Encouraging Innovation in payment systems

The modes of making payments is changing fast and evolving continuously. The payments options have changed faster in the past 15 years than in the previous 150 years and every innovation has resulted in a movement away from cash. Innovation is making payments increasingly convenient, instantaneous and ubiquitous. RBI's endeavour has always been to encourage innovation, especially in the payments space.10

FinTech

FinTech stands for financial technology and describes technologically enabled financial innovations. The technology enabled products enhance financial services by increasing efficiency, reducing cost and providing diversity in products. FinTech firms are redefining the way companies and consumers conduct transactions daily. In India, FinTech has the potential of providing workable solutions to problems like low penetration, scarce credit history and cash driven transaction economy encountered by traditional financial institutions.

RBI Inter Regulatory Working Group on FinTech and Digital Banking had categorised FinTech innovations broadly into the following areas, viz., (i) Payments, Clearing and Settlement, (ii) Deposits, Lending, Capital raising, (iii) Market provisioning, (iv) Investment Management and (v) Data Analytics and Risk Management. In India, FinTech companies are not competing with banks but are collaborating with them by putting in place Business to Business (B2B) models and thus acting as ecosystem enablers.

One of the classic examples of FinTech in the payments space is the UPI platform, an application based electronic payment system enabled through a smart phone that uses a registered virtual address to make or receive payments which has revolutionised the mobile payments arena. UPI platform allows non-bank FinTech players to on-board bank customers and offer payment services. There are currently over 40 non-bank third party applications of various merchants live on the UPI platform. UPI was launched in August 2016, and with over 207 banks live, it has witnessed over 200 crore transactions per month since October 2020.

Regulatory Sandbox

RBI announced the opening of first cohort under the Regulatory Sandbox (RS) on November 4, 2019 with 'Retail Payments', as its theme. This is expected to spur innovation in digital payments space and help in offering payment services to the unserved and underserved segment of the population. Migration to digital modes of making payments can obviate some of the costs associated with a cash economy and can give customers a friction-free experience.

The innovative products / services which, were considered for inclusion under RS are:

• Mobile payments including feature phone-based payment services: General innovation in mobile payment services has focused on or supported app-based access, limited to smartphones and similar devices. There is a need to innovate payment services for feature phones to provide the necessary thrust towards enhanced adoption of digital payments by various strata of society.
• Offline payment solutions: Consumer behaviour has been driving growth of digital payment systems as more and more consumers are embracing mobile technology. Though mobile internet speed has risen, connectivity issues remain unresolved in large areas. Therefore, providing an option of off-line payments through mobile devices for furthering the adoption of digital payments is required.
• Contactless payments: Contactless payments, while decreasing the time taken for payment checkout, also ease payments for small ticket transactions. Tokenisation technologies often form the basis of facilitating seamless e-commerce experiences fueled by mobile and other connected devices. The rapid growth in devices provides a significant opportunity for payments through any form factor and anywhere.

Out of the 32 applications received under the first cohort, 6 were selected for the “test phase”. 2 of the entities commenced testing from November 16, 2020 with the other entities entering the test phase by December 21, 2020.

RBI subsequently announced the opening of the second cohort under RS on December 16, 2020 with the objective to spur innovations capable of recasting the cross-border payments landscape by leveraging new technologies to meet the needs of a low cost, secure, convenient and transparent system in a faster manner. The window to submit applications under the second cohort is open till February 15, 2021.

PSS Innovation Contest

RBI conducted a PSS Innovation Contest in collaboration with IDRBT. The objective of the contest was to provide a platform to encourage, recognise and promote innovations and ideas in the PSS arena as well as foster new developments by entrepreneurs, start-ups and similar entities in the payments space. The themes covered as part of the contest were (i) offline payments, (ii) automated online dispute redressal systems, (iii) safety and security in payment systems, (iv) payment options for feature phone users, (v) simple and easy KYC, (vi) payment systems data analytics, (vii) cross-border remittances, (viii) next-gen payment modes, (ix) instrument-less payment systems, (x) innovative confirmation and settlement modes for payment transactions, and (xi) automated payment processing. The shortlisted applications were invited to present their innovations to an eminent jury. The outstanding innovators were awarded prizes and all shortlisted applicants were provided certificates of appreciation.

Innovation Hub for the Financial Sector

PSS do not work in isolation. They have forward and backward linkages with the whole economy and act as catalysts for the financial sector. It is, therefore, incomplete to consider innovations for the payment systems alone without having a view for the financial sector as a whole. Payment systems are not an end in itself but a means to achieve wider financial inclusion, betterment of the society, efficient banking services, business continuity at times of emergency, etc.

RBI has set up an innovation hub (Reserve Bank Innovation Hub - RBIH) that would create internal capabilities by building applied research oriented, project specific teams with expertise on latest technology. This will facilitate setting up an innovation ecosystem for exchange of innovative ideas and providing an environment where the ideas can be prototyped, tested and certified for wider usage. Such a hub will be on the lines of the innovation hubs developed by various organisations across the world. The Hub will be guided by a Governing Council under a Chairman; Mr. Senapathy (Kris) Gopalakrishnan is the first Chairman of RBIH.

Source : RBI