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Article- The Digital Micro-Payment Bugle

March, 2017

CFO Insights on Financial Services

Dr. Ashok Jhunjhunwala, Professor, Department of Electrical Engineering, Indian Institute of Technology, Madras

There may not have been a better time to pen this article. The Mobile Payment Forum of India (MPFI) was born some seven years ago, with the objective of enabling small payments through mobile. Number of mobiles had crossed 900 million and it was apparent that most people would soon have access to a phone. The idea of payment of the smallest to not-so-small an amount, anytime, anywhere, and from anyone to anyone was crystallised. The payment should be instantly possible irrespective of the type of phone that the payer and payee had, the operators they took service from, or the bank or the financial instrument they kept their money with. Banks, telecom operators and technologists got together, were able to rope in RBI, and worked out the details. One would not have to even remember her bank account number, as the person’s phone number will be mapped to it. Since a person may have multiple accounts, an MMID was added to the phone number, which gave a unique mapping between the extended phone number and a bank account. Draft regulations were prepared by MPFI and RBI accepted it. RBI went on to form a National Payment Corporation of India (NPCI) to act as an intermediary and carry out the settlement. One started to imagine that paying the vegetable vendor using a phone and the vision of cashless society was setting in.

Just when everything was falling in place, small and narrow interests of individual businesses started creeping in. Mobile companies wanted to get as much as they could from each payment and compared the prevailing cost of “sending money to a village” as basis for their charges. Further, they wanted their mobile wallets to replace the banks. Banks would not tolerate any new player and would make things difficult for wallets. They would not even allow a third-party player to come up with an application where money would be transferred from one bank account to another and insist on all users using their (bank’s) application alone. So if one has two bank accounts with two different banks, two applications will have to be loaded. No one was thinking of the customer. On top of it, smart-phones were in their infancy and it was difficult to load these applications on a variety of feature phones available. The only easy option was SMS based payment, which was not as secure. It is at that time, MPFI came up with an idea of using spare capacity on USSD (a channel available on mobile phones and used to send dialled digits). But again, mobile companies would want a huge fee. MPFI then came up with a way to make third party SMS based payment encrypted to communicate with bank’s payment systems. But banks would not accept it. As a result, the mobile payment explosion never took place, but crawled.

The demonetisation drive initiated last month, has suddenly given a new lease of life to micro-payments, and it is more likely to happen today. Customers and merchants would both like to get this working, so that they have to depend less on cash. The Government’s push is helping. At the same time multiple digital payment options are now available.

USSD based payment would probably be simplest, as it would work on any phone (feature or smartphone). A customer has to type in merchant’s extended phone number, amount to be paid and a PIN on her phone and the transaction would be instantaneous. Merchant just needs to display the extended phone number (linked to his or her account) in the shop. In

the meantime, Aadhaar number and finger-print authentication has scaled in the country. If the merchant has a smart-phone and finger-print sensor, the customer just needs her Aadhaar number and use her thumb to make the payment. Of course, the customer’s Aadhaar number and account need to be linked, but even a PIN is not required, making it less prone to misuse. The only problem is that some customer’s finger-print may not be clear and the transaction may fail. A second try would make it successful in most cases. For a small number of customers, their finger-print may be unclear and they may have no option but to use a PIN.

As yet another option, soon a QR-code based Universal Payment System will be launched, where the merchant will have a QR-code picture on his or her wall. A customer with smart-phone can point and click at the picture, enter the amount and PIN to complete the transaction. Of course the traditional card based payment using POS machine would be another way, though getting the POS machine to every vendor quickly may be tough. In all cases, a confirmatory SMS will be sent to customer’s phone, if it is linked to bank account. Finally, there are enough wallets in the country today and they are doing well. Digital micro-payment is about to explode.

Creating some PULL may help. May be the Government could come up with standard deduction for tax of an amount that a merchant receives using digital transaction, up to a maximum of INR 100,000. Government could certainly remove all charges on customers for such digital payment.

As digital micro-payment explodes in the nation, the economy could benefit immensely. Money will be in banks and not in individual’s pockets. Transactions will be traceable. On top of it, given the situation that we are in today, this micro-payment revolution may occur in the shortest possible time in the country, enabling us to create history. But the rapid movement to digital transaction needs a cautionary note.

The first caution is with respect to frauds and dispute resolution. Frauds can easily destroy confidence in this new system. It will take a long time to overcome the fear after that. It is impossible to completely prevent frauds. Therefore, what would be needed is some customer-centric dispute resolution mechanism, so that customer is not penalised unduly for frauds. This is especially important in the first year or two to build trust. The second caution has to do with tax-authorities using the transaction data to harass small merchants and customers. While legitimate taxes need to be paid, honest small merchants and middle and low-income people do not have the wherewithal and expertise to deal with tax-authorities and answer their queries; nor can they hire legal and chartered accountant’s services easily. Fear will prevent their move to digital.

Unless steps are taken to guard against these possibilities, the micro-payment revolution can again peter out and get postponed.

It is important that government, industry and policy-makers understand that trust and confidence need to be won. It can easily go the other way, more rapidly than one can imagine.

There is little doubt that India is at a threshold of a major revolution. But the champions of micro-payment can become their own enemy and can hurt the movement. Hopefully we will all be careful and see it all the way this time.

Opinions expressed in this article are the author’s own.

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