Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

Payments Are Going To See Revolutionary Changes in India

There are incredible changes coming into banking in India, and it’s being driven by the RBI under Rajan. These changes will change our payment landscape, but also revolutionize credit for the small and medium size players in the country.

The Centralized GIRO System for Bill Payment

This sounds strange, but the concept of GIRO is a payment made by a payer. People typically have to pay bills on a regular basis (or one time). Currently, they all go to individual payee websites or offices, and drop cheques, use cards or pay with online transfers. Each payer has to set up a payment gateway and infrastructure to accept all sorts of payment methods. These have different mechanisms for reporting and you struggle to figure out what you paid for which, looking at your bank statement.

RBI wants to create a centralized system for bill payment.

A centralized system allows bills to be listed at one location, and you can go pay your bills online easily, with safety and with no fear that the money will go to the wrong source or that the biller can refute that it got the money. (Some of these aspects have not been addressed in the draft report).

There is a proposed Bharat Bill Payment System (BBPS), a not-for-profit entity, that will set up standards for the process of centralized bill payment. This is like the NPCI for banks, which is the body that has ensured common standards in bank accounts, which ensures you can withdraw your money from any bank’s ATM anywhere in the country.

The BBPS will then authorise for-profit Operating Units who will bring billers and payers on board. A customer that pays an “OU” will see that money going to a centralized account in the BBPS, which will then be forwarded to the biller.

This will kill many of the current payment systems (like BillDesk) which allow people to pay online. But these BillDesk types can become OUs instead, and benefit from the wider brand plus the RBI backing. It’s not apparent where the money comes from yet – are fees paid by the biller to the intermediaries? Do they charge customers? But this is a payment system change that you simply can’t ignore, if you’re in the space.

The Trade Settlement and Credit System

RBI wants to revolutionize the concept of MSMEs (Micro, Small and Medium Enterprises) receiving payments from large customers. The customers typically demand large credit periods – one month to one year – after delivery of goods. This is obviously murder for a small business who needs to pay salaries each month, and who would have already invested in raw material for building the goods to deliver.

RBO proposes a single Trade Receivables and Credit Exchange. Once a buyer received goods, that buyer can then place the “receivable” on the exchange. Financiers will then “bid” to discount the loan – i.e. they will tell the supplier, who is now looking at the long credit period before he gets any money, that instead of Rs. 100 later, he can get Rs. 90 now. While the amount may be lower, cash is supreme, and it’s in the supplier’s interest to take this deal.

The brilliance of this is that in a centralized system, everything is open and available. That a supplier is longer term player (having received payments over a long term). That a buyer is paying his suppliers (useful for the banks who have loaned the buyers money). This builds confidence and a quasi-credit-rating for such players.

Secondly, it provides SMEs with credit that they would otherwise have to approach banks for, individually. Each bank will ask for so many documents, for such a “discounting” facility. With an exchange, banks will all get the same documents, and they can bid different amounts – meaning, a supplier can choose the kind of credit he wants.

Finally, it brings small players into the credit ecosystem. Currently large companies dominate bank credit because banks trust them more. With a “factoring” exchange, credit will be made available to smaller companies as well. And, on the other side, smaller financiers will be able to find and vet good suppliers to provide credit to – you don’t have to be a bank, but can be a local NBFC, a microfinance institution or such.

Public Key Infrastructure

While you might balk at having to do two passwords for each transaction, or using a pin code along with your debit card, the ability to secure your transactions has increased the confidence in the system as a whole. Even then, it’s cumbersome as passwords can be compromised.

To move this forward, the RBI suggests the use of Public Key Infrastructure through Digital Signatures. If you don’t want to use a password set you could use your digital signature to authenticate yourself to a bank, optionally. This gives corporates the ability to assign payment and authorization responsibilities to different people, whose digital signatures are different and avoid the problem of compromised passwords.

The Opportunity

Players in the payment space have largely looked at creating gateways, becoming prepaid money holders or mobile phone recharge facilities. The new changes will bring in new opportunities – for instance, a PayZippy prepaid card at Flipkart can be listed as a way to pay all billers in the centralized GIRO system. Or, suppliers at Amazon’s marketplace can get immediate access to money after Amazon delivers goods to customers.

To enable these, we need the players to be aware of the various things they can do, or that they need to do. And what the course of appeal is in case things go wrong (like if a GIRO customer pays, but the biller hasn’t received the money). Finally, it’s important to build the technological infrastructure to connect with these centralized systems.

Each of these areas brings in the potential for large players to be created. In the end, payments and credit are intertwined – the more we focus on building both together the better it is for the future of the country. And eventually, as we grow, we can even see other regular bills like commercial rents, maintenance, school fees, car service payments and subscriptions go down a centralized payment route.  There are greater returns in terms of getting a better corporate credit history, and of securitizing some of these payments to players who have different maturity horizons. These are exciting times for those in the payments space!

  • Elroy Serrao says:

    The “OU” scheme you outlined, is already in place to some extent as far as collection of monies due to billers is concerned. See RBI circular dated 2009 for this :
    Will be interesting to see how incumbent players like BillDesk react to this, since introduction of GIRO payments may see a significant erosion in their competitive advantage.

  • Binoy Chand says:

    If you read the RBI notification carefully and read it also in the light of the Nachiket Mor committee report – i think the insights would have to different.
    (a) The GIRO is meant to help ‘cash’ payments and the BBOU;s are retail front end points where people can go pay in cash
    (b) It is very likely all these OUs’ will become payments banks
    (c) The role of BBPS is the setting of standards and possibly in settlement (this would adversely affect exiting commercial banks that act as settlement banks for billers)
    However as rightly pointed out in the article – the pricing aspects are unclear – unless it is going to be subsidized by the government, the only way forward wold be to charge consumer – can’t see too may consumers wanting to pay for it.
    And think! this is a killer for the private wallets, not a boost! why lock up money in a non-interest bearing instrument when you can readily pay cash.

    • GIRO is useful for paying cash, I agree, but if you read the first para, it states that the RBI wants to usher in a less-cash society 🙂
      OUs will likely become payments banks I agree (if and when that payment bank regulation comes – I’m waiting for it, too. Next part of the revolution)
      YEs, banks like Axis and HDFC which are float banks for a large number of billers will probably see their influence wane.
      While it could be a killer for private wallets, they primarily exist because payment systems are crappy right now (too many failures). If they could fix the payment gateway ecosystem there will be no need for private online wallets. (Which is a different point that RBI hasn’t yet addressed)
      And cash is a non-interest bearing instrument too 🙂

  • Binoy Chand says:

    Unfortunately the conceived GIRO scheme will work against the ‘less-cash’ philosophy. This is any event a retrograde step – at a time when the government is trying to push for electronic flows of monies.
    It is a mechanism which will effectively push biller costs to consumers – case in point is the e-seva in Andhra Pradesh where the consumers are charged for every transaction and the billers save costs by getting rid of cash collection counters. The savvy/high-end/richer customer will pay online/electronically at biller website without any costs, whereas the bottom of the pyramid will have to pick up a transaction cost now (they may save on transport, time etc though)
    And also consider the potential citizen information misuse that is now going to be possible at each of the OU’s. Matter of time before consumer information is sold an ‘monetized’ at these centres…
    As i said retrograde move…cannot believe that Dr Raghuram Rajan would have blessed this!

    • I honestly disagree. I think this is like the whole privacy argument against AADHAAR. it helps the BoP more than concerns them.
      Cash is an important part of our system and should be. Yes, finance folks call it leakage, but it’s important that it remains “leaked” otherwise our bankers would have destroyed the economy by continuous evergreening and faking of asset classification. That’s a different argument, but I believe cash is important for trust, andfor people who can’t or won’t use other payment instruments.
      The BoP won’t go electronic anyway. We might as well make it easier for them to pay. The old, the infirm, the invalid, they shouldn’t have to go to 100 places to pay 100 bills. Look at Bangalore. It has Bangalore one counters, where you can pay electricity bills, prop taxes, phone bills, get copies of govt certifiates etc. HUGELY successful because you just have to go to one place. And they accept cash, cards, cheques, anything. There is no transaction cost (the billers pay, I guess)
      The GIRO system will help non-cash settlement by making it easier to pay cash alongside with other instruments, and when they can pay with whatever credit instrument they have. We just have to make those instruments more usable and available (they currently aren’t).