The Indian payment system has advanced exponentially throughout time. It has progressed from transferring goods for goods to cashless one-click transactions. But the shift towards an easier, faster, and more secure payment system wasn’t quick and easy. When debit and credit cards were introduced, however, it was a largely cash-based economy, and the majority of people would prefer to transfer and exchange notes and coins up until the last few years.
Demonetization was among the major events that accelerated the start of a cashless society. As we are entering this third decade of the 21st Century, the latest technologies are helping us embrace the digital payment system and making this transition in our culture feasible.
Let’s take an overview of the evolution of the ever-changing payment environment in India.
- Paper Instruments
The function of paper and money was formalized and nationalized throughout the British Raj (18th – 20th Century). Europeans introduced the paper currency to India. The Britishers began to print currency notes shortly after the Paper Currency Act in 1871.
- Rise of Digital Payments System
Following Indian independence in 1947, business transactions were mostly performed using cheques and cash. It wasn’t until the 1980s, supported by the double tailwinds of international technological advancement and the demonetization process of banknotes of high value in 1978, that the use of electronic payment in India began to take off.
- Electronic Credit Cards and ATMs
Andhra Bank, in 1971, issued the first credit card that was electronic in India. In the following years, many banks began offering debit and credit cards. ATMs were first introduced towards the close of the decade, and at present, there are 250,000 ATMs across India within the National Financial Switch (NFS).
- Online Payment Systems
Since the introduction of the internet in the 1990s, many payment processing platforms have become available, like the Payment Gateways for online stores. Electronic instruments were the subject of innovation. It was further accelerated by establishing the first banks that were private in the 1990s and the ’00s.
The RBI introduced the ECS Credit (Electronic Clearing System) at the beginning of 1990 to facilitate large-scale payments, such as dividends as well as pay for the payroll of corporate companies. Corporates could pay multiple times to their employees using an online transfer of funds.
BBPS (Bharat Bill Payment System) attempts to bring together digital and physical delivery options that are part of an insular ecosystem of agent and billing companies into a single system that uses common standards and operational infrastructure provided through NPCI (National Payments Corporation of India).
The Aadhaar Payment Bridge System (APBS) was established in 2013 to allow the transfers of funds to Aadhaar bank accounts that the government and related organizations need. With this mechanism, Direct Benefit Transfer (DBT) schemes like LPG subvention, MNREGA, etc., are in place to offer state subsidies and welfare benefits to the people.
- NEFT & RTGS
Then, in November of 2005, NEFT (National Electronic Funds Transfer) was launched to make it easier to transfer online one-to-one funds for both individuals and corporates. NEFT operates using batch settlement, which means that the funds get cleared (i.e., being accounted for) instantly and then cleared after each period which is usually within 30 minutes. The transferred funds are made readily available to the creditor before the end period of settlement. From December 2019, this service is available 24/7.
RTGS (Real Time Gross Settlement) is a different payment method used for transfers of funds greater than Rs. 2 lakhs. The money transfer is done in real-time, and hence the funds are instantly settled between all parties. This means that the funds can be accessed in creditors’ accounts immediately. RBI gives an 11-hour period (7 AM – 6 PM), and banks can operate during this time frame.
- IMPS & UPI
In 2010 NPCI introduced its IMPS (Immediate Pay System) to allow instant funds transfers throughout the day. The IMPS also had the added advantage of requiring only the beneficiary’s mobile number for payment.
UPI or Unified Payment Interface provides a simplified interface for accepting merchant payments, peer-to-peer transactions, and pulls (or collect) functionality. One of the main advantages of UPI is the interoperability it offers between banks and the ability to start payments using the account of any UPI-enabled account using every UPI application. In addition, various online payment gateways like Zaakpay have been able to simplify payments through UPI transactions.
- Online Payment Gateway
In the mid and early 1990s, eCommerce exploded onto the Indian payments market, and there was a requirement to allow transactions on the Internet. In 1996, ICICI Bank started internet banking for its clients for the very first time. Billdesk was the first to set up an online payment gateway in India in 1999.
In simple terms, a gateway allows a business to accept online payments by connecting the user to the merchant’s bank via different payment methods. There are a variety of online payment gateways available in India, such as Zaakpay. They allow you to pay with debit and credit cards, net banking, mobile wallets, and UPI.
Digital Growth Drivers Around the World
The global origination and the adoption of digital payment services resulted from various requirements. Still, in general, the ecosystem of digital payments systems is driven by three main elements: technology, customer demand, and regulatory. According to estimates from industry experts, usage of mobile devices and the Internet reached 3 billion globally, which covers about 65 percent of the globe’s adult population in 2020. With high processing capabilities, large memory, massive memory, high-resolution camera, GPS, and barcode scanners, NFC technologies are powerful and can facilitate payments made through digital technology.
In addition, they have distributed ledger technology (DLT) that can be decentralized and scalable with better resilience to business interruption, catastrophe recovery, and risk management. It has led to cost reduction for infrastructure, improved scalability, flexible service options, and enhanced flexibility.
Furthermore, there has been ease because of payments initiated by devices leading to preemptive fraud detection and more effective risk management and compliance. It is powered by cryptocurrency, Internet of Things (IoT), automated payments, APIs, points of sale (POS), tokenization of mobile wallets, digitally connecting every industry to the payments landscape, creating an integrated payments ecosystem.
The sector of payments is reaching an uncharted level. The regulatory mandate, combined with technology advancements FinTech revolution, has brought an entirely new way of payment methods used around the globe. As FinTech’s are making huge advancements in the payment market with their innovative solutions, banks and card networks face increasing challenges to remain relevant. The solutions currently focus on real-time, low-value, high-volume peer-to-peer transactions such as eCommerce, mCommerce, etc.