RBI Opens The Door To A New Dimension Of Digital Payments

Offline digital payments sound antithetical. Yet, it is something the regulator is pushing for and the industry sees as a way to take digital payments deeper into the hinterlands.

On Friday, the banking regulator said it will release a nationwide framework for implementing offline retail digital payments. This followed a pilot project conducted in 2020, under which transactions up to Rs 200 could be made in offline mode without additional factor authentication. The pilot, which ran between September 2020 and June 2021, involved 2.41 lakh transactions worth Rs 1.16 crore.

"Offline digital payments would work best for micro payments under Rs 200," said Sunil Kulkarni, chief executive of Business Correspondent Federation of India. "The moment you enter the sub-200 category, you see that the infrastructure cost, transaction time and issues from internet connectivity outweigh the benefit of digital payments," he explained.

Offline digital payments can work through cards, token or even via voice-enabled solutions. The idea is that those without smartphones should also have access to digital payments.

For instance, customers can be given a card or token. These can then be used on an acceptance device, even without internet connectivity. In the absence of internet, the acceptance device will record the payment associated with the card or token and close the transaction.

As soon as the acceptance device collects a pre-decided limit, it would not work till the merchant reconciles the transactions with the payment system operators and receives payments.

The value of payments via offline digital options is typically very small.

For instance, over the course of the pilot programs, the average value was around Rs 48 per transaction. "This is exactly where the sweet spot is," said Kulkarni.

Offline payments would include things like near field communication-enabled cards on specialised acceptance infrastructure, and interactive voice response-based payments systems, said Anand Kumar Bajaj, MD & CEO, PayNearby.

Presently, the largest use case for offline digital payments is across mass transit systems.

Even at present, customers can load their travel cards with funds, which can be instantly redeemed for entry into metros and buses. These transactions do not require mobile connectivity to operate. However, these are still closed loop mechanisms, since cards availed from one metro network may not work across others.

"With the emphasis that RBI is putting on growing micro digital payments offline, we should see more use cases emerge with open loop cards accepted for mass transit," Kulkarni said.

Such cards can also be made available for payments at kirana stores and other establishments, to expand use of offline payments.

Companies like RapiPay, which provide assisted transaction services in remote locations, will also benefit from this push. According to Nipun Jain, CEO of RapiPay, 70% of the company's direct business offices, which allow for assisted money transfers and cash withdrawals, are in tier-2 and tier-3 cities and rural areas.

"This will boost convenience and number of transactions for lakhs of RapiPay direct business offices pan-India which provides services like AEPS (Aadhaar Enabled Payment System), micro ATM, domestic money transfer, CMS (cash management system), etc. to more than 3 crore customers every month," Jain said.

To be sure, this is not the first time that India is trying offline digital payments. The National Payments Corporation of India already operates unstructured supplementary service data or USSD-based transactions under the *99# protocol.

The USSD-based payment service allows customers with feature phones to transfer money, check account balances and other value added services through text messaging, without requiring the internet.

However, the service has not truly taken off since its launch over a decade ago, although it did become the base for the immediate payment service and unified payment interface. In the month of July, only 1 lakh transactions worth Rs 16 crore took place on the USSD-based payments platform, according to data available with the RBI. In comparison, UPI reported 324 crore transactions worth over Rs 6 lakh crore in the same month.

Offline digital payments also come with typical risks that plague non-cash transactions.

For instance, any voice-based or interactive voice-response based system can be manipulated by fraudsters who promote their own toll-free numbers, instead of those provided by genuine service providers. Similarly, NFC-enabled card system could also be manipulated by fly-by-night operators who may take cash from customers and promise to load their cards with funds.

Business risks aren't insignificant either.

The cost of setting up the infrastructure and maintaining it, outweighs the earnings from the services. For instance, voice-based payments would need investments in setting up specialised servers which can accept multiple concurrent calls. For smaller companies, this would be a significant cost.

Over and above the push for offline digital payments, the RBI also said it would implement a framework for geo-tagging payment acceptance infrastructure.

According to Sumita Kale, advisor, Indicus Foundation, geo-tagging would help the regulator in understanding the gaps in the growing digital payment space in India and address issues where needed.

"Through geo-tagging you can get the exact locations where the penetration of digital payments is low, or is not working to the best of its potential. It would help the regulator, banks and other entities to develop strategies to address these problems," Kale said.

It would further help the regulator streamline the use of the payment infrastructure development fund, as investments would go to regions where they are most needed, she added.