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What is e-RUPI & and how it is a big leap in the Digital Payments Ecosystem in India

Launched in August 2021 by Prime Minister Narendra Modi, e-RUPI is a new digital payment solution for seamless transfer of funds, without the need for any card, digital payments app, internet access or even a bank account. 

 

e-RUPI is a cashless and contactless payment method done through an e-voucher sent to beneficiaries via QR Codes or SMS strings, which can be redeemed/used for specific purpose only, at the service providers. It connects the sponsors of the services with the users and service providers digitally, with no physical interface required.

 

These vouchers will be both person and purpose/end-use specific, for ex: If they are issued by government for availing any medical service at a particular hospital, then they can be redeemed only for that. In other words, it will work as a closed system PPI.

 

How e-RUPI works?

 

e-RUPI is developed by NPCI on its UPI platform, with onboarded banks as the issuers. The government or any private corporate will approach the partner banks with the details of specific beneficiaries to whom the payments have to be made and the purpose of such payments.

 

Each beneficiary will be uniquely identified basis their mobile number and voucher will then be issued and delivered (in the form of QR Code/SMS) in the name of that beneficiary only. 

 

Objective of e-RUPI

 

e-RUPI is expected to serve the following objectives:

 

  • The long-term vision of e-RUPI is to reach the unbanked population, include them into a formal financial system and reduce the digital gap in the country
  • To provide an equal access to various healthcare, education, and other benefits to each citizen of the country
  • Transparency in transactions, as the end-use of the funds can be easily tracked
  • Will guarantee that the money is used for the purpose for which it was intended, unlike traditional bank account transfer where it is possible that the funds are used for other purposes

 

Further, with the government in the process of establishing a digital currency for the Central Bank, e-RUPI can be used to emphasize the flaws in the current digital payment infrastructure which is crucial for the development of digital currencies in future. 

 

Application of e-RUPI

 

Currently, this is a platform launched as a government initiative for leak-proof distribution of welfare benefits to eligible beneficiaries. It aims to provide services under various schemes of the government including Ayushman Bharat Pradhan Mantri Jan Arogya Yojana and other subsidy programs, etc. 

 

However, in future even private entities can use this voucher-based payment method for providing services to their employees for travel, healthcare, and other such purpose-specific expenses.

 

It can also be used to provide credit to first-time borrowers, where the end-use of funds is specific and thereby evolving the digital lending landscape in the country.

 

A move towards digitalization and introduction of Digital Currency

 

While e-RUPI is in itself not a digital currency, as it is still backed by Indian Rupee as the underlying asset and is purpose specific, it is definitely a move towards introducing digital currency/cryptocurrency in India.

 

Both e-RUPI and cryptocurrency work on similar principle of enabling end to end digital transactions and removing physical intermediaries thereby ensuring transparency, data security and overall reduction in operating costs. 

 

What lies ahead?

 

With the introduction of e-RUPI, it is clear that the government is in support of new digital initiatives, as they expect that India has tremendous potential to change the way they transact and pay for different services. This is supported by increasing adoption of digital payments for small-value transactions, especially by the non-digital customer segment in the country.

 

This backed by India’s high currency to GDP ratio, validates that such digital initiatives and crypto assets/digital currencies can co-exist and position India as the front runner towards forming a complete digital economy. Further, e-RUPI will encourage the use of PPIs in India for better channelization & monitoring of funds, providing an opportunity for Fintechs driving digital payment solutions to design new products build around e-RUPI/digital currencies and such kind of digital solutions.

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What are the new RBI norms with regard to recurring card payments? – All you need to know

 

Have you recently started receiving mails/SMS from various banks and service providers asking to re-register your e-mandates for automated payments such as OTT, newspaper subscriptions, etc?. This is because of the new RBI guidelines with regard to recurring transactions, coming into force from October 1, 2021. 

 

What are these new RBI norms?

 

In another step to secure digital transactions via credit/debit card, PPI or UPI, RBI has implemented the new auto debit rules. As per the new norms, all such transactions will have to be further secured with an additional factor of authentication (AFA) – 2-factor authentication. Any transaction, whether domestic or cross-border, using cards, without AFA, would be discontinued.

 

New rules for Automatic Payments – A Snapshot

 

Process
Transaction amount <= INR 5,000
Transaction amount > INR 5,000
Registration of e-mandate
A one-time registration process of card, with AFA validation, irrespective of transaction amount 
Processing of first transaction
Transaction will be processed, with AFA validation
Pre-transaction notification for subsequent transactions
  • Customer will receive a notification giving information about the debit 
  • Nothing further has to be done & the debit will be executed
  • Customer will receive a notification, at least 24 hrs prior to actual debit for approval
  • Approval through 2-factor authentication
  • Post successful AFA, card will be charged
Managing of e-mandates
The issuer to provide online facility to pause/cancel the e-mandate at any point of time, requiring AFA 

Source: RBI

 

Further to this, the bank/issuer is required to take additional information such as the validity period of the e-mandate, etc at the time of registration. And if required, the facility to modify the validity period, shall also be provided.

 

The banks also need to send a post-debit notification to the cardholder, once the auto-debit is processed. And, finally set up a redressal mechanism to address customer grievances related to this.

 

What will be its impact on payments?

 

This move is introduced in an attempt to protect consumers with regard to safeguarding of pre-stored data relating to cards and avoiding digital frauds. And especially those consumers who hastily give their consent to unnecessary automated payments and fall prey to data breaches.

 

With the new guidelines coming into implementation, all such recurring payments need to be reviewed and re-registered with respective issuing banks to avoid transaction failure.

 

However, these will only impact standing instructions (SIs) on cards. The automated instructions under UPI Autopay, e-NACH and other SIs to banks will not be impacted.

 

The directive will empower card users and will give them more control over their transactions. They can now determine and set the amount, velocity, etc, thereby managing such recurring mandates efficiently.

 

Way forward

 

For end consumers

 

Initially, this will impact customers to some extent, as the previous payment mode was meant to provide them with a seamless experience (especially for transactions above the INR 5,000 cap in B2B usage). Also, such payments may move to other alternate modes of payment such as e-NACH, UPI, etc for a better customer experience. However, in the long run with awareness they will realize that such regulations are for their benefit as it will eventually increase the security on card transactions. 

 

For Businesses

 

These guidelines will encourage businesses particularly, small & medium sized businesses to reach out to untapped customer base and build new business models in and around subscription payments and help grow this market multi-fold in the coming years.

 

To sum it up, the entire payments ecosystem is going through changes due to these regulations and all stakeholders are getting impacted in one way or the other. It will require banks/card companies/fintechs in the payments space to provide such portals to comply with the new regulations. However, there is still a long way to go as not only the banks/card companies, but the merchant/merchant aggregators’ ecosystem also needs to be in a state of readiness for its successful implementation. 

 

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Introduction of Blockchain in Fintech

Fintech being a leading light of the startup ecosystem over the years, has played crucial roles in development of the financial services industry. Strong ecosystem level changes are opening up opportunities for new business models. Introduction of blockchain technology in this evolving sector has a considerable impact and advantage.

 

Blockchain technology is a “chain of blocks” where each block holds timestamped digital data and it’s own previous blocks’ unique identity. The unique features of blockchain have potential to benefit the financial sector significantly.

 

In this blog we will cover following topics:

  • What is Blockchain?
  • How Blockchain is transforming the financial ecosystem
  • Fintech and Blockchain-Use Cases
  • Future of Blockchain in Finance

 

What is Blockchain technology and its features?

Blockchain is a decentralized database management system. The name signifies itself, a series of blocks containing transaction data, a hash identity, and node details are connected to form a chain. Blockchain is distributed ledger technology (DLT) which allows data to be stored globally on thousands of servers.

 

Below are the key features of Blockchain for its deeper understanding:

 

  • Security and Transparency

Financial services all across the world are still centralized and multi-folded. Financial data is mostly stored in centralized databases, and it has to go through multiple intermediaries like front-back offices etc which results in lack of transparency across the system, wherein safety being solely dependent on intermediaries and their level of security.

This lack of transparency within the system fosters security threats or data breaches across the organization.

With the introduction of blockchain technology, transparency and security can be ensured simultaneously. Its distributed consensus based architecture facilitates the security towards data breaches, security threats etc. 

 

  • Privacy

Blockchain system provides operable keys-a public one and a private key. Public key is available to all users in the network. However, the private key is only accessible to the stakeholders of the transaction. This enables transparency wherein the transaction will be visible to all users in the network with public key whereas the stakeholders and the transaction details will only be visible to those who have access to the private key. This process enables transparency within the system while securing the confidential information of the stakeholders.

 

How does Blockchain work?

Blockchain records validate and store the data in its database. So, it leverages to validate a transaction happening across the network. Each block in the block chain contains follow information

  • A hash pointer (link to previous block)
  • A timestamp
  • Transaction data

 

Future of Blockchain in Fintech Technology

Andy Martin, a world-class blockchain expert, recently forecasted market changes based on the token economics forced by blockchain and described what exactly it provides:

 

Decentralized communities provide certainty of identity, “who am I dealing with”, the certainty of provenance, “what am I buying” and smart contracts give certainty of execution, “if I do this, then I get paid” in these new marketplaces.”

 

Let’s understand better how Fintech and Blockchain can be chained together to build a FinBlock ecosystem.

 

Blockchain in the fintech industry can provide us a more seamless and effective way to banking, built around concepts of equity and decentralization. Blockchain-based fintech enables seamless transfer of funds, top of the line security and transparent financial tracking.

 

Reduced Costs and Transactions in Minutes

 

With blockchain integration in fintech applications, sending money, regardless of the amount, is much faster. Blockchain-based transactions occur in real time, so the recipient will not have to wait for days or weeks to get the money.

 

In addition to this, fintech applications powered by blockchain technology can drastically reduce the transaction costs enabling direct, P2P transactions that eliminate any middleman, meaning all unnecessary expenses and fees.

 

Use Cases of Blockchain in Fintech

 

Some use cases of blockchain in fintech services are: Cross Border Payments, Lending Platforms, Credit Score, Invoice Management and Billing Solution, Fund Investment, Government Expenses, Financial Record Keeping, Stock Exchange and Initial Public Offering

Let’s discuss Cross Border Payments and Lending Platforms use case in details:

 

Cross-Border Payments

Banks always charge an additional fee for every transfer or payments across borders, which in a way becomes expensive and slow. 

E.g If you want to transfer money from India to the USA, the transfer goes through one or more financial institutions before it reaches the receiver.

Introduction of Blockchain allows individuals to send and receive money with minimum interference of different intermediaries, which enhances the payment settlement quickly and efficiently.

 

Lending Platforms

When it comes to lending, one is required to establish trust and make a transaction happen. However, with blockchain technology in fintech, borrowers can directly deal with the lenders on the rate of interest, installments, and duration of the transaction with the help of immutable smart contracts.

 

Conclusion:

Blockchain in financial services can offer multiple benefits, which can help transform the finance industry. According to KPMG, “blockchain can reduce errors by up to 95%, increase efficiency by 40% and reduce capital consumption by up to 75%”. Blockchain in finance is an exciting concept with the potential to transform the finance industry.

Blockchain can help different financial institutions and government entities to improve trust, bring transparency and cut down costs. 

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OPEN BANKING- Is India ready to enter banking 2.0?

What is open banking? 

 

Open banking is nothing but a payment system that works on an application programming interface (API).  Let’s understand it better with the help of an example.

 

In India, how long does it take to open a new bank account? How many times do you need to verify your documents? If you want to apply for a loan, how much time does it take to get it approved?

 

I am sure you all can relate to how much effort it takes to complete each task mentioned above. If you talk about applying for a loan, let alone from a different financial organization, you need your bank account details, a good credit score, and a valid KYC document to even be approved.

With the introduction of open banking in India, everything will be possible within a few minutes and with a few clicks.

 

Open Banking and its status in India

 

Open Banking in India is still in a nascent stage and awaits a mass adoption wave. The reason behind this could be that the traditional Indian banking systems are extremely manual and system-based. Currently, even the adoption of net banking is not ubiquitous. The system focuses more on security and privacy, thereby compromising its efficiency. However, open banking has lots to offer when compared to traditional banking systems.

 

Is India ready for open banking? Prima facie the thought seems like a no-brainer. It is possible, as today we make payments using our phones for everything, be it an electricity bill or grocery bills, you name it! And you are doing it via phone.  A final noteworthy feature of India’s approach to open banking is that the perimeter of data subjects is broader than in most other jurisdictions.

 

Many open banking approaches are focused on consumer data and access to financial services. But India’s approach extends this to include small businesses also, who can be a part of this payment ecosystem and add one more layer to the data stack and have the access to improved financial services and their offerings

 

The progression of India with open banking principles can only be achieved through interoperability and data sharing in the financial sector. If you bring banks and non-banks together under the same infrastructure or common ecosystem, this architecture will facilitate financial inclusion, as can be seen by the increase in a high volume of low-value payment transactions, which further leads to digital transformation and development.

 

Open banking adoption accelerates or not?

 

In my opinion, the banking system has been transforming with each passing day. From an individual standing in long queues to just open an account in one tap, we have evolved. Whether it is physical banking or digital banking, individuals choose convenience and variety. 

 

There are many successful open banking stories. M-Pesa in Kenya, Alipay in China, and Paytm in India- their adoption indicates that there had been a certain digital drift that led to the success of these platforms. This indicates that traditional banks should change the way they have traditionally approached customers and should adapt to the new world of open banking. Digital banking or open banking systems can give them access to innovative ways of implementing digital technologies within the system, which in the future will help them to provide personalized customer services which will help them in retaining their market share and reduce capital on research and development of services.

 

How secure or safe is my data?

 

Every new technology in the market comes with new risks and uncertainties. However, with open banking platforms, they have the potential to rewrite the relations between a bank and its customers. When we talk about a consumer, a consumer is someone who prefers convenience packaged with security and safety. So, open banking will enhance or enable the management of money more securely, more convenient, and customer-focused.

 

At last, I would like to conclude that with every step in the future or tomorrow something or the other is changing. Change is inevitable, and it comes with a mixed bag of offerings. Here, in the case of open banking in India, the future is going to be collaborative and interconnected.

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NFC: What is it?

Ever wondered what happens in the background when you say my card has a“Tap & Pay” feature? 

It’s because of a technology called NFC or Near Field Communication.

 

NFC or Near Field Communication is a contactless communication technology based on a radio frequency (RF) field using a base frequency of 13.56 MHz NFC technology is perfectly designed to exchange data between two devices through a simple touch gesture. 

NFC is a form of communication between two devices, which makes transferring data more secure, convenient, and easy.

 

How does it work?

 

NFC works just like Bluetooth and Wi-Fi, NFC works on the principle of sending information over radio waves. With the introduction of NFC, a user can share data, make payment without any manual hassle has turned out to be more important than any other technology in recent times, particularly in terms of mobile payments with simple operation. 

  • With the mobile based payment app on your phone, you will just need to Tap the phone on the POS machine and a connection will be established utilising the NFC feature which is secured with password authentication or scanning your finger which makes it more secure. 
  • Further, the transaction is then approved by a different chip called the SE (secure element), which transfers the transaction for approval back to the NFC modem. 

Currently, in India NFC-embedded cards are in the market with the imposed limits on the transaction sizes that it can process for NFC based card transactions.

 

With the introduction of NFC compatible smartphones like Samsung’s Galaxy Series, Google’s Nexus Series, and the iPhone in India we are stepping into a more cashless payment’s era. 

 

Is NFC Payments secure or not?

 

Are NFC payments secure or not? Most of you were wondering the same. However, the answer is NFC based payments are secure and safe. 

 

 For e.g A consumer who is interested in making payment via NFC based mobile application, due to the imposed limits on the transaction size on consumers cards the data cannot be stored in any of businesses NFC based terminals. In Addition to this, for instance, if a business’s NFC enabled terminal had been compromised but still the customer’s card details cannot be accessed. Likewise, tokenization makes NFC based payments so secure that there’s no decipherable information to steal from NFC terminal.

 

With the introduction of a process called tokenization, both NFC enabled merchants and the customers can feel reassured that contactless payments will provide end to end data security. For customers, card numbers are never stored in the application or anywhere in the operating system but in fact they are replaced with “token”. Furthermore, two-factor authentication like Face ID, passcode or touch ID within our smartphones enable a second layer of encryption and makes it more secure and safe for payments. On the merchant side NFC terminals and readers also use tokenization technology to encrypt sensitive information.

 

Contactless payments and its evolution in India

 

India’s journey towards a cashless economy can be judged by the impact of demonetization (2016) and COVID-19. Back in 2016, the government announced demonetization to convert India from cash-based economy to cashless economy. India had shown a gradual progress with the digitisation followed by ATM, credit and debit card, digital wallet, prepaid cards, recharge vouchers etc. payment solution helped India to build a cashless economy.

 

On 24 May 2021 – NPCI (National Payments Corporation of India) partnered with Turkey’s global payment solutions company PayCore as one of the certified partners for RuPay SoftPOS to drive cashless payments across the country. RuPay SoftPOS allows retailers to easily accept payments from contactless cards, mobile wallets, and wearables using only their phones. With the usage of RuPay SoftPOS, millions of merchants can now transform their NFC smartphones into POS machines to accept contactless payments. 

 

Under this association, NPCI mentioned that they have authorised the SoftPOS solution developed by PayCOre for RuPay. This solution can be integrated into bank or aggregator acquiring systems to enable acquiring of RuPay using mobile phones enabled with NFC capability. 

 

With PayCore’s SoftPOS solution, which enables smartphones and tablets to be used as POS terminals without any additional devices, investment costs required by banks to reach out to over 63 million micro-, small-and medium-sized businesses will significantly reduce, said Ali Kancha, chief executive of PayCore”.

 

According to Nalin Bansal, “chief of fintech’s, corporates and new initiative at NPCI, the launch of RuPay SoftPOS is aimed at supporting small merchants which form the backbone of our Indian Economy and is one of many in the series of launches starting with its open-loop transit program.”

 

With the introduction of eye-popping innovations and technologies like UPI (scan & pay), FASTags, NFC payments, interoperability etc it certainly holds a promising future in India. In addition to these NPCI initiatives to introduce SoftPOS to support small merchants and provide one step towards a cashless economy. Recently, Google Pay is offering the NFC feature for android phones that support NFC to make payments at NFC based terminals. 

 

Apart from the list of Pros and Cons of NFC as a technology in the payment sector. One of the major challenges I came across is the  transaction limit of Rs 5000 set by RBI for NFC payments. However,  in the future it will prove to be a big step towards a cashless economy where NFC based terminals or POS will provide seamless payment experience to the end user and the receiver.

 

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Fintech APIs are changing the landscape of financial services

Over the past decade, technology has shown tremendous impact in many industries. With the change of customer behaviour and the emergence of regulatory compliances, the landscape of the financial industry is changing. Customers are demanding a multi- and cross-channel experience, which is real-time as well as available round the clock. Thus, Banks are changing their approach from traditional product-centric to a customer-centric approach. This has resulted in banks looking for new age solutions to redefine customer experience. Earlier if a customer wanted to send money abroad, then they might have to go to the bank or financial institution branch and it took 2-3 days to get funds credited to the receiver’s account but now money can be transferred at any time by just a few clicks using a mobile phone.

 

Consumer’s appetite has been ever increasing for high-end digital experiences including seamless and easy accessibility of all financial products at their fingertips. Responding to these demands, Fintechs are building revolutionary financial products and experiences by using APIs to quickly deploy a suite of advanced financial services and products.

 

What is an API and how does it work?

 

API stands for an Application Programming Interface. It’s a digital interface which acts as an intermediary to allow two different systems to talk to each other. 

 

A very prominent example of API usage which most of us have seen on many websites nowadays – “log-in using Google/Facebook/Twitter”. With just one click we automatically login on to the website or app but have you ever wondered how it works

 

It looks very easy and simple for users. Every time the application loads, it uses the API to check whether the user is already logged in using any social media platform. If not, when the user clicks the “Log-in Using google” button, a pop-up opens where the user is asked for confirmation to log in with the selected google profile. After the confirmation, the API interacts with the google system and provides the application with identification information to provide auto-login.

 

Digitalisation has fastened the transformation of the banking industry globally in the last few years. APIs are playing a very important role in the field of payments, Peer to peer management, Insurance, trading and many more. Fintech APIs are creating financial products and services faster and in more cost-effective than ever before. Now Banks, financial institutions and merchants can easily connect with third-party service providers and expand their products and services very quickly. Online shopping of groceries and household goods is a new trend all over the world, merchants are providing seamless payment experience with various payment methods to customers. Customers can easily transfer funds, make purchases, buy insurance, take loans and perform personal banking tasks on the go.

In short, APIs have transformed Financial institutions and Banks as a platform that offer customer-centric products and fill the gaps of legacy banking practices.

 

Fintech APIs provide access to data among the parties involved in financial transactions, including banks, third-party providers, websites and consumers.

 

Nowadays a new concept of Open APIs is on the rise. Open APIs allows third-party service providers to access the data and services of an organization in a controlled environment. It provides opportunities to create new products and adds new functionality to its core offering. 

 

Benefits of Fintech APIs 

  • Real-Time Access: APIs have achieved real-time money transfer globally with minimal effort and are available to customers 24/7. APIs are changing how we interact with the world, and all these actions happen in real-time.
  • Revenue Opportunity: Earlier banks were quite secretive about their client information due to security concerns. With APIs, the financial institutions can provide easy accessibility of big data which can help them in creating highly personalized financial services and enhance the decision capabilities of the business. 
  • Cost-effectiveness: Instead of spending high cost in developing the system from scratch, the financial institutions can use these Fintech APIs and significantly reduce development costs.
  • Accelerated time to market: By using fintech APIs Financial institutions can spend more time and resources to focus on innovation instead of repetitive development tasks. Create fully functional digital services within days instead of months.

To compete with the currency digitalisation banks and financial institutions need to transform their existing core banking services using Fintech APIs. Fintech APIs help in bridging the existing legacy gap between the financial institutions and customer’s requirements. Features and functions from legacy applications can be easily pulled out and combined into processes that authorised users and other applications can access from anywhere, anytime.

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Embedded Finance: Changing the landscape of Financial Industry

In today’s tech savvy world, customers want everything at the right time in the right quantity with minimal efforts and a seamless experience. Every Service provider is trying to provide financial products at the fingertip of the customer. This is a game changing opportunity for fintech to offer the unique, agile and ease to use next generation technology. 

 

Embedded finance is a buzz in the fintech industry and is growing at a tremendous rate. Covid-19 pandemic has accelerated the customer base and their engagements on these platforms.

 

What is Embedded Finance?

 

Embedded finance is a seamless integration of financial services with non-banking solutions. Customers can access financial products and services through mobile apps. Embedded finance can help businesses gain customer loyalty, increase customer base, better product offerings and more revenue opportunities. For Instance, Ola cabs is offering cab rides embedded with financing solutions such as wallet services (post-paid or limit based).

 

Embedded finance is also known as embedded banking. To provide financial services to customers. Businesses need to start exploring the opportunities of enabling embedded finance through a partner ecosystem which will significantly reduce their time of market time as well as low cost. 

 

In this customer centric world, embedded finance can provide significant advantages to businesses over their competitors. Previously, there was a gap between consumer requirements and the service offered by the seller. Embedded finance understands the gap and eliminates the need for a third party between consumer and seller. It is transforming the financial services distribution model and creating a revenue opportunity for businesses. 

 

Here are a few major manifestations of Embedded Finance:

 

Embedded Payments

Embedded payment means providing integrated services of payment processing within the app or platform itself. For e.g. Post-paid wallets or Payment Infrastructure offered by Ola or Amazon. While booking a cab from the Ola app, customers can easily make the payments by Ola wallet without the worries of carrying change to pay cab drivers on completion of ride.

 

Embedded Lending

Embedding credit offerings within the customer journey of non-financial digital apps or platforms. For Example, customers can now purchase any home appliance from the mobile app and convert the payments into easy EMI options on the same app.

 

Embedded Insurance

Embedded Insurance means bundling of Insurance along with the purchase of the products and services. Platforms partner with external Insurance companies to offer embedded insurance services for their customers. Online vehicle selling platforms, also enables customers to buy Car Insurance products while purchasing the vehicle.

 

Embedded Investment

Platforms integrate with the brokerage firm to offer investment services to their customers on their platform. Platform uses APIs of the brokerage firms for offering microservice ranging from opening an account, funding, trading, portfolio management, and market data.

 

Key players and their role in Embedded Finance Ecosystem

There are three main players working in the embedded finance ecosystem to offer better services and create new revenue opportunities.

Digital Platform

Customer facing digital platforms like mobile apps or desktop platforms who have a better understanding of customer needs.

 

Financial Institutions

Financial Institution like Bank, NBFC who provides financial services and manage all regulatory and compliance.

 

Embedded Finance Infrastructure Company

Fintech companies which act as a bridge between Digital platform and financial institution to offer end to end APIs, SDKs or software solutions thus enabling the embedded finance in the digital platform. With this, customers can enjoy the financial service within the same platform.

 

In India, UPI has transformed the payments landscape and made it simple for technology companies to become payment providers. To compete with the fast-changing digital world and rising demand for embedded finance, financial institutions are increasingly offering banking as a service (BaaS)—bundled offerings, often white-labelled or co-branded services, that nonbanks can use to serve their customers. 

 

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Necessity of Revolution in Cross Border Payment process

E-Commerce has broken the political borders and offers products & services across different country borders. This has resulted in a high volume of cross-border goods and payment flows. 

Cross border payments have become an integral part of the day-to-day activities of global businesses. Small Businesses’ zeal to expand their business beyond their country boundaries has been well supported by ongoing digitalisation and high-end technological capabilities across multiple sectors and industries. However, it continues to face significant challenges owing to complicated cross-border mechanisms. The Small businesses face challenges in making or receiving payments internationally because of dealing in different currencies and country specific rules and regulations for international payments. This has created a need for a more agile and frictionless cross border payment framework making cross-border payments as simple as domestic transactions.

 

What are Cross-border payments?  

 

Cross-border payments are defined when both the parties i.e. buyer and sellers involved in the transaction are registered in different countries. Most popular cross border payments methods are wire transfer, credit cards and alternative payment methods- mobile wallet, low value payment method. All interaction for payments happens between buyers and sellers through their respective Banks. The Banks communicate with each other through the SWIFT mechanism when it comes to international transactions. 

In Traditional cross-border payments of correspondent banks, the number of intermediary banks depends on the relationship of the buyer’s and seller bank’s with the correspondent bank. As the number of intermediary banks increases, costs associated with fees and commissions also increase. A Bank can track the transactions till its immediate bank. It becomes difficult for the originating bank to track the transaction once the payment goes to the next bank in the sequence. There is no standard procedure for cross-border payments due to different rules and regulations of each country.  Evolving customer requirements, instantaneous fund transfer, cost reduction, complete transparency and technological innovation has initiated the process to improve cross-border payments as a whole.

 

Cash Flow in Cross-border Payments

 

When a customer makes a purchase, there’s a complete back-end process wherein money gets transferred from the buyer’s bank account to the seller’s bank account. This process becomes very complex when it comes to cross-border payments. In international transactions, currency exchange rates and foreign transaction fees are also involved along with the fees or commission charged by the different bank in the value-chain. In cross border payments domestic and international financial institutions are working together to make the transfer of funds.

 

When a purchase is made, if the buyer’s and seller’s bank have a direct relationship payment is done very easily and seamlessly but in the absence of direct relationship intermediary bank’s role becomes important. These intermediary banks are called correspondent banks.

 

Major Banks across the globe have their own branch or correspondent bank’s branch in another city. In such cases, the funds will first move from the Buyer’s bank branch to the Bank’s own branch or its Correspondent bank’s branch in the seller’s country. This fund is further transferred to the seller’s bank who will then credit the seller’s account. There are many entities, different currencies, exchange rates and transaction fees involved in the single international transaction which make the process slow and opaque in nature. The more the number of correspondent banks in the chain, cost and complexity of transaction keeps on increasing

 

In the Era of Globalised Digital Economy, international payments still felt backward and analogue.

 

A Revolution in Cross Border Payments  

The future of cross-border payments is clear wherein the world requires ability to move funds instantaneously, seamlessly with full transparency and 24*7 access. As the payment industry started moving forward on this journey, an array of new industry initiatives and emerging technologies are transforming the payments process. Fintechs using emerging technologies like blockchain, artificial intelligence, machine learning have started offering faster, agile and seamless solutions to the financial institutions to cater the emerging needs of customers.

 

Currently multiple paths are being used by the payment service providers such as Real-time payments, SWIFT gpi, SWIFT’s transaction manager, artificial intelligence, blockchain and digital currencies- cryptocurrency, central bank digital currency and stable coins. These new ways in cross-border payments would provide opportunities to make cross-border transactions faster, more frictionless, efficient, transparent and cost-effective like domestic transactions. Fintechs act as catalysts for innovation and bring global payments together through various approaches. Banks have started collaborating with fintech to mend their strengths and optimize their offerings by enhancing the payments infrastructure with latest technologies.

 

This revolution will transform the landscape of cross-border payments and empower the end user with full control on sending and receiving international payments at any point in time with complete transparency related to fees/ commissions charged and traceability of transactions in the system.

 

As per Deloitte report – B2B and P2P payments with blockchain would result in a 40% to 80% reduction in transaction costs and take an average of four to six seconds to finalize (compared to two to three days using the standard transfer process).

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Aadhaar Pay – Digitisation of Payments in India

In Today’s world of Digitalisation, the Government of India (GoI) is taking steps to provide the infrastructure and technology to promote the digital payment ecosystem. GoI has initiated steps like BHIM Aadhaar Pay, an alternative for online and card based payment to popularize digital payments in Rural India which forms 65% of Indian Population. Aadhaar pay is still not accepted by the merchant and the customers of rural areas because of lack of any awareness about Aadhaar Pay solutions and its benefits. In the absence of any publicity campaigns about Aadhaar Pay in print media or broadcast media, customers find it difficult to trust Aadhaar Pay.  

 

What is Aadhaar Pay?

Aadhaar Pay is a smartphone app for individual merchants developed by National Payments Corporation of India (NPCI). Using this app, merchants can receive instant payments in their bank accounts from the customers having an account with any of the banks. Aadhaar Pay uses Aadhaar number along with validation using biometric authentication or OTP sent on the Aadhaar linked mobile number. This is extremely helpful in rural contexts, since most rural users do not remember their password and PIN. 

 

How does Aadhaar Pay work ?

Rahul is an owner of a kirana store in a small village of India. Mohan is a regular customer and purchases all the household goods from his shop. Today while making payment for the goods, Mohan realised that he had forgotten his wallet at home and requested Rahul to make a note of the bill amount and he will clear these dues tomorrow. On hearing this, Rahul informed Mohan about the concept of Aadhaar pay. At first, Mohan was confused because he had never heard about it. However, after Rahul explained to Mohan that he can use aadhar based payment process to make direct payment from his bank account without the need of an ATM card or a smartphone, Mohan decided to give it a try. 

 

Rahul logged into Aadhaar Pay through a mobile app of his bank using his Aadhaar number and typed the bill amount. Thereafter, Mohan typed his Aadhaar number and selected his Aadhaar linked bank name and completed the transaction by authenticating with a fingerprint. After the completion of payment both Rahul and Mohan instantly received confirmation messages on their phones.

 

Mohan’s story highlights the need for a “payment solution” that would simplify and digitize transactions especially for those with low literacy levels in rural areas.

Aadhaar pay will help merchants to receive funds on a real time basis and no MDR is charged by the bank. Currently, approximately  96 crore bank accounts are linked with Aadhaar including 75% of Jan Dhan Yojana accounts. Some of the largest banks in India such as State Bank of India, ICICI Bank, Andhra Bank, Syndicate Bank, IndusInd Bank and IDFC First Bank have gone live with Aadhar Pay. 

 

Despite its high utility and ease of user experience, the reliability and security of Biometric authentication pose a high challenge to its wider acceptability. The task becomes particularly challenging when there have been cases of leakage of Aadhaar data. UIDAI has tried to mitigate such concerns by ensuring that the Aadhaar database is not directly connected to the service provider and all the authentication is done through APIs only. Another main concern is that many people in India do not have clear fingerprints due to the nature of their work causing high authentication failure during fingerprint impressions on the biometric reader. However, this problem has drastically reduced as Biometric readers have evolved ever since and now new biometric readers including iris scan are being used which are more reliable.

 

Challenges faced in Implementing Aadhaar Pay

Technical Challenge

According to UIDAI, ~ 16 lakh Aadhaar authentication requests fail every week mainly due to problems faced in capturing fingerprints mainly due to very high match ratio (98%) being set in certified Biometric readers.

 Administration Challenge

Only prerequisite for Aadhaar pay has been linking a Bank account number with Aadhaar. However, the Honourable Supreme Court of India has made the linking non-mandatory in its judgement. 

 

Key to the success of any new tech enabled platform is the absolute trust and confidence of customers and service providers that their privacy will be protected and transaction is secured. To make Aadhaar pay more secure and safer than card payments, there should be proper laid down procedures for Certification and Testing of third party apps used by merchants for payments. This would build confidence in authenticity and reliability of Aadhaar pay and would promote its use amongst the mass population. 

 

Way Forward

 

Based on our market understanding and research, we conclude that the potential of Aadhaar Pay is still underutilised and the idea of cashless India can still be achieved with Aadhaar pay with support from all stakeholders. GOI and banks should create awareness and incentive schemes for Aadhaar Pay amongst merchants and customers especially for rural areas using both print and digital media.

We feel that Aadhaar Pay will create an ecosystem especially for rural demographics wherein customers have ease of payments and merchants have quick access to the payment with a comparatively low- cost payment solution. 

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This family is returning home after using their credit card.

Is Buy Now Pay Later a Blessing or a Curse for Users?

Buy Now Pay Later (BNPL), as the name suggests, facilitates users to buy products now and pay at a later stage. The facility offers the advantages of a credit card without carrying the card at the time of payment. This concept is similar to the local Indian concept of the “Khaata system” – the consumer purchases items from the shopkeeper on credit. The settlement is done on a monthly or weekly basis.  

BNPL and Millennials

BNPL is available to users of demographics. But it has the highest acceptance amongst “millennials” because of their high willingness to spend coupled with lower availability of resources & non-availability of credit. 

 

Pay later without credit assessment enables Millenials to avail credit services without having a good credit score. Millennials are also attracted to exciting discounts and cashback offered by fintech and retail companies for using their BNPL services.

In the era of digitalization, BNPL brings the new generation credit facility to its users with a more secure, easy and quick process to sign-up with just a few clicks in less than 30 seconds.  

Advantages of BNPL

Users can avail of the Credit facility with no hidden charges, at zero interest rate fee, and with an easy EMI payment option that helps them buy the products immediately without spending any upfront cash in real-time. There is a minimal penalty levied in case of late payment. 

 

A customer can sign up with different fintech at the same time and avail of higher credit limits. In the current scenario of increasing cyber fraud, BNPL eliminates users’ risk by not exposing sensitive data such as bank account and card details.

 

Several fintech companies provide BNPL services to change the shopping experience for their users. It allows them to enjoy credit facilities at various e-commerce websites and offline in-store purchases POS by QR code. Retail stores or e-marketplaces provide the BNPL facility to their customers by themselves or through partnerships with fintech providers. 

 

BNPL services empower their customers by getting the products/ service accessible in the most convenient manner, especially during a pandemic situation, which develops further trust and loyalty between the merchant and the customer. 

 

This flexible payment option reduces the cart abandonment rate and provides a better customer experience, thus increasing customer penetration. Some market players offer high discounts, cashback and loyalty rewards for using the BNPL payment option, enabling them to increase customer’s shopping basket size and purchase frequency with this easy and seamless checkout option. 

Disadvantages of BNPL

Though a boon to many, ease of accessing “Buy Now Pay Later” services at the checkout could become a temptation for young consumers to spend more than they can afford. It may eventually become a part of their lifestyle and lead to excessive impulse shopping and eventually fall into a debt trap. 

 

People use BNPL facilities at the time of cash crunch and when they have sufficient cash since it provides them with an easy, secure, convenient, and quick checkout mechanism. 

BNPL users have been continuously increasing across the globe. At present, one of every five digital users has used this facility during this pandemic. 

Bottom Line

Every product or service bears its pros and cons. It depends on users’ consumption behaviour to use the positives to their advantage and avoid falling on the negative side. For those who extensively use free credit available facilities and get in the trap of a vicious debt cycle, BNPL could be troublesome.

However, BNPL has come out as a blessing for users facing liquidity crunch to get the essentials products during the lockdown.

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