Analysis of Payment Systems (NEFT, Mobile Payments) By M.MURALIDHAR MBA BANKING TECHNOLOGY PONDICHERRY UNIVERSITY Project supervisor Dr. M.V.N.K.PRASAD (Asst. Prof.) IDRBT Institute for Development and Research in Banking Technology Castle Hills, Masab Tank Hyderabad 500 057 Phone: 90-40-23534981 (8 Lines); Fax: 90-40-23535157 Web: http://www.idrbt.ac.in
CERTIFICATE This is to certify that project has been successfully completed to my satisfaction by M.MURALIDHAR and that the goals set upon at the outset of this endeavor have been worked upon to the best of the students abilities and resources. I hereby allow this project to be presented for evaluation with my full consent. Dr.M.V.N.K.PRASAD ASST. PROF IDRBT <year> by Institute for Development and Research in Banking Technology, All Rights Reserved i
CONTENTS Executive Summary iii. 1. PAYMENT SYSTEMS IN INDIA... 1 1.1 INTRODUCTION.....1 1.2 RETAIL PAYMENT SYSTEMS.. 1 1.2.1 RETAIL PAYMENT INSTRUMENTS.... 2 2. National Electronic Funds Transfer (NEFT).. 3 2.1 NEFT OPERATION.... 3 FIG 2(A): NEFT OPERATION FLOW.... 4 FIG 2(B): NEFT OPERATION FLOW.... 5 2.2 CHALLENGES.........6 2.3 PROPOSALS...7 3. MOBILE BAKING 8 2.1 BUSINESS RULES GOVERNING MOBILE BANKING SERVICE 9 2.2 MOBILE BANKING ISSUES...10 2.3 PROPOSALS.. 11 BIBILOGRAPHY....13 <year> by Institute for Development and Research in Banking Technology, All Rights Reserved ii
Executive Summary Background The payments systems in India has evolved over the past few decades and now with the electronic payment systems, the transactions are made more faster, reliable and secure. Objective & Scope The objective is help the customers educate and induce them to use electronic payment systems to provide them with efficient payment services. Methodology The payment systems in various developed and developing countries are analyzed, as how they have transformed their payment systems and strategies to increase the use of electronic payment systems. Requirements (Hardware & Software etc.) Computer which can support Microsoft office, pdf reader. Results Proposals have been suggested to increase the use of electronic payments and for the penetration of mobile banking services. Utility to Banks Banks can implement the proposals which are feasible to them, to provide their customers with faster, reliable and secure electronic payment systems and reduce their costs of paper based payments and mobile banking which is branchless banking helps in providing efficient customer service. Short Summary of the Project Though electronic payment systems have evolved in India, paper based payments still dominate majority of transactions in retail payments, which will have processing overhead on the banks, where are the electronic payment systems are easy to implement and costs considerably for the banks and can be tracked with ease. The electronic payment systems are secure, fast and reliable. The banks have to employ strategies to increase the use of electronic payments by their customers. In India majority of the population have mobile phones, mobile banking helps the customers to perform banking through their mobile than visit and bank, banks should promote mobile banking among their customer thus reducing branch banking and mobile banking which is a branchless banking which contributes significantly towards financial inclusion. <year> by Institute for Development and Research in Banking Technology, All Rights Reserved iii
1. PAYMENT SYSTEMS IN INDIA 1.1 Introduction Payment Systems are the key component of any financial system. They facilitate the movement of money in the economy. The efficient functioning of the payment system makes a key contribution to overall economic performance by allowing safe and timely completion of financial transactions. Payment Systems also provides the conduit for effective transmission of monetary policy. The payment systems segment of the financial system has been witnessing rapid changes due to the developments in Information and communication technologies. The changes are either spearheaded by the Central banks /Governments, or banking sector. The aim of most of these developments have been to (i) Reduce the usage of currency and paper based payment instruments and (ii) Facilitate faster movement of funds in the economy increase the efficiency with Safety and security arrangements. 1.2 Retail Payment Systems Retail payments are transactions which can typically be classified as, (i) Person to Person, (ii) Person to Business - (eg. bill payments), (iii) Currency withdrawals ATM/debit cards) and (iv) Advances (credit cards). These payments generally refer to obligations arising from retail commercial and financial transactions which can be either one-time person to person (or business) payments or recurring bill payments(or domestic remittances from person to persons) or payments to Governments. These transactions need not be of small value alone, but are generally of low average transaction value but high transaction volumes. They also involve a much broader range of payment instruments and transaction systems. The most popular means of retail payment instrument is, the Currency which is the legal tender. The main advantage of currency vis-à-vis other payments instrument is its universal acceptance, immediate final settlement and relatively lowest cost to the payee for upfront payment (cost would be involved when the payment has to made at a particular location). The major disadvantage of currency is carrying of large quantities of currency to make payments would involve transportation issues and is also a security risk. Further, holding large quantities of currency does not fetch any return - the interest foregone because of currency holding is a cost to the holder of currency. While currency as a payment instrument would have no perceptible cost to the payer, the processing of this instrument involves a cost to the <year> by Institute for Development and Research in Banking Technology, All Rights Reserved Page 1 of 17
society. Next to currency the other paper based payment instruments viz. cheques have been a common mode of payment instrument for the business. The general public prefers this mode mainly for payment of utility bills etc. 1.2.1 Retail Payment instruments Cheque : Cheques as payment instrument is most popular mode of payment in the country. The clearing and settlement of cheques drawn on different banks require the coming together of the banks in that area for transfer of instruments and the final settlement of funds. This process is facilitated by the clearing houses at these centers. The clearing and settlement process has been mechanized by the introduction of Magnetic Ink Character Recognition (MICR) based sorter machines. Eighty percent of the total cheque clearing volume and value in the country are accounted for by these centers. At the remaining centers where the volumes of cheques are low, manual clearing continues. The clearing and settlement cycle in the country is two days one Day-1 the cheques are presented at the clearing house and Day-2 the funds settlement and return clearing are accounted for. Electronic Retail Payment Instruments The retail electronic payment systems in the country are National Electronic Funds Transfer System (NEFT) Electronic Clearing Service (ECS) Card Based Payment System Large Value Payment Systems Real Time Gross Settlement System (RTGS) High Value Clearing Systems <year> by Institute for Development and Research in Banking Technology, All Rights Reserved Page 2 of 17
2. National Electronic Funds Transfer (NEFT) National Electronic Funds Transfer (NEFT) system is a nationwide funds transfer system to facilitate individuals to electronically transfer funds i.e. inter-bank fund transfer. 2.1 NEFT operation NEFT uses the Public Key Infrastructure (PKI) technology to assure end-toend security and the Indian Financial Network (INFINET) to connect bank branches for electronic transfer of funds. An individual / firm / corporate intending to originate or transfer funds through NEFT has to fill an application form giving details of the beneficiary. The remitter fills in the NEFT Application form giving the particulars of the beneficiary viz. bank-branch, IFSC of the beneficiary bank branch, beneficiary's name, account type and account number The originator authorizes the branch to debit his account and remit the specified amount to the beneficiary. The remitting bank branch prepares a message and sends the message to its pooling centre (also called the NEFT Service Centre). The pooling centre forwards the message to the NEFT Clearing Centre (operated by National Clearing Cell, Reserve Bank of India, Mumbai) to be included for the next available batch. The Clearing Centre sorts the funds transfer transactions destination bankwise and prepares accounting entries to receive funds from (debit) the originating banks and give the funds to (credit) the destination banks. Thereafter, bank-wise remittance messages are forwarded to the destination banks through their pooling centre (NEFT Service Centre). <year> by Institute for Development and Research in Banking Technology, All Rights Reserved Page 3 of 17
The destination banks receive the remittance messages received from the Clearing Centre and pass on the credit to the beneficiaries accounts. Alternatively Individuals, firms or corporates who do not have a bank account (walk in customers) can also deposit cash at the branch with instructions to transfer funds using NEFT. Fig 2(a) : NEFT operation flow <year> by Institute for Development and Research in Banking Technology, All Rights Reserved Page 4 of 17
Fig 2(b) : NEFT operation flow <year> by Institute for Development and Research in Banking Technology, All Rights Reserved Page 5 of 17
2.2 Challenges To make NEFT near real-time and available to the customers 24*7. To reduce paper based payments and increase use of electronic payments. Validating accounts before transactions, thereby preventing unwanted transactions and increasing efficiency. Monitoring transactions to prevent money laundering. 2.3 PROPOSALS To increase the use of electronic transactions among customers, the banks can adopt two strategies viz. providing incentives over the use of NEFT or charging nominal fee over paper based transactions (which require cost estimation of paper based payments). Though the banks may not prefer the latter, the former should be implemented more aggressively to increase electronic payments. Banks should also encourage use for net banking by providing net banking account at the time of creating a new account rather than the customer applying for net banking after account is created with the bank. Thus this allows customers to use net banking facilities which includes electronic payments. Another important factor is providing the customer education about use of electronic payment systems, albeit many of the customers are aware of these payments, they do prefer paper based payments as they are not aware of the faster and secure transactions provided by NEFT. Though RBI has instructed banks to increase settlements from 6 to 11 and made hourly settlements, many banks have not updated this information on their website. Banks should provide separate support/helpline for customers for queries or issues over electronic payments, thereby improving customer confidence on electronic payments and ease of use over paper based transactions which are difficult to track. Before making an NEFT payment, the bank should validate the beneficiary account i.e. account name and branch, thereby eliminating transactions to wrong account number, which increases customer confidence over electronic payments as in case of paper based i.e. cheque where validating before transaction becomes difficult, but is possible in case of electronic payments.(though banks can provide this validation within their bank i.e. intra-bank, it should be made possible for inter-bank by RBI) <year> by Institute for Development and Research in Banking Technology, All Rights Reserved Page 6 of 17
NEFT transactions are made available to walk-in customers by depositing cash at the branch, though banks allow a maximum limit to credit for an account (Beneficiary) per day, the customer can credit to beneficiary again from another bank, thereby the customer can create a pool of transactions to an account from different banks to the same account, which may be an act of money laundering.hence the banks should monitor their customer account to prevent money laundering. NEFT transactions for walk-in customers should be processed only after verifying the customers (viz. identity proof) who wishes to make an electronic payment to prevent money laundering. Though NEFT settlement cycles are increased from 6 to 11 settlements on weekdays - at 09:00, 10:00, 11:00, 12:00, 13:00, 14:00, 15:00, 16:00, 17:00, 18:00 and 19:00 hrs. The transaction which is made after 19:00 will be processed only the next day at 9:00 i.e. after 14 hours of last settlement cycle, which may result in large pool of transactions both at 1 st and 11 th (last) settlement, RBI should implement one more settlement cycle at 2:00 to process instruction made after 19:00 for internet banking customers. <year> by Institute for Development and Research in Banking Technology, All Rights Reserved Page 7 of 17
3.MOBILE BANKING Mobile Banking is a service that allows you to do banking transactions on your mobile phone. Services Offered PULL based services (initiated by the customer) PUSH based services (originated by the Bank) Request services (initiated by the customer for placing various requests/instructions to Bank) ( The customer can avail Mobile Banking on any Mobile Phone with valid connection from a service provider. However for enjoying all the services offered through Mobile Banking, a handset with added features is essential.) PULL based services (initiated by the customer) Balance Enquiry Mini Statement Fund Transfer within Federal Bank Issued Cheque status PUSH based services (originated by the Bank) Cheque Book Issue Alert Cheque Deposit Bounced Alert Cheque Issued Bounced Alert Term Deposit Maturity Alert prior to a selected number of days by the customer Loan Due Alert prior to a selected number of days by the customer Credit to the Account having amount higher than the limit specified by the customer Debit to the Account having amount higher than the limit specified by the customer Account Balance goes above the amount specified by the customer Account Balance goes below the amount specified by the customer All these alerts will be delivered to the customer's Mobile Phone as SMS. Request services (initiated by the customer for placing various requests/instructions to Bank) Request Cheque Book Request Account Statement Feedback to bank Customer Care Contact details view <year> by Institute for Development and Research in Banking Technology, All Rights Reserved Page 8 of 17
Technology In Use SMS It works on the "Text Messaging Facility" also called the SMS that is available on mobile phones. This facility allows you to send a short text messages from your mobile phone instead of making a phone call. The response is sent to you as an SMS message, all in the matter of few seconds. GPRS General Packet Radio Service (GPRS) is a packet oriented mobile data service through which you can access the services of Federal Bank Mobile Banking using your MPIN. GPRS will be enabled by the mobile service provider for the Java enabled mobiles. J2ME Using GPRS Internet Connection, You can download the Mobile Banking application on your mobile handset from BankS website. 3.1 Business Rules governing Mobile Banking Service The Mobile Banking Service will be available to all the customers having Current/ Savings Bank Account (Personal segment). The customers will have to register for the services. Daily transaction limits for fund transfer/ bill/ merchant payment is Rs.50,000/- per customer with an overall calendar month limit of Rs.2,50,000.00 The service is free of charge. However, the cost of SMS / GPRS connectivity will have to be borne by the customer. <year> by Institute for Development and Research in Banking Technology, All Rights Reserved Page 9 of 17
3.2 Mobile banking issues Customer education Multiple pin remembrance Security Mobile banking application download & installation, usage. Multiple mobile banking applications by various banks. Certifying mobile banking applications. Standards for mobile banking. Penetration of mobile banking. <year> by Institute for Development and Research in Banking Technology, All Rights Reserved Page 10 of 17
3.3 PROPOSALS Customers generally find it difficult to download and install the application on their mobile phone due to lack of education on how to do so, the banks should have a separate mobile banking counter at the their branches, this will serve two purposes o Helping the customers in educating about mobile banking / providing MNO customers service numbers for installation of mobile banking application and also how to use it. o Attracting customers who come to bank branch towards mobile banking if is shown as an special service which is provided by bank at free of cost. Banks have already done a complete KYC of the customers, further registration for mobile banking services will act as a significant barrier in the customer adopting the service, hence o New customers who are opening a bank account should also be provided with mobile banking. o Only existing customers who wish to have a mobile banking service should undergo registration for mobile banking service. RBI should consider releasing a mobile banking application which allows the customer to switch between his different bank accounts. There should be a centralized database which will help the banks in identifying the account to which money is to be credited. o RBI or an authorized centre should help the banks in switching and settlement of mobile banking transactions to help interbank mobile payments. o The mobile banking applications should be certified. RBI should consider releasing a mobile banking application which allows the customer to switch between his different bank accounts. This will reduce using multiple mobile application software s by various banks and will help the customer get accustomed to single application. <year> by Institute for Development and Research in Banking Technology, All Rights Reserved Page 11 of 17
Increased partnerships between banks, carriers and merchants to increase the number of products available for purchase till M-commerce comes into full effect. <year> by Institute for Development and Research in Banking Technology, All Rights Reserved Page 12 of 17
Bibliography: Neft System http://www.rbi.org.in/scripts/faqview.aspx?id=60 Mobile Banking transactions in India - Operative Guidelines for Banks www.rbi.org.in/scripts/bs_viewcontent.aspx?id=1660 Payment Systems in India - Vision 2009-12 http://rbi.org.in/scripts/publicationreportdetails.aspx?urlpage=&id=573 <year> by Institute for Development and Research in Banking Technology, All Rights Reserved Page 13 of 17