate a payment system in India unless authorised by RBI.
The RBI is taking a studied stance with reference to ushering in changes to and in the payment systems. Periodically it has constituted various committees like the Rangarajan Committee I & II, Saraf Committee, Patil Committee, Burwan Working Group, etc. for the benefit of banking sector and particularly the payment systems. Since the year 1998 onwards, The Reserve Bank has been continuously bringing out a Payment System Vision document for every three years which enlist the road map for implementation. The latest one is for the period 2019 -21.
Coming back to the discussion of evolution of payment systems, for effecting the transfer of money in bank accounts, a payment instrument was needed to instruct the bank to effect that transfer. The instrument so employed was the ‘cheque’ for a very long period.
Thus a system consisting of the cheque as the payment instruments and an infrastructure around the cheques which consisted of the drawee bank, the drawer bank and the cheque clearing houses came on the scenario and were collectively known as the payment systems.
This cheque clearing systems have since been migrated from manual clearing system to a Magnetic Ink Character Recognition (MICR) clearing systems in mid 1980s which brought in a great level of automation in cheque clearing process alongwith standardising the cheque in terms of its physical dimensions.
After nearly twenty odd years of MICR clearing existence, the cheque truncation system (CTS) was introduced first in New Delhi in 2008 and then all the 66 MICR centres were subsumed into three grid-CTS systems. With this transformation a very large share of cheque clearing in the country started taking place on T+1 basis akin as if they were being cleared as ‘local’ cheques. Standardisation of cheque with features of built-in fraud prevention measures have also been brought in the form of CTS-2010 cheque standards.
At present the use of paper-based instruments like cheques, drafts, etc accounts for nearly 60% of the volume of total non-cash transactions in the country which in value terms comes out to be around 11%. This share has been steadily decreasing over a period of time with the electronic mode gaining popularity.
Cheque clearing which was made efficient through MICR clearing however had an inherent issue. Settlements through cheques were cumbersome and time consuming especially when they were being used for bulk and repetitive payments such as collection of utility payments, payment of dividends and the like.
To address the growing need and also to minimise the use of cheques for such payments, the Reserve Bank introduced the ECS (Credit) scheme during the 1990s which became a popular tool to handle bulk and repetitive payment requirements like salary, interest, dividend payments of corporates and institutions.
ECS (Credit) facilitated customer accounts to be credited on a specified value date and is made available at all major cities in the country.ECS in itself has undergone many changes and reforms from being a local system to a regional system and then a national level system.
These changes have been facilitated by the adoption of Core Banking System in banks which brought in straight-through processing of payments. Efficiency has been further improved with the operationalization of the National Automated Clearing House (NACH) by National Payments Corporation of India (NPCI).
NACH is a pan-India system that is used for processing bulk and repetitive payments and the ECS is gradually being subsumed into NACH. Over a period of time, various systems as discussed below have come into existence to meet the remittance requirements of different segments of users.
Electronic Funds Transfer (EFT) Systems:
The electronic funds transfer (EFT) system for retail segment introduced in the late 1990s enabled an account holder of a bank to electronically transfer funds to another account holder with any other participating bank. This system was then available across 15 major centers in the country.
The system is no longer available for use by the general public, for whose benefit a feature-rich and more efficient system, which is the National Electronic Funds Transfer (NEFT) system as it is popularly known is now in place. Though NEFT began its journey a decade ago as a local EFT system, it expanded to cover large areas and is a pan-India system today.
NEFT was made available across a longer time window and it provided for batch settlements at hourly intervals, thus enabling near real-time transfer of funds. This System later incorporated some unique features like accepting cash from customers for originating NEFT transfer transactions, facilitating NEFT transfer transactions without any minimum or maximum amount limitations, initiating one-way transfers to Nepal, receiving confirmation of the date and time of credit to the account of the beneficiaries.
Apart from NEFT, the Immediate Payment Service (IMPS) and Real Time Gross Settlement System (RTGS) that facilitate funds transfer requirements of users were made operational. RTGS was introduced in 2004 and this system settles all inter-bank payments and customer transactions on real time basis. Whereas IMPS is a 24×7 platform for immediate funds transfer system, the RTGS essentially involves a larger Financial Market Infrastructure which processes large payments including customer payment transaction where value is above Rs. 2 lakh.
With the fast improvements in IT systems of banks and their core banking systems, the smooth integration of various delivery channels into banking system has been made possible. The banking facilities including for payment purposes thus are now easily available in online channel.
On the one hand, all these changes have been taking place from the perspective of customer-initiated transactions, a whole set of changes have also been introduced from the perspective of government payments. For financial inclusion as well as digitising government payments and to enhance efficiency and transparency, the use of Aadhaar for beneficiary identification and authentication in payments has been employed.
In order to facilitate bulk and repetitive government benefits and payments of subsidy to identified beneficiaries, the Aadhaar Payments Bridge System (APBS)has been put in place. National Payment Corporation of India (NPCI) manages this system with linkage to Public Management Financial System (PFMS) through accredited government banks and sponsor banks of NACH.
Aadhaar Enabled Payments System (AEPS) which is a similar payment system for retail segment facilitates operations from Aadhaar seeded bank accounts using biometric authentication of customers. Today AEPS has foundan increasing use for Business Correspondent (BC) operationsof own-bank customers and also customers of other banks, in an interoperable manner.
Mobile Banking System:
The ubiquity of mobile phones, combined with affordability and availability of internet data has led to an increase in number of mobile internet users. Taking advantage of this, an increasing number of payment facilities are being integrated into the mobile channel.
Customers are now using their net banking application on their smartphone and are sending money on-the-go using IMPS or NEFT. Reserve Bank has brought out a set of operating guidelines on mobile banking for banks in October 2008. These guidelines have rules that the banks which are licensed and supervised in India and have a physical presence in India only are permitted to offer mobile banking services after obtaining necessary approval from the central Bank.
The guidelines gives direction on establishing systems for security and inter-bank transfer arrangements through Reserve Bank’s authorized systems. The objective is to develop an inter-operable standards so as to facilitate funds transfer among accounts of same or different banks on a real time basis irrespective of the mobile network a customer has subscribed to.
ATMs / Point of Sale (POS) Terminals:
Presently, there are over 61,000 ATMs in India and a bank customer can withdraw cash from ATM terminal of any bank up to 3 times in a month without being charged for the same. There is a presence of over five lakh Point of sale (POS) terminals in the country, which are enabling customers to make payments for purchases of goods and services by means of credit/debit cards.
To facilitate customer convenience the Banks are also permitting cash withdrawal using debit cards issued by the banks at PoS terminals. Businesses are increasingly adopting POS systems. In the early 2000s, a big technological breakthrough in the form of cloud based data storage happened.
With the introduction of cloud-based storage and computing heralded the next step in POS technologies evolution: The ‘mobility’. As a result of cloud-based servers the retailers could start accessing their POS system by picking up any device with internet connectivity. A mobile POS system thus helped retailers manage their entire business from any device, any time. Technological changes in POS resulted in reduced lineups to pay and thus facilitated a faster customer service.
From credit cards to one-click payments, India have made a significant advancement in how payments are done in the last few years. India is continuously growing towards a “less-cash economy”. In the pre-internet era, electronic payments, especially credit and debit cards, became the most dominant forms of non-cash payments. Credit card was first introduced by the Central bank of India in 1980 in association with Visa and Master Card.
The welcome change was quickly adopted by retailers and the consumers as an easy way of making payments. With the establishment of the internet over a wide area in the mid-90s, it brought in a new kind of adoption with people selling their products and service online, now known as “E-commerce”.India’s first e-commerce website was launched by Indiaplaza.com in 1999.
Thereafter first-ever payment aggregator “BILLDESK” launched its operations in India, in 2000. In 2007, a startup called Flipkart opened its business online and was later joined by other e-commerce players. E-commerce players changed the way people shopped online by giving all products and services in one place.
As e-commerce business grew, the need for integrating a secure and reliable payment gateway gained prime importance. Payment gateways help in transactions between merchants and their consumers, quickly and safely. The payments are processed in one click and all the transaction information is encrypted and tokenized.
Another turning point came in 2016 with the launch of UPI – Unified Payment Interface, by the Govt of India and NPCI. It was a smooth and quick transition for UPI to gain adoption by the people. UPI transactions saw a growing increase year after year. Identifying its utility and ease of transaction, payment gateways did not take much time to integrate UPI in their system and offered it as an additional payment option to customers. It was this time that payment gateways flourished and its utility found widespread acceptance.
(Source: RBI Annual Report)
India is witnessing a growth trajectory in digital payments. In fact, India is expected to be the growth engine by 2025 and according to stats, a $1 trillion digital market is expected by 2025 in India. Cash less push have propelled the growth of digital payments to stratospheric levels.
Gone are the days when banks had the monopoly on transaction services. With the emergence of new fintech companies and payment banks, the landscape would be far more vibrant. Today telecom companies, banks, mobile wallet firms and payment banks are vying with each other for customers and a greater share of the financial market.
Financial technology, often shortened to fintechis an emerging industry that is harvesting technology and innovation to improve activities in finance. Fintech entrepreneurs are eliminating barriers to payments, and that would be resulting in greater economic activity and new wealth. Digital-savvy consumers are looking forward to innovations like Bitcoin, blockchain, tokenization and peer-to-peer networks.
Fintech companies are offering electronic payment systems and alternatives which eCommerce companies can easily incorporate into their sites. This futuristic business model would enable users to store a portion of their fiat money in digital form and make purchases and payments.
Fintech entrepreneurs would be more attuned with the higher expectations of a younger, digital-savvy generation who buy goods with a tap of a phone screen. Frictionless systems like distributed ledgers are eliminating barriers to cross-border payments, remittances and data transfers by being real-time, cheap and secure.
These efficient transactions would unlock greater economic activity in the future and would promote prosperity. Entrepreneurs are designing newer processes and building innovative solutions in the payments industry that would let banks and consumers into new era. Millennials are having a different mindset than the previous generations. The modern culture embraces instant gratification and immediacy. As e-commerce industry would grow, the payments industry will see more innovations regarding checkouts and customers would be provided with more ease.
The future would see an increase in “invisible payments”. Invisible payments as the name suggest would include more secure and improved payment systems such as biometrics and cryptography through which customers won’t have to pay anything in person, but it will be automated and hence, invisible.
To conclude, India has been through a very healthy evolution of payment systems over the time. In looking back, one can easily admit that it had actually been a revolution, without being so realising. Today our payment systems are not only comparable to any systems, anywhere in the world, but our systems also setting standards and good practices for the world to follow.
With the ever changing scenarios in the information and communication technology, world over, different kinds of payment instruments and systems are evolving. It is happening in India too. Today we can boast of a strong retail payments framework existing in the country comparable to that of any advanced country. Our payment framework is even better than some of them in terms of the variety and efficiency.
Financial technology or Fintech as it is called is evolving at a pace, which is unthinkable. There is a lot of potential and scope in the Indian finance sector. The number of digital transactions is rising exponentially, as merchants and consumers find ease in digital payments.
Financial institutions must now not only design processes and systems that incorporate cutting-edge technology and innovations but it is also required to meet higher customer expectations. We can easily say that financial services, including banking services, are at the cusp of a revolutionary change driven by technological and digital innovations.