Funnel Vision #24
Offline digital payments - The future of payments
Despite the long-standing proliferation of smartphones and ambitious efforts of Telecoms like Jio, many rural and semi-urban regions in India continue to grapple with the issue of access to the internet. According to the official data released by the Government of India, there are still some 25,000 villages in the country that don’t have access to the internet. In states like West Bengal and Bihar, hardly 7-8% of rural households have any access to the internet, whereas only 18-21% of urban households have any access to the internet. For example, there are still around 2223 villages in Arunachal Pradesh that don’t have mobile or internet connectivity.
These surprisingly stunning facts uncover a remarkable revelation – despite the evolution and availability of technology, people living in village areas find it a tumultuous ordeal to use digital banking services like UPI for their daily transactions and hence end up in a stiff conundrum for seamless transactions when they are stranded for cash. Thus, the lack of payment infrastructure never ceases to be a point of concern in the government’s tale of woes to facilitate financial inclusion for the benefit of the entire community.
However, akin to how a small shaft of light would lighten up a darkened attic, RBI unveiled a new framework on 3rd January which is applicable with immediate effect that serves to be a panacea for this plaguing issue.
The Framework
As per the announcement on the website of Reserve Bank of India, the framework incorporates the feedback received from the pilot experiments on offline transactions conducted in different parts of the country during the period from September 2020 to June 2021 and involved 2.41 lakh transactions worth Rs 1.16 crore. Under this new framework, offline digital payments i.e. transactions that do not require internet or telecom connectivity can be carried out face-to-face (proximity mode) using any channel or instrument like cards, wallets, mobile devices, etc. Such transactions would not require an Additional Factor of Authentication (AFA).
However, the offline mode of payment can be enabled only after obtaining the specific consent of the customer. Customers shall enjoy protection under the provisions of circulars limiting customer liability issued by RBI and also have recourse to the Reserve Bank – Integrated Ombudsman Scheme for grievance redress. The RBI has asked all the authorized Payment System Operators (PSOs) and Payment System Participants (PSPs), acquirers, and issuers (banks and non-banks) to ensure compliance with the instructions.
How will offline digital payments work?
Since the transactions are offline, alerts (by way of SMS and/or e-mail) will be received by the customer after a time lag. Transactions are subject to a limit of ₹200 per transaction and an overall limit of ₹2000 for all transactions until the balance in the account is replenished. Balance replenishment can only occur in an online mode with an additional authentication factor. The issuer shall send transaction alerts to users as soon as transaction details are received. There is no compulsion to send an alert for each transaction; however, details of each transaction shall be adequately conveyed.
This framework has given a ray of hope to the people who don’t have access to the internet yet. They will be able to transact seamlessly even if they don’t have cash in their wallets. And considering commerce is the bedrock of any community, the presence of a good payment infrastructure may be a turning point for them.
Challenges with offline digital payments
The people of the rural parts find it difficult to show trust on the Internet. As these are technologically challenged people, they do not even try to know about it and use it. They can't understand why giving away their bank details to someone else on the internet is useful, and they can not build trust about it. They have safety concerns and feel that everything related to banking and money has to be conservative, for security purposes.
Previous attempts to bridge the digital divide
After the NPCI launched the RuPay card to promote a unified way of online payments, credit and debit cards started becoming substantially accessible to the rural population. But, due to the lack of adequate digital infrastructure, it was of no use for the people of the rural areas. There are hardly any PoS terminals found in the shops in rural areas. With over a billion debit and credit cards in the country, there are only around 50 lakh PoS terminals available. This massive difference in the numbers is due to the cost of acquisition of the PoS terminals, which is considerably high for local merchants of the rural areas.
Future – should the existing FinTech players enter this market or is it too small?
There are multiple companies contemplating an entry into this upcoming market that needs significant technological disruption while maintaining ease of operations for the layman customer. For instance, VISA was exploring the possibility of introducing special cards that would facilitate transactions in areas with little or no connectivity. On the other hand, NPCI evaluated the viability of using text messages which could be sent even from feature phones (as rural areas may not have the best of the penetration of smartphones, especially when compared to the urban regions) to facilitate digital offline payments. The customer could essentially send a text message with a specified code and transfer the desired amount to the merchant by enabling USSD mobile banking services in their feature phone. Many FinTechs are envisaging to unlock this not-so-distant reality by using NFC (Near-Field Communication) to make a dent in this space. Of the total mobile phone consumer base of 118 crore, only 74 crore have smartphones, which means that there are close to 44 crore feature phone users in the country, thus making this a very attractive market for the upcoming startups and FinTech firms.
Conclusion
Although the analysis seems quite rosy, technology’s tryst with finance leading to disrupting innovation has always been impeded by heavy regulations and adoption barriers. It is not wrong to claim that offline digital payments are still a work in progress and warrant utmost attention going forward. But there are hardly any naysayers resisting the fact that this will help more people to go digital and culminate into the birth of a new era of offline payments revolution, much like the large-scale adoption of UPI for online digital transactions. Hopefully, this will be a veritable catalyst to coalesce the entire community under the umbrella of digital payments.
Meet the Author
This issue of Funnel Vision has been authored by Avichal Agrawal and Saurabh Laddha.
That’s all for this edition!
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Very well explained.