Banking sector on the cusp of new digital revolution

Banking sector on the cusp of new digital revolution
Highlights

Electronic settlement and payment system is set to enter another innovative phase with wider adoption of Near Field Connectivity (NFC) technology by banks. NFC can facilitate payments through contactless cards using the radio frequency waves.

Near Field Connectivity technology to increase cashless transactions many-fold

Electronic settlement and payment system is set to enter another innovative phase with wider adoption of Near Field Connectivity (NFC) technology by banks. NFC can facilitate payments through contactless cards using the radio frequency waves. Thus, payments and transfer of funds can happen by merely waving smartcard/smartphone close to Radio Frequency Identification (RFID) reader installed by a beneficiary outlet. In next few years, every alternate smartphone may have the RFID reader to facilitate transmission of money from one account to another

Transformation in the payment and settlement of funds through electronic mode is fast picking up pace. Improved technology levels and its widespread dissemination mark the surge in electronic payment system in India. Shift from standalone automation to anywhere banking on core banking platform has been a strategic move in disseminating technology-led banking services. The increase in add-on alternative delivery channels (ADCs) such as ATMs/POS terminals/internet banking/mobile banking and mobile wallets has changed the landscape of payment and settlement system in India. As a result of continuous thrust on electronic banking, the number of debit cards has reached 589.5 million and number of credit cards has reached 22.2 million by August 2015. The increased expansion of scope of Direct Benefit Transfers (DBT) to disburse government subsidy under National e-Governance Plan (NeGP) has added a new dimension to the spread of electronic payment system. In the initial stages, customers were not inclined to use their credit/ debit cards and its data for online payments.

However, with better security measures and proliferation of multiple online payment channels today, cashless transactions have gone up surpassing the paper-based transactions. With a billion mobile users and 402 million internet users, the digitization is set to scale up much faster to weed out paper based banking, soon. Hence, electronic payment landscape is witnessing phenomenal transformation with the help of advanced technology.

Surge in cashless transactions
Besides spread of ADCs and their interoperability, the electronic payment mode gained better pace. Moreover, the introduction of double authentication system and introduction of ‘one time password’ (OTP) sent through mobile infused greater confidence among users. Better security features and increased confidence on electronic payment mode reduced cash transactions. The transactions through cheques have increased to reach Rs 85 lakh crore whereas cashless transactions through credit card, debit card, NEFT, and online payments/mobile wallets have reached a staggering level of Rs 92 lakh crore. This takes the total cashless transaction amount to Rs 177 lakh crore during FY 15. Re-emphasis on financial inclusion and issue of large number of debit cards has brought far reaching change to the payment space. The digital revolution in customer behavior and the increased competition is likely to further intensify the “War on Cash” which will also mitigate the risk of money laundering. Moreover, the payment industry has recently seen the entry of diverse non-banking digital players, both technology giants and start-ups that are posing competition to the established banks. It is further set to intensify with payment banks in the offing.

Near field Connectivity (NFC)
Electronic settlement and payment system is set to enter another innovative phase with wider adoption of NFC based technology by banks. NFC can facilitate payments through contactless cards using the radio frequency waves. Thus, payments and transfer of funds can happen by merely waving smartcard/smartphone close to Radio Frequency Identification (RFID) reader installed by a beneficiary outlet. Though NFC technology dates back to early 2000, it has picked up pace from 2010 with first Android phone capturing NFC signals. The first NFC enabled phone was Nokia - 6131 launched way back in 2006. With recent thrust on using NFC technology more and more smart phones are becoming NFC enabled. In next few years, every alternate smartphone may have the RFID reader to facilitate transmission of money from one account to another by bringing the instrument close to the reader and punching the amount meant to be transferred. Thus NFC enabled smart cards can work on ‘tap and pay’ method in small payment domain. No physical swipe will be needed like now.

How it works
NFC basically works on RFID technology where it uses electromagnetic induction to transmit information. The same thing happens in Bluetooth but it uses radio transmissions. Hence Bluetooth can work in a range of 30 feet whereas NFC can work in close range depending upon the size of the NFC chip and its design. It also depends on the device (contactless card) scanning the RFID reader but as a thumb rule, the access range could be between 2 to 6 centimetres where the card holder need not necessarily take the card out of the wallet. The wallet itself can be taken close to the reader device. SBI and ICICI bank have already introduced the contactless cards which are NFC enabled for ‘tap and pay’ mode. But RBI has, as of now restricted the transactions up to Rs 2000 due to security concerns. Doing away with the second layer of authentication could increase the risks for both the cardholder and the merchant. Hence, the transaction limit is kept low but large number of small transactions can be covered through NFC mode.

Road Ahead
Bank customers should adopt such innovative payment mode both for convenience and control over their expenditure. But it will again depend upon the RFID reader devices to be installed by merchant establishments to create a compatible eco system. The usage of NFC enabled smartphones for payment system is yet to be introduced but way forward, mobile devices can be used for payment purpose and even transfer of funds from one mobile to other will be possible if both devices are NFC enabled. Banks may also adopt Shifted Frequency Analysis (SFA), a better security feature for protecting chip transactions like in US where 3 lakh NFC enabled cashless payment terminals are under use. Once the NFC payment mode becomes widely operational, the electronic payment system can become the culture of the society. India thus may move up many notches in its journey towards a ‘less cash society’. Among many, Sweden, Canada, USA and South Korea are some of the front running countries which could cover most of its financial transactions through electronic mode that equally helps them check money laundering. NFC technology can help further transformation of payment space and can be a defining breakthrough in spreading electronic payment culture in India.

Dr K Srinivasa Rao

(The author teaches at the National Institute of Bank Management (NIBM), Pune. The views are his own)

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