The Rise of Electronic Payments in India

Paper payment instruments – cheques, demand drafts and cash – have existed in India since the 19th century. As recently as 2003, 86% of all non-cash payments in India were still made through the use of paper instruments, with electronic payments only just beginning to take off. Since then, electronic payments have grown by at least 60% year-on-year, and by mid-2009 electronic payments represented 33% in volume and 62% in value of all payments made in India. There has been a 5% decline in cheque clearing in 2008-2009 compared to the previous year.

There are various types of electronic payment networks in India, including a real-time system for high-value settlements, various types of retail payment systems and a growing card payment infrastructure. Improving the availability of these networks throughout the country is a priority for the Reserve Bank of India (RBI), the central bank, and by the end of 2009, it is expected that close to 80% of all bank branches will be connected to at least one type of electronic payment network.

Corporates: The Move to Electronic Settlement

Despite cheques still being an important payment method for corporations in India, the growth of electronic payments is considered inevitable in the future. Increasingly, businesses are seeking ways to speed up funds realisation – a critical requirement for working capital efficiency and improving credit risk management. The fragility of the postal infrastructure, wide geographical spread and multiple clearing zones in India present significant inhibitors for the efficiency of paper collections. However, electronic collections overcome these challenges and provide benefits in terms of surety of funds, lower costs and effective monitoring and auditing of the payments process.

  • Electronic payments and settlements offer the following benefits to businesses when compared to cheques:
  • Reduced administrative overheads and costs.
  • Reduced operational risk through elimination of risks arising from loss of cheques, transit delays/errors and cheque fraud.
  • Improved liquidity management through greater predictability of payments.
  • Improvement in the supply chain as a result of the faster movement of funds.
  • Improvement in the sustainability of the corporation’s business model by reducing paper consumption.

Despite the benefits, change is slow and the RBI is taking definitive steps to use regulation to move paper-based payments and settlement to electronic modes.

Central Bank Initiatives to Promote Electronic Payments and Settlement

The RBI’s future vision of the Indian banking includes a prominent role for electronic payments. In line with this, the central bank is implementing, or has completed, the following initiatives and regulations to encourage electronic payments and limit further proliferation of paper instruments.

Rapid expansion of the electronic funds transfer systems

Currently more than 55,000 bank branches in India (two-thirds of the national branch network) provide National Electronic Funds Transfer (NEFT) and Real-Time Gross Settlement (RTGS) services.

Launch of National Electronic Clearing Service (NECS)

Launched in September 2008, NECS is the first automated clearing house offering in India, allowing for single-debit, multiple-credit electronic settlements.

Gradual phasing out of paper-based clearing

Clearing of paper instruments above INR100,000 is being phased out from November 2009 and statutory payments such as direct and service tax, excise and customs duty are already required to be settled electronically.

Pricing control on electronic transactions

Standardised industry-wide pricing caps have been implemented on electronic payments, resulting in cheaper transactions.

Formation of the National Payments Corporation of India

With specific focus on the country’s payment networks, a national corporation has been set up to develop and manage India’s electronic clearing and settlement infrastructure.

Challenges Faced by Businesses Shifting to Electronic Settlement

Although India’s regulatory and policy environment is conducive to the migration from paper-based to electronic settlement, there are other practical challenges to overcome:

  • Additional payee financial information, such as bank and branch codes, is required to send payments electronically.
  • In the paper-based clearing system, funds are not debited until the cheque is encashed; the benefit of this extra liquidity is attractive to some businesses and individuals.
  • There are varying levels of awareness of new banking options among Indian consumers – the availability of new electronic payment modes does not necessarily translate into consumer usage.
  • There is a certain resistance to change from a cultural perspective – cheques have been used in India for generations and so the adoption of a new method is slow.

For many established Indian businesses, a shift from paper-based to electronic payments would affect other parts of their administration function, such as accountancy systems, approvals processes and procurements functions.

Best Practices in Paper-to-electronic Change Management

To realise the cost and efficiency benefits from shifting to electronic payments, it is imperative to develop a comprehensive paper-to-electronic (P2E) change management solution. This begins with an analysis of the client’s extended enterprise of vendors, distributors and other value-chain constituents to identify opportunities for P2E transition.

Best practices in P2E change management solutions include:

Programme management
  • A dedicated programme manager for the project.
  • Identify areas/functions of the organisation that would benefit from P2E transition.
  • Prepare and execute the implementation plan.
Communication management
  • Design and implement communication strategy.
  • Provide outbound follow-up and reminder services to stakeholders.
  • Provide inbound helpline services to stakeholders.
  • Document and compile stakeholder responses.
Stakeholder awareness programme
  • Conduct training programmes to increase awareness of the P2E transition.
  • Address concerns regarding electronic security and other issues.
Tools and templates for transition management
  • Customise project plan template to client’s requirements.
  • Provide templates for communicating with different stakeholders.
  • Provide template for capturing vendors’/payers’ bank information.
  • Integrate vendors’/payers’ bank information into the client’s financial control system.

Solutions that address P2E change management in this way eliminate the need for the client to devote resources to non-core change management activities and expedite the migration programme, allowing benefits of the P2E transition to be realised sooner. They also improve operational control by using efficient and effective reconciliation tools to identify the source of the electronic payments.

The Way Forward

Trends indicate that India will continue to shift from paper-based to electronic payment systems over the next three to four years. This requires companies, individuals, banks and the regulatory authorities to adapt to the new environment. Certain challenges, mentioned in this article, need to be addressed in a structured and focused manner to enable successful management of this change. Developing solutions that enable the management of the paper-to-electronic transition process in a seamless and effective manner is important for fully realising the benefits of the transition.

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