Introduction
It is quite common to have faced inconvenience while making digital payments using the internet, which is primarily attributable to erratic internet connections. Poor connectivity is prevalent across India and may be experienced in rural as well and urban areas. In remote and rural areas, the problem of financial exclusion is exacerbated as majority of the people already lack access to basic financial services, and the tool of internet enabled digital financial services (DFS) which is intended to bridge this gap, is also not effective.
To this end, in a bid to increase financial inclusion, the Reserve Bank of India (“RBI”) has introduced a new DFS model of ‘offline retail payments’ i.e., digital payments that can be made by the parties without depending on the internet to take effect. This mode of payment could be a game-changer in India in terms of uptake of DFS in remote areas as well as being a major step towards financial inclusion. 80% of India’s population owns a bank account primarily due to the Jan Dhan scheme.[1] Although this may seem to be a good figure, the mere existence of a bank account is not sufficient to measure financial inclusion as account usage, financial literacy, savings and institutional borrowing lag behind.[2] Moreover, as per 2020 figures, only 36% Indians owned a smartphone[3] and only 50% had access to the internet.[4]
This reflects a massive divide in terms of ownership of smartphones (most of the innovation in DFS is app-based and not feature phone based) along with access to internet which are the primary tools for DFS, as more than half the population of India remains excluded. One step toward achieving financial inclusion (keeping in view the low smartphone and internet penetration) could possibly be the RBI’s pilot project on offline retail payments (“Pilot Scheme”). This blog discusses the said scheme and suggests measures that may be taken to make this innovative step secure and successful.
RBI’s Pilot Scheme
In its August 2020 Monetary Policy Statement[5], the RBI announced that it would roll out a pilot scheme for offline retail payments to boost DFS. In August 2020, RBI rolled out the nine-month pilot scheme[6] and gave the rationale for it: “Absence of, or erratic, internet connectivity, especially in remote areas, is a major impediment for adoption of digital payments. Availability of options to make offline payments, using cards, wallets or mobile devices could boost the adoption of digital payments”. The intent here is clearly financial inclusion, by developing digital infrastructure for a new mode of DFS. In a nutshell, the scheme is aimed at authorized payment system operators, banks, and non-banks, to provide offline small value payment solutions using cards, wallets, mobile devices, or any other channel for remote or proximity payments.[7] The upper limit for a payment transaction is INR 200, and for a payment instrument is INR 2000.[8]
In terms of customer security, the requirement for an additional factor of authentication may be dispensed with at the choice of the user, and two RBI circulars on limited customer liability are applicable.[9] The said circulars essentially lay down: (i) in case of contributory fraud or deficiency on the part of the bank or non-bank, the customer will have zero liability; (ii) in case of a third party breach where the deficiency does not lie either with the financial institution (“FI”) or the customer, the customer liability depends on the number of days lapsed in reporting the unauthorised transaction(s). Reporting after a lapse of three days makes the customer liable; (iii) in case of negligence of the customer, the customer bears the entire loss up till the time of reporting, post which the loss is borne by the FI. The FI also has the discretion to waive customer liability, even in cases of negligence of the customer. Crucially, the FIs are required to communicate these provisions to their customers.
In furtherance to the Pilot Scheme, out of 32 entities that applied for RBI’s regulatory sandbox (test phase), only six were permitted to test their financial product.[10] On a deeper look into the products that have been permitted in the test phase, it appears that firstly, half of them are being developed for feature phones, either exclusively or in addition to smartphones. This is significant, as general innovation has been in relation to app-based payments which is limited to smartphones, and focus on feature phone-based payments may provide a greater thrust towards adoption of DFS by various strata of society. Secondly, the products appear to be a mix of remote and proximity payments.[11] While proximity payment products intend to use near-field communication technology (or contactless, as commonly understood), remote payment products will be even more beneficial, as they would enable payments even without such technology. They intend to use sound medium i.e., interactive voice response, as well as the SIM card itself for facilitating payments which may be easier to use on feature phones. Thirdly, one can note that the service providers are providing specialised products to enable financial inclusion, such as for self-help groups, for travel pass purpose, and are also providing the product in various Indian languages to enable widespread use.
International Experience in Offline Payments
In the context of offline payments, Ghana leads the way with the government owned National Switch and Smart card payments system[12], also called the e-zwich.[13] It is an interoperable platform where customers can perform banking and retail transactions either online or offline, through biometric authentication, thereby ensuring accessibility even in the remotest of areas.[14] The factors that led to the e-zwich being developed to reach the doorsteps of all Ghanaians was that it was aimed at people who may have trouble remembering the pin number on the cards. Moreover, it took into account crucial factors such as inadequate network communication infrastructure and irregular electricity connection.[15] The twin challenges faced by e-zwich were that first, there was paucity of merchants that accepted such cards for payment purposes, and this possibly led to the government using e-zwich extensively for government to person payments[16]. However, expansion of the use of e-zwich beyond government payments seems to be a persisting challenge[17], even though payments at shops, filling stations, and supermarkets have been linked to e-zwich. Second, the final reconciliation of transactions by PoS merchants at the end of every working day requires communications/cellular infrastructure, which may also be a challenge along with poor internet connectivity.[18]
In Sweden, unlike Ghana which has government-led solutions, Crunchfish is a private technology company is working on a project that would enable offline transactions through an offline wallet. The catch is that the logs would be settled when one of the parties go online, thereby requiring internet in the final leg of its transaction. This innovation is also targeting to support Swedish Central Bank’s digital currency project “e-krona”.[19] In the Indian context, in cases of erratic internet connections, this service could be tremendously useful whereby a later internet connection would confirm an earlier offline transaction, however, the flip side being that internet connection would be essential to complete the transaction.
Potential Issues
On a review of the RBI’s Pilot Scheme read with the limited liability circulars, as well as the limited international experience in this context, there are several issues that emerge. If the test phase is successful, however, two issues which would require specific attention are (i) security concerns to control fraud, and ensure transparency and trust in the payment system; and (ii) merchant adoption coupled with customer education. Some steps which may be taken to address these concerns are: first, as the legal regime governing offline retail payments evolves, the regulator may build in relevant provisions in the recent Master Direction on Digital Payment Security Controls setting out the RBI (Digital Payment Security Controls) Directions, 2021.[20] These directions are aimed at “regulated entities to set up a robust governance structure for digital payment systems and implement common minimum standards of security controls for channels like the internet, mobile banking, and card payments”. Chapter II deals with general security controls, and there are specific additional chapters containing security controls for internet banking, mobile payments applications and card payments. Therefore, it may be useful to include specific security and fraud control measures for offline payment systems as well.
Second, the RBI and payment system operators may work towards developing a strategy for ensuring merchant adoption of such offline retail payments, which is customized to the needs of the local ecosystem of customers and suppliers.[21] Further, a detailed work program on educating customers on the use, benefits, and risks of using such a mode of payment is imperative. As the intent is to use the offline payment systems in remote areas, the customer education programs may be developed in multiple languages. Since there is a positive and long run relationship between financial inclusion and economic growth[22], achieving financial literacy is crucial for the Indian growth story.
A Step towards Financial Inclusion
The G-20 High-Level Principles for Digital Financial Inclusion serve as a roadmap for increasing financial inclusion. While the principles do not specifically mention offline-payments, the very first principle encourages the development of relevant national strategies and action plans to develop new digital models for achieving digital financial inclusion[23], and also suggests that the industry adopts customer-centric product design approaches that focus on customer needs and behaviour, and facilitate the uptake and usage of digital financial services among the financially excluded and underserved.[24] The RBI’s Pilot Scheme puts forth a new DFS model specifically aimed at customers who are unable to use the internet, and to that extent, appears to be in alignment with the said principles.
The goal of RBI in developing the regime for offline retail payments should be that the features of cash are preserved to the extent possible: that it always works and that it safeguards privacy, along with the added benefit of paying exact sums while ensuring social distancing. If the DFS model is successful in increasing financial inclusion in areas having unstable and erratic internet connectivity, it may become a permanent feature of the payment system landscape in India.
[1] Neha Abraham, Over 80% Indians now have bank accounts. How many are actually using them?, Scroll.in (May 18, 2019), https://scroll.in/article/923798/over-80-now-indians-have-bank-accounts-how-many-are-actually-using- hem#:~:text=India’s%20banked%20population%20more%20than,amount%20to%20being%20financially%20included.
[2] Credit Delivery and Financial Inclusion, Annual Report, Reserve Bank of India (Aug. 29, 2018), https://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1231.
[3] Vaibhav Asher, Share of mobile phone users that use a smartphone in India from 2014 to 2022, Statista (Nov. 12, 2020), https://www.statista.com/statistics/257048/smartphone-user-penetration-in-india/#:~:text=India%20smartphone%20penetration&text=As%20of%202015%2C%2018.21%20percent,over%2025%20percent%20by%202017.
[4] Sandhya Keelery, Internet penetration rate in India from 2007 to 2020, Statista (Feb. 3, 2021), https://www.statista.com/statistics/792074/india-internet-penetration-rate/.
[5] Monetary Policy Statement, 2020-21 Resolution of the Monetary Policy Committee (MPC) August 4 to 6, 2020, Reserve Bank of India (Aug, 6, 2020), https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50176.
[6] Offline Retail Payments using Cards / Wallets / Mobile Devices – Pilot, Reserve Bank of India (Aug. 6, 2020), https://www.rbi.org.in/commonperson/English/Scripts/Notification.aspx?Id=3192.
[7] Id.
[8] Id.
[9] Customer Protection – Limiting Liability of Customers in Unauthorised Electronic Payment Transactions in Prepaid Payment Instruments (PPIs) issued by Authorised Non-banks, Reserve Bank of India (Jan. 04, 2019), https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11446&Mode=0;Customer Protection – Limiting Liability of Customers in Unauthorised Electronic Payment Transactions in Prepaid Payment Instruments (PPIs) issued by Authorised Non-banks, , Reserve Bank of India (Jul. 06, 2017), https://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=11446.
[10]RBI regulatory sandbox – First Cohort on Retail Payments (Test Phase), https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=5085611608172909314.html; https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50665.
[11] Supra 2.
[12] Ghana links mobile payments to national switch, Mobile Payments Today (Dec. 26, 2013), https://www.mobilepaymentstoday.com/news/ghana-links-mobile-payments-to-national-switch/.
[13] E-zwitch, Ghana Interbank Payment & Settlement Systems Limited, https://ghipss.net/products-services/e-zwich.
[14] Keith Breckenridge, The world’s first biometric money: Ghana’s e-Zwich and the contemporary influence of South African biometrics, 80(4) Africa 642, 644 (2010).
[15] Id.
[16] Digital Financial Services, World Bank Report (Apr. 2020), http://pubdocs.worldbank.org/en/230281588169110691/Digital-Financial-Services.pdf.
[17] Id at 19.
[18] Supra 12.
[19] Crunchfish enables offline frictionless mobile payments Crunchfish (Jan. 30, 2020), https://www.crunchfish.com/crunchfish-enables-offline-frictionless-mobile-payments/.
[20] Master Direction on Digital Payment Security Controls, Reserve Bank of India (Feb. 18, 2021), https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12032&Mode=0#14.
[21] Badal Malick, Rajesh Shukla, Opinion: What makes merchants adopt digital payments?, Mint (Aug. 9, 2018), https://www.livemint.com/Opinion/nuRRIsiLkbMMRLJ7iAN5nN/Opinion-What-makes-merchants-adopt-digital-payments.html.
[22] Dinabandhu Sethi, Debashis Acharya, Financial inclusion and economic growth linkage: some cross-country evidence, Emerald Insight (Aug. 6, 2018), https://www.emerald.com/insight/content/doi/10.1108/JFEP-11-2016-0073/full/html?skipTracking=true#:~:text=Financial%20inclusion%20contributes%20to%20economic,Nanda%20and%20Kaur%2C%202016.
[23] G20 High-Level Principles for Digital Financial Inclusion, Global Partnership For Financial Inclusion, pg. 11, https://www.gpfi.org/sites/gpfi/files/documents/G20%20High%20Level%20Principles%20for%20Digital%20Financial%20Inclusion%20-%20Full%20version-.pdf.
[24] Id at 12.
This article has been authored by Ms. Shreya Garg, Senior Resident Fellow at Vidhi Centre for Legal Policy. She was assisted by Mr. Faiz Uddin Ahmad, a student at RGNUL, Punjab. This blog is part of RSRR’s Excerpts from Experts Blog Series, initiated to bring forth discussion by experts on contemporary legal issues.