Structure and Evolution of EFT Payment Networks in the USA, India, and China
Payments Systems are going through revolution particularly in developing countries. Since they lack the infrastructure to follow traditional options, they are opting for innovative solutions using mobile technologies and are attempting to leapfrog. Networks through which payment transactions are processed are equally important.
Below is a brief introduction to EFT networks used in payments industry in USA, India and China.
From A Guide to Debit and ATM Card Industry
EFT (Electronic Funds Transfer) Networks in USA
EFT networks are the telecommunications and payments infrastructure linking consumers, ATMs, merchants, and banks. The physical components consist of ATMs, POS terminals, telecommunication connections, apparatus that route transaction information to appropriate parties, and computers that store deposit and transaction information. Two characteristics of an EFT network distinguish it from other payments systems that may use similar physical components. First, transactions are PIN-based. Second, consumer accounts are immediately debited (funds are immediately transferred from demand deposit accounts).
There are two types of EFT transactions. The first are ATM transactions. The second are online debit transactions at POS terminals. EFT networks can be used for either ATM transactions or online POS debit card payments or both. In practice, most EFT networks process ATM transactions, and a subset of these also processes POS transactions. A few EFT networks have been devoted solely to POS transactions.
EFT networks are typically separated into two types. Regional EFT networks serve specified regions of the United States. There are three large regional networks: NYCE, Star, and Pulse. The NYCE network serves primarily the Northeast and Midwest, Star serves the West and the midsouth Atlantic regions, and Pulse serves the Central and Southern regions. Today it is something of a misnomer to call these large networks regional because they have grown to the point of near-national coverage. Examples of smaller regional networks include Shazam, located primarily in the Midwest, and Presto, serving the Southeast.
National networks are fewer in number than regional network but are distinguished by their national territory. National territory does not necessarily translate into large size. The Armed Forces Financial Network is comparable in size to some of the larger regional networks, but its mission of serving the armed forces community leads it to a national geographic territory. Visa and MasterCard operate EFT networks that are truly national in size and territory. Each uses its own physical infrastructure to run ATM and POS transactions, and for marketing purposes their ATM and POS networks carry different names. Visa’s Plus and MasterCard’s Cirrus are ATM networks, while Visa’s Interlink and MasterCard’s Maestro are POS networks.
Another important distinction for national networks is that they may serve as a bridge between regional networks. If a transaction conducted on a regional network is initiated using a card from another regional network, a national network may link the two regional networks so that the transaction information may be routed from one regional network to the other. In a sense, national networks serve as networks of networks.
There are many types of ownership and membership structures among EFT networks. A single bank may own a shared network, but ownership by multiple banks is more common, a legacy of the fact that many of the first shared networks were typically joint ventures among banks. Some of these joint ventures included many banks, while others had a few. Nonbank ownership of networks ranges from complete ownership of the network (as with Concord EFS’s Star network) or as a joint venture with banks (such as First Data and NYCE).
Membership in an EFT network is typically limited to financial institutions (banks, savings institutions, and credit unions) and can be, but is not necessarily, tied to ownership.
Offline debit card networks
The second component of the ATM and debit card infrastructure is offline debit card networks. Offline debit card networks are a telecommunications/payments infrastructure linking consumers, merchants, and banks. There are two offline debit card networks, one run by Visa and the other by MasterCard, which essentially piggyback off the card associations’ credit card networks. Visa has named its offline debit product Visa Check Card and MasterCard refers to its product as MasterMoney.
The physical components of the offline debit network consist of POS terminals, telecommunication connections, apparatus that route transaction information to appropriate parties, and computers that store deposit and transaction information. Information necessary for the authorization of an offline debit transaction as well as information for processing the payment follow the same infrastructure routes as for credit card transactions.
Two characteristics distinguish offline debit transactions. First, transactions are signature- based. Second, consumer accounts are debited one or two days after the transaction (that is, there is a lag before funds are deducted from demand deposit accounts).
To complete this section, it may be useful to emphasize the similarities and differences between online and offline debit transactions. Both transactions are conducted at a POS terminal. Both represent payments in exchange for goods or services. But online debit requires the use of a PIN and funds are debited immediately, while offline debit does not require a PIN and funds are not debited immediately. Online debit transactions are processed over an EFT network. By contrast, offline debit transactions are processed over credit card networks. Online debit allows the consumer to obtain cash back at the point of sale, while offline debit does not. Finally, consumers and merchants face differing fees for online and offline debit (detailed in Chapter 4).
From Point of Sale (POS) Systems and Security
Debit Cards and ATM Networks
A. Regional EFT Interbank Networks
- Concord STAR
B. National EFT Interbank Networks
- Visa Plus
- Mastercard Cirrus
Debit POS (Point of Sale) Networks (PIN based)
Transactions are processed over EFT Network
- Eposnow (iPad)
- DucePos (iPad)
- Revel (iPad)
- ShopKeep (iPad)
- Instore (iPad)
- Lavu (iPad)
- OrderBird (iPad)
- Touch Bistro (iPad)
- SalesVu (iPad)
Offline Debit Card Networks (Signature Based)
Transactions are processed over Credit Card Networks
- Visa Check Card
- Mastercard MasterMoney
EFT Networks in India
India is mostly cash based economy. Manual Paper based and Wooden Drawer based Cash Registers are the predominant form of payment transactions systems.
In last few years, many innovative solutions have come up but penetration is very low.
Issues of Data Privacy and Cybersecurity are not yet on the minds of Developers of these new solutions.
Regulations and Oversight of these newer platforms is non existent.
People use debit cards predominant to withdraw cash from ATM machines. Online payment transactions are done for paying utilities bills and making bookings for Air, Train, and Bus Transportations. Credit cards are used by very small segment of people in cities.
From Innovative payment systems for financial inclusion
Innovative payment systems for financial inclusion
- Over INR 8743 bn in payments to be made through prepaid Instruments in FY20
- India Point of sale terminals lowest amongst BRIC nations
- Overall business opportunity for business correspondents estimated at INR 567 bn per year and revenue opportunity for POS –related shared services at INR 16 bn per year
24 OCTOBER DELHI/MUMBAI:
Disruptive game changing innovations in the payment systems will be critical to accelerate financial inclusion agenda of India, states a latest report on financial inclusion by EY, the global professional services organization. The report titled ‘Accelerating financial inclusion- The role of payment systems’, was released at a global conference on Financial Inclusion and Payment Systems in Delhi today.
The report aims to provide an outlook on India’s financial inclusion agenda, the growth drivers for its success and the supporting infrastructure that will be needed. As per the report, with current trends like growing urbanization, rising middle class and aspirations, this is the right time to tap the large unbanked population of India.
Mahesh Makhija, Partner – Advisory (Financial Services), EY says, “India is an exceptional country with unique consumer needs. To accelerate financial inclusion in India, we will need to understand what combination of payment products and services will work in the Indian context. Innovations in payment systems will occur at the intersection of different industries like financial services, telecom and retail.”
The report lists 6 key elements that make up the financial inclusion agenda of India:
New game, new rules — evolving prepaid instruments landscape in India
Prepaid Instruments (PPI) are at their nascent stage in India, but have the potential to play a vital role in the country’s struggle to reduce dependence on cash in its economy, says the report. EY estimates that although prepaid market represented only 3.62% of the Indian card market, this will increase dramatically over the next decade. EY recommends that the Government look closely at PPI’s as an option to disburse Government benefits (currently estimated at INR 4800 billion). Market growth in PPI’s will also emanate from the proliferation of m-wallets, money transfer and other new applications of the product. According to the report, these new segments are expected to collectively contribute 47% of the prepaid market in FY 20. Over INR 8743 billion in payments is likely to be made through PPIs in FY 2020. This will be more than 12 times the volumes in FY2013.
Rethinking mobile money — the case for electronic rupees issued by the RBI
Mobile money has the power to democratize banking in India by bringing large numbers of the country’s unbanked population into its formal financial system. As per the report, almost 83% of India’s population is expected to own and use mobile phones by 2014. However, for several reasons mobile money adoption in India has been low. Consumers and merchants are not incentivized to make the transition to mobile money and Banks and Telco’s have adopted a ‘wait and watch’ approach. According to the report, the challenge is to take a transformative step that will lead to a paradigm shift in the mobile money paradigm. One such step would be creation of electronic rupee. These would be issued by the Reserve Bank of India as legal tender, just as it currently issues currency notes and coins.
“We think that the creation of electronic rupee is a transformative solution to today’s issues with mobile money in India and in fact across the globe” said Mahesh.
Enabling payments —increasing Point Of Sales (POS) penetration in India
As financial inclusion gathers momentum, there is an urgent need to enhance POS acceptance infrastructure in India. India still has one of the lowest number of POS terminals (per million people) in the world. According to the report, penetration of POS terminals is only 693 per million of India’s population, compared to similar emerging countries such as Brazil, which has 32,995 terminals per million people and China and Russia, each of which has around 4000 terminals per million people. India’s POS landscape is characterized by a large skew in favor of urban locations-more than 70% of the POS terminals are installed in the top 15 cities contributing to over 75% of the total volumes at POS. Moreover, only 1.1 million of the more than 10 million retail touch points have POS installed for electronic payments acceptance. Technology will play an important role with the implementation of new POS capabilities. Large urban retailers seek technologies like Mobile POS (Mpos) which help them in “line-busting” whereas the smaller merchants seek a cheap and easy-to-use solution like a card-reader attached to a phone. Rural merchants on the other hand are likely to adopt biometric POS terminals, which enables them to accept Aadhaar enabled debit cards that are likely be issued in large numbers for financial inclusion. As per the report, there could be close to 3.5 million POS in the next five years if necessary initiatives and actions are taken to increase the POS penetration.
Evolving payment ecosystems – shared services models for inclusion and growth
The report states that to enhance their reach, banks are introducing payment ecosystems that work across organizational boundaries to deliver innovative payment services. The report discusses 7 different models of shared services that Banks are leveraging aimed at acquiring, engaging and retaining customers. EY estimates the overall opportunity for shared services like business correspondents at around INR567 billion per year in the next 2-3 years and an overall revenue opportunity of INR16 billion per year for POS-related shared services by 2018 at the present rate of growth in card-related transactions and merchant terminals.
Pathways to excellence — the transformation agenda for banks
Changing consumer behavior, the increasing urgency of financial inclusion and ubiquitous mobile telephony are powerful external factors that will transform the Indian payments industry over the next 10 years. In the last decade, India has witnessed significant achievements in its efforts to migrate from traditional payment methods through cash to modern electronic payment systems. In 2012 the percentage of non-paper based payments transactions was 48% up from 27% in 2008. While there has been significant progress made on various parameters, a lot still needs to be done in the next few years. According to the report, India is at an interesting point in its payments journey wherein the foundation is laid, but its future growth will depend on innovation in products, business models, consumer interfaces, security and infrastructure under the umbrella of enabling regulations.
Cashless in India – Government imperatives to promote electronic payments
From taxes to social welfare benefits, the Government of India cumulatively receives and disburses billions of rupees to and from its citizens. The Interbank Mobile Payment Service and Aadhaar Enabled Payment System platforms have the potential to integrate the payment systems of various Government to Public (G2P) schemes and enable mobile phones to be used as front-end technology instruments states the report.
By digitizing this flow of money, the Government can lead a strategic shift from the high dependence on cash to a more efficient, electronic payment system, which leverages online and mobile channels to cut costs and bring social benefits to millions.
The establishment of a strong payment and settlement framework and associated enabling institutions has aided a conducive environment for financial inclusion in India.
From Why it is difficult to scale POS machines in India
Why it is difficult to scale POS machines in India
Shashidhar KJ October 19, 2016
Earlier this month, the Reserve Bank of India (RBI) said it would be setting up an acceptance development fund (ADF) to boost the card payment infrastructure in the country. The proposed ADF which will be funded by card issuers to build a corpus by diverting a percentage of their transaction revenue into the fund. Money from the fund is then invested in structured initiatives to expand acceptance infrastructure such as POS terminals.
We have the dubious honour of having one of the lowest POS terminal penetration, according to an Ernst and Young report. The report said there were only 693 machines per million of India’s population, compared to similar emerging countries such as Brazil, which has 32,995 terminals per million people and China and Russia, each of which has around 4000 terminals per million people.
This was back in 2015 and the number of POS machines issued from banks has improved to over 14 lakh in July, as shown by RBI data.
Isn’t it odd that there are over 697 million debit cards and 25.94 million credit cards and there are only 14,43,899 POS terminals in the country?
Indeed, the RBI, in its concept paper to boost card acceptance, points out that people primarily used their debit cards to withdraw money from ATMs.
Closer look at POS terminal data
However, a if we look at closer at the POS terminals deployed in the country, we see a curious concentration. The top banks in the country – State Bank of India, ICICI Bank, HDFC Bank, Axis Bank and Corporation Bank – have the highest number of POS terminals accounting for 80.94% of all terminals in the country.
The RBI counts 56 scheduled commercial banks in the country. Not to mention that there are 56 functioning regional rural banks and 93 cooperative banks.
It’s interesting to note that the banks mentioned above generally have a well developed credit card business portfolios which contribute to their balance sheet in a significant way.
Enter the MDR
An explanation for the skew of POS terminals within these banks could be that they get to charge merchants a higher merhcant discount rate (MDR), an inter-bank interchange fee, for credit card transactions.
The MDR is fee collected by banks from merchants for a card transaction. When a customer uses a HDFC Bank credit card on a POS terminal, the merchant is charged a fee to settle the payment in another bank.
Typically banks charge around 2-2.5% per transaction on credit cards. However, the RBI has capped the MDR for debit cards at 0.75% for transactions below Rs 2,000 and 1% for transactions above Rs 2,000.
The devil, however, lies in how the MDR is split between the bank issuing the card and bank accepting the payment. For credit cards, the issuing bank gets around 1.8% of the 2-2.5% MDR. Meanwhile for debit card transactions, issuing banks make around 0.5% out of the 0.75% interchange fee.
No incentive to develop the system
Currently, other banks (public, regional and cooperative banks) have no incentive to develop card acceptance networks. They are not interested or do not have the expertise to develop a credit card business to command a higher MDR. They would rather have their customers use debit cards as a dumb instrument to withdraw cash at ATMs instead.
Rahul Kothari, vice president and head of business at PayUbiz explained that banks look at POS as a means to retain customers through current accounts and offer them other products.He added that right now there is no level playing field between third party companies who develop POS solutions and banks. RBI guidelines say that third party companies need to take permission from banks to process POS payments, Kothari added.
Third party POS players in India include PayU, MSwipe, Ezetap and Oxigen.
Industry sources also pointed out that banks charge around 5-10 basis points (bps) for getting a bill of sponsorship to handle POS payments. MediaNama was unable to independently verify this.
What needs to be done
There needs to be a more equitable distribution of the MDR between banks which will open up competition between smaller banks who will now have a reason to build their card acceptance networks. To an extent, the ADF aims to do that by taking a portion of the fees got by the issuing bank and put it into a corpus to get more POS terminals in the country.
However, the RBI should ensure that the proceeds of the fund should go to banks who do not have a proper card acceptance network.
Secondly, third party POS players must also be brought into the discussion. For example, Oxigen has a product called Super POS which also doubles as a mini ATM and has biometric and Aadhaar authentication. The RBI recently issued a notification which instructed banks to upgrade ATMs and POS machines to accept Aadhaar. Banks should figure out a way to work with non-bank entities to push for a cash less environment.
Perhaps, banks can employ third party players as banking correspondents in rural areas and get give a cut from the MDR to them.
What about QR codes
Paytm has an interesting approach to offline merchants. Recently the company announced that it has more than a half a million offline merchants. Paytm’s offline merchants have a QR code which a customer has to scan on the app to make a payment. Effectively, it has turned the POS system on its head by cutting the costs of installing and maintaining a POS terminal.
Once a customer decides to move his/her money to a bank account, they need to pay a fee of 1% to Paytm which is considerably lesser than the MDR charged by banks. I spoke to a mom-and-pop shop owner in the neighbourhood who said that this was a lot more cheaper than the costs associated with cards. He explained that he wants acceptance of Paytm to increase so that savings on transactions will be reduced.
To sum up
There are a number of factors which are inhibiting the growth of POS terminals in India:
– Allowing only banks to lead the way on POS.
– The bank interchange fee (MDR) for merchants is too high.
– The cost of handling and maintaining machines are an added cost for merchants.
– The split of MDR disproportionately favours the banks issuing cards. There needs to be a more equitable distribution of the fee between the issuing bank and the accepting bank.
From Paytm has more offline merchant transactions than online: CEO Vijay Shekhar Sharma
Paytm has more offline merchant transactions than online: CEO Vijay Shekhar Sharma
Shashidhar KJ September 26, 2016
We’ve been seeing Paytm stickers coming in offline stores all over, at least in Delhi, Mumbai and Bangalore. In the month of August, Paytm’s offline merchant transactions exceeded online transactions on the platform, CEO Vijay Shekhar Sharma (VSS) told MediaNama, and a large part of this has been owing to a change in technology approach by the company. The company claims over half a million offline merchants now. Edited excerpts from MediaNama’s interview with VSS:
Took a call to focus on offline in 2016: “Every year we pick up a theme. When we first started, it was online recharges, the second year was online payment. Now, this year when we started we thought we would take up offline as a plan that we would have Paytm in every nook and corner (of the country). We thought that after Paytm, there should not be any pain-point left for anyone else to solve.
Online is great, online is nice and but this is where the bus is moving. But ultimately there is a larger customer base and transaction base which happens in the offline world. It was a very, I would say, uncanny for an online company to think of offline.
So we built our own software where we can track offline signups, sales-force automation and a lot things, so that we are disciplined. And I think we have more than half a million merchants signed up.
Update: VSS has clarified that the company refers to a transaction as “offline” when the merchant doesn’t have their own application, and is integrated only using the QR code, and not via the API. Thus, these will not include transactions made on the Uber app.
Dumb card, smart POS; smart phone and dumb POS: “I mean if you look at it, first of all, our understanding is that we have a different process versus other offline payment methods. Offline right now is dominated by Visa and MasterCard. American Express is also very small.
But the consumer has a dumb device called card, and what merchants carry is a smart device called POS with Internet connection. So, we are changing that structure. We are saying that merchant will not have a smart device or Internet connection, and consumer will have that. So payment happens via a QR code and the processing happens on the consumer side.
NFC versus QR code: “I think we saw it first in China, where QR codes dominate massively, and we had discussions with our friends in China (Alibaba) on why they chose to have QR code. I have personally have been a total non-believer of QR code in advertising, but when it came to payments it became important because the consumer and merchant have to communicate in a non technical way,and some way for the data to be given from consumer to merchant easily.
Whether you look at NFC, there is an investment that the merchant has to do. And if you use the smartphone as a consumer device the cost structure works in reverse in our case. The idea that we had is that every smartphone, technically, might not have NFC. But every smartphone does have a scanner.
So on the Paytm app, when you click on pay, the QR code scanner comes up.
Challenges in going offline: “So, it was three layers of new things. One for the consumer, it was new because they have never gone in the offline world and paid in any online payment instrument. We had to help with consumer mindset. Second is towards the merchant who are okay with cash and have no obligation to build a non-cash business. The third was that we had chosen a new technology, where the consumer and the merchant had to learn. But the thing that we found out was, in the end, it was so fast that I don’t think OTP or NFC or any other thing like MMID will work.
The point is that this is tokenization for your digital wallet.”
Sector choices for offline rollout: We started with the transportation vertical – autorickshaw, taxi, Uber, parking or petrol pump – where there is a lot of sale. Second place where we found the spends were in the groceries, fruits and vegetables etc and the third category was discretionary spends which was like shopping, quick service restaurants and restaurants. So we created three beats for these.
Our approach was that Delhi is the first city where you have to find the correct solution. Because in verticals like in parking, there would be Internet connectivity problems, while in QSR, payments need to happen very fast, and OTP would be very slow.
So we built the beta run in one city and then went to multiple cities. There is a team which builds solutions, and there is a second team which takes it to the market.
The teams which go to market look at top cities, mid-tier cities and long tail cities. We found it very surprising that in long tail cities, it increases sales for a merchant when they say that they accept Paytm.
There is also a number where you can dial and say that you want Paytm, and through this tens of thousands of merchants have been signed up. Consumers and merchants reach out to us just because somebody else has used it. Then there is a front-tail where we go to the shop, and we explain to them what the product is where they do merchant on-boarding, verification and give them QR codes. So two different processes, but both require the merchant to be on-boarded with full verification and documentation.
Merchant transaction charges: In our case, the merchant pays 0%. So consumers will load money through credit cards and debit cards and pay to the merchant. So effectively, the merchant is effectively receiving credit and debit card payments at 0%. We make money which comes through the wallet, which is used on the Paytm network.
Another interesting thing is the money these merchants receive goes back to the network to be used and only 5% is sent back to the bank account.
(Editor’s note: Paytm charges charges 4% for wallet-to-bank account transfers for customers who have not completed their KYC and 1% for KYC compliant customers. That still is effectively lesser than card companies who effectively charge around 2.5% on transactions)
Paytm by the numbers
Paytm wallet users: 140 million
Monthly transactions: 75-90 million (as per media sources)
GMV (current): $5 billion
GMV projected by financial year end: $10 billion
Offline merchants: 500,000
Monthly offline transactions: 10 million per month
Payments bank launch: Diwali 2016
Investors: Ant Financials (AliPay), Alibaba Group, SAIF Partners, Sapphire Venture and Silicon Valley Bank
Online vs offline growth: Our online was a bit like iOS growth. One successful merchant gave us another one. While with offline, it was more like Android growth: it just grew very fast. In the month of July, we just had it at the same level between offline and online. And in August offline overtook online. Basically now, Paytm does more offline merchant transactions than online.
Recharge now constitutes less than 20% of our business. That number is very small now because we have created so many uses cases. One thing we found out was, when you give your payment system to a merchant, the merchant’s experience becomes a part of the total experience. Consumer might prefer to pay through an instrument, but the process to reach the merchant payment instrument is so difficult, that the consumer might give up before that. We found out that the payment system should be there on the merchant’s side.
Concentration of cities & Ticket sizes: “Right now we are there in about 900 cities and towns. When we look at our payment consumer, where the median is bigger, as expected, it is coming from cities where the Internet connectivity is there. So top 10 cities will be constitute about 50%. Online transactions go through ecommerce merchants and have a larger ticket size. But if you look at offline transactions, payments in offline usage of wallet, there is a smaller order value.
From RBI concept paper looks to boost card payments at POS terminals
RBI concept paper looks to boost card payments at POS terminals
Shashidhar KJ March 11, 2016
The Reserve Bank of India came out with a concept paper earlier this week for improving the card acceptance infrastructure and is seeking comments, suggestions and views from relevant players on the same.
“The “economics” of card payments plays an important role in ensuring greater and wider participation of all stakeholders involved in the card payments value chain and, as such, any strategy geared towards expansion of the infrastructure in a “managed” way has to also address these issues,” the RBI said.
Accordingly, the RBI has outlined a broad strategy to enhance the growth in acceptance infrastructure through POS terminals and usage of cards which includes further rationalisation of merchant fees for debit card transactions. Here are some of the take aways from the paper:
Card payments in India
– The RBI noted that growth in electronic payments is not uniform across all segments nor is it visible at all locations across the country. Particularly, in the context of cards, while the card base is increasing rapidly, activation or usage rates are quite low, especially for purchase of goods and services. Card usage at ATMs, on the other hand, is quite high.
– Debit cards registered a growth of 64% between Oct 2013 and Oct 2015 while credit cards grew at 23% during the same period. As at end-December 2015, the total number of credit cards stood at 22.74 million while debit cards stood at 636.85 million cards in the country.
– Between Oct 2013 and Oct 2015, ATMs increased by around 43% while POS machines increased by around 28%. As of end-December 2015, the number of ATMs has increased to 193,580 while POS machines had increased to 1,245,447 in the country.
– From April 2015 to December 2015, the usage of debit cards at ATMs continues to account for around 88% of the total volume and around 94% of total value of debit card transactions. Usage of debit cards at POS machines accounts for only around 12% of total volume and 6% of total value of debit card transactions.
– From April 2015 to December 2015, credit card usage at ATMs accounted for around 0.73% of volume and 1.25% of value of total credit card transactions. Use of credit cards for POS transactions accounted for 99.27% of volume and 98.75% of value of total credit card transactions in the country.
– While almost every bank is a card issuer, very few banks are engaged in the activity of merchant acquiring and setting up of card acceptance infrastructure. Thus, there is concentration in acquiring business with the top 5 acquirer banks accounting for nearly 81% of the POS infrastructure and top 10 acquirers’ share of POS being above 90%.
– The number of merchant establishments accepting card payments has increased from 0.85 million merchant establishments in Oct 2013 to around 1.15 million establishments in Oct 2015, a growth rate of 34%. As on Dec 2015, the number of such merchant establishments was 1.26 million.
Factors inhibiting growth for card acceptance
– High cost of acquiring business that include high capital cost of POS machine, recurring maintenance, difficulty of servicing POS machines in rural areas.
– Low utilization of cards makes acceptance for small merchants and in rural areas unviable due to low card footfalls and low transaction values besides other costs associated with merchant acquiring, ultimately forcing acquiring banks to withdraw the POS terminal.
– Lack of adequate and low cost telecommunication infrastructure
– Lack of incentive for merchants to accept card payments is another inhibiting factor. Further, transparency and audit trails associated with card payments often act as deterrent for accepting card payments by merchants.
– Insufficient awareness about the costs associated with use of cash apprehension of using non-cash payments, especially concerning its safety and security, anonymity associated with cash payments, surcharge and convenience fees being levied for use of card and electronic payments, difficulties in changing consumer behavior, etc. also inhibit growth / usage of card of payments for purchase of goods and services.
– Merchant Discount Rate (MDR) also often acts as a disincentive.
Strategies for enhancing acceptance
Mandate installations of POS terminals in proportion to cards issued: The RBI said that banks issuing cards should install proportionate number of POS terminals to the number of cards issued. However, it noted that not every bank is equipped to run merchant acquisition business. The lack of expertise may lead to some banks entering this business through outsourcing model which later might prove costly.
Setting up of Acceptance Development Fund (ADFs): The RBI also mooted for setting up an ADF where different stakeholders in the card payment chain come together to set up a program to encourage wider deployment of card acceptance infrastructure. These are generally funded by card issuers to build a corpus by diverting a percentage of their transaction revenue into the fund which is then invested in structured initiatives to expand acceptance infrastructure.
ADFs are usually managed by third parties who establish the framework for use of funds which include subsidies for installation of terminals, development of new technologies / segments / geographies, marketing and education to increase awareness for acceptance as well as for usage.
Rationalisation of Merchant Discount Rate
The major source of revenue in the card business is the Merchant Discount Rate (MDR) or Merchant Service Fee. MDR comprises other cost segments such as the interchange fee (fee paid by acquirer to card issuing bank), processing and other fees payable to the card network, and other costs incurred by the acquirer along with acquirer’s margin. The RBI has proposed a number of options for the rationalization of the MDR some of them are:
Uniform MDR across all merchant categories & locations proportionate to transactions size: RBI had fixed a cap on MDR for debit card usage as
- not exceeding 0.75% of the transaction amount for value upto Rs. 2000/-
- not exceeding 1% for transaction amount for value above Rs. 2000/-
This is basically maintaining status quo for the regulatory structure. However, the growth in deployment of POS terminals has come down as lower MDR was cited as on of the reasons making the business unviable.
Differentiated MDR at select merchant categories at all locations: Another approach is to have a differentiated MDR framework for some select merchant categories across all locations. For example, some merchant categories could include utility bill payments (electricity, water, gas, telephone), municipal taxes, primary hospitals and health centres, primary educational institutions, public distribution system outlets ( like ration shops), fertilizers, seeds and similar agricultural products, public transport, etc.
Differentiated MDR at select merchant categories in Tier III to VI locations: An another alternative is to rationalise MDR in select categories in Tier III to VI locations with the objective of ensuring wider deployment of POS terminals.
From Update: Card payments on POS terminals suffered outages and failures over the weekend
Update: Card payments on POS terminals suffered outages and failures over the weekend
Shashidhar KJNovember 14, 2016
Update: MediaNama spoke to Manish Patel, CEO of POS machine company Mswipe who spoke told us that card networks are unable to deal with the sudden surge in payments on their networks. He added that on Saturday between 7 pm to 9.30, pm Visa’s servers failed but POS machines were still able to process payments from MasterCard.
MediaNama was unable to independently verify this but we have written to Visa and will update once we hear from them.
Meanwhile, Mswipe said that it saw a huge surge in the number of transactions it processed. Typically, Mswipe processes 45,000-50,000 transactions a day. On Friday, this number went up to 1 lakh transactions and to 1.25 lakh transaction on Saturday. On Sunday, Patel added the number of transactions went above their capacity to process them and that they are currently adding more capacity.
Earlier: POS terminals across the country suffered outages for several hours over the weekend and many card transactions were declined according to multiple people who spoke with MediaNama. For example, card transactions at a restaurant in Mumbai’s Mulund West was down from 7 pm to 10 pm on Friday, and there was a similar outage the next day. The restaurant owner told MediaNama that he had contacted ICICI Bank about the outages, and they attributed it to the demonetization drive, saying they needed some more time to recalibrate. Many stores in the neighbourhood also could not process card payments, and insisted that customers pay by cash. MediaNama’s Salman SH and Sneha Johari reported similar outages in Bangalore and Pune.
Also read: MediaNama’s Demonetization Liveblog, with the latest updates.
In Bangalore, a pubs POS terminals were down on Saturday morning. The pubs owner also said that he had to to accept bank transfers from customers to his account. The owner added that all six POS terminals were down due to increased volumes on card payment networks. The POS machines displayed an error code “server down”.
On Sunday, Damodar Mall, CEO of Reliance Retail tweeted about card payments getting declined and appealed to ICICI Bank and HDFC Bank for help.
We have written to ICICI Bank, HDFC Bank and Axis Bank for comments regarding the outages. Meanwhile, State Bank of India (SBI) tweeted that it processed 10.05 lakh POS transactions on Sunday. To give context, SBI processed 3,25,00,690 debit card transaction over POS terminals in July, according to RBI data.
Meanwhile Rahul Kotari, business head of PayUbiz, told MediaNama that the payment gateway has seen a spike in the number of transactions from around 750,000 a day to 1.5 million a day following the demonetization. Note that PayU also has a POS machine for offline transactions and process them through its payment gateway. He added that the payment gateway is built to handle five times its current load and is increasing it to 10 times anticipating a surge in online transactions. Kothari added that the company is considering deploying QR codes in the short term for offline merchants to help ease the pain of doing business.
Asymmetry in POS terminals
As we have pointed out many times, India has the dubious honour of having one of the lowest POS terminal penetration, according to a 2015 Ernst and Young report. The report said there were only 693 machines per million of India’s population, compared to similar emerging countries such as Brazil, which has 32,995 terminals per million people and China and Russia, each of which has around 4000 terminals per million people.
The Reserve Bank of India’s data shows that there are over 697 million debit cards and 25.94 million credit cards and there are only 14,43,899 POS terminals in the country.
A closer look at the POS terminals deployed in the country, we see a curious concentration. The top banks in the country – State Bank of India, ICICI Bank, HDFC Bank, Axis Bank and Corporation Bank – have the highest number of POS terminals accounting for 80.94% of all terminals in the country.
From Paytm Has Just Created Millions Of PoS Across India With A Single Move; Every Paytm User Can Now Accept Card Based Payments
Paytm Has Just Created Millions Of PoS Across India With A Single Move; Every Paytm User Can Now Accept Card Based Payments
Paytm has just created millions of Point of Sales (PoS) across the nation, with one strategic move. Now, anyone with a merchant account with Paytm can receive payments via debit card/ credit card, which means that digital payments have been super-simplified and scaled beyond imagination.
This is certainly one of the masterstrokes by Paytm for encouraging even more digital transactions and a good move towards an absolute cashless economy.
Paytm founder Vijay Shekhar Sharma said, “India needs a very innovating mobile pos machine and Paytm has already been accepted by many merchants. By extending our merchant network to all other payment networks, we are enabling digital payments to a very large number of Indians.”
How Will It Work?
Suppose you visit a local grocery shop to purchase few items and the shop-keeper has a Paytm account. Now, there can be two scenarios: Either you also have a Paytm account, which means that you can simply transfer the amount. Or, you don’t have a Paytm account, but have debit/credit card to make the payment.
In this case, the merchant can accept your debit/credit card via his Paytm app, and complete the payment.
This is how it will work:
Step 1: The merchant raises the bill, and gives you his phone wherein you enter your debit/credit card number
Step 2: The customer receives an OTP on his mobile number
Step 3: Enter the OTP inside merchant’s Paytm app
Step 4: Payment complete
Till December 31, there would be no fees for such card based transactions on merchant’s Paytm app. The new version of the app has been updated, and under ‘Accept Payment’ tab, merchants can receive payments from cards issued by Rupay, Visa, MasterCard and Maestro.
Big Boost For Cashless Economy
There are around 150 million users of Paytm, and almost 1.5 million merchants registered with the. With one single step, these 1.5 million merchants can now accept debit and credit based payments, thereby transforming into a live PoS, instantly.
Besides, RBI has recently increased the limit for merchants to Rs 50,000 per month, which means that they can send upto Rs 50,000 from Paytm app to the bank, without KYC. This, along with PoS transformation means that merchants would now prefer Paytm mode of accepting payments (both from credit/debit card or peer-to-peer money transfer).
Merchants can register with Paytm by visiting here.
Paytm is expecting atleast 10-15 million more merchant accounts after this decision to convert apps into PoS. We will keep you updated as more details come in.
Debit and Credit Card Networks
- American Express
- Diners Club
Government of India Networks
- IMPS (Immediate Payment Service)
- NEFT (National Electronic Funds Transfer) -Online Banking Transfer
- NFS (National Financial Switch) – ATM (Automatic Teller Machines) Network
- SBI Chhota (little) ATM (using POS devices for Cash)
- RTGS (Real Time Gross Settlement System) – Large Value Real Time Network
- UPI (Unified Payment Interface) -using BHIM app
- NACH (National Automated Clearing House)
- AEPS (Aadhaar enabled Payment System) -MicroATM
- BBPS (Bharat Bill Payment System) – for paying Utilities Bills
- RUPAY – Credit and Debit card network
- *99# (uses USSD channel)
- *99*99# (Uses USSD channel)
NFS in India
National Financial Switch (NFS) is the largest network of shared automated teller machines (ATMs) in India. It was designed, developed and deployed by the Institute for Development and Research in Banking Technology (IDRBT) in 2004, with the goal of inter-connecting the ATMs in the country and facilitating convenience bank- ing. It is run by the National Payments Corporation of India (NPCI).
AEPS from NPCI website
In order to further speed track Financial Inclusion in the country, Two Working Group were constituted by RBI on MicroATM standards and Central Infrastructure & Connectivity for Aadhaar based financial inclusion transactions with members representing RBI, Unique Identification Authority of India, NPCI, Institute for Development and Research in Banking Technology and some special invitees representing banks and research institutions.
The working group on MicroATM standards & Central Infrastructure & Connectivity has submitted its report to RBI. As a part of the working group it was proposed to conduct a Lab level Proof of concept (PoC), integrating the authentication & encryption standards of UIDAI, to test the efficacy of MicroATM standards and transactions using Aadhaar before they are put to actual use. The PoC was successfully demonstrated at various venues.
AEPS is a bank led model which allows online interoperable financial inclusion transaction at PoS (MicroATM) through the Business correspondent of any bank using the Aadhaar authentication.
The four Aadhaar enabled basic types of banking transactions are as follows:-
- Balance Enquiry
- Cash Withdrawal
- Cash Deposit
- Aadhaar to Aadhaar Funds Transfer
The only inputs required for a customer to do a transaction under this scenario are:-
IIN (Identifying the Bank to which the customer is associated)
Fingerprint captured during their enrollment
From RUPAY from NPCI website
The National Payments Corporation of India (NPCI) is a pioneer organization in the field of retail payments in India. It is a body promoted by RBI and has presently ten core promoter banks (State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, Union bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank and HSBC). It has been incorporated as a Section 25 company under Companies Act and is aimed to operate for the benefit of all the member banks and their customers.
The vision of NPCI being able to provide citizens of our country anytime, anywhere payment services which are simple, easy to use, safe, and secure, fast and also cost effective. NPCI aims to operate for the benefit of all the member banks and the common man at large.
Reserve Bank of India, after setting up of the Board for Payment and Settlement Systems in 2005 released a vision document incorporating a proposal to set up an umbrella institution for all the Retail Payment Systems in the country. The core objective was to consolidate and integrate the multiple systems with varying service levels into nation-wide uniform and standard business process for all retail payment systems. This led to the formation of National Payments Corporation of India, (NPCI).
RuPay, a new card payment scheme launched by the National Payments Corporation of India (NPCI), has been conceived to fulfill RBI’s vision to offer a domestic, open-loop, multilateral system which will allow all Indian banks and financial institutions in India to participate in electronic payments.
“RuPay”, the word itself has a sense of nationality in it. “RuPay” is the coinage of two terms Rupee and Payment. The RuPay Visual Identity is a modern and dynamic unit. The orange and green arrows indicate a nation on the move and a service that matches its pace. The color blue stands for the feeling of tranquility which is the people must get while owning a card of the brand ‘RuPay’. The bold and unique typeface grants solidity to the whole unit and symbolizes a stable entity.
From ICICI Bank Website
The IMPS (Immediate Payment Service)
from ICICI Bank helps you access your bank account and transfer funds instantly and securely. You can send money using ICICI Netbanking on an internet-powered laptop or PC. We enable you to transfer funds from your ICICI account to any ICICI or non-ICICI account. The beneficiary account is credited immediately when a fund transfer request is made from your side.
This service is available 24×7, throughout the year including Sundays and any bank holiday.
Use IMPS service to transfer funds anytime, from anywhere using: Netbanking, Imobile, and M.DOT
What is RTGS ?
The acronym ‘RTGS’ stands for Real Time Gross Settlement, which can be defined as the continuous (real-time) settlement of funds individually on an order by order basis (without netting). ‘Real Time’ means the processing of instructions at the time they are received rather than at some later time.’Gross Settlement’ means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis). Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are final and irrevocable.
What is NEFT?
National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme, individuals can electronically transfer funds from any bank branch to any individual having an account with any other bank branch in the country participating in the Scheme.
Use NEFT service to transfer funds anywhere using the following modes:
- Internet Banking
Unified Payment Interface (UPI) is here
Discover a quick and easy way to send and receive money using a Virtual Payment Address (VPA) without entering additional bank information.
From Ezetap ties-up with SBI to launch PoS and ATM solution Chota ATM
Ezetap ties-up with SBI to launch PoS and ATM solution Chota ATM
Vivek Pai October 6, 2014
Ezetap SBIBangalore-based point of sale (PoS) startup Ezetap has partnered with the State Bank of India to launch ‘Chota ATM’, a solution that can double as an ATM device as well as a PoS terminal that can accept payments from any debit and credit card.
Targeted at neighborhood Kirana shops, the solution will be offered to merchants for a non-refundable deposit of Rs 499 along with a monthly fee of Rs 150 and a commission of Rs 5 per cash-back transaction.
Sanjay Swamy, Managing partner of AngelPrime (which incubated Ezetap) writes that merchants can sign up for this service by opening a zero balance current account with SBI and use this solution over an Android or Windows phone or tablet with an active data connection.
It’s worth noting that SBI had earlier selected Ezetap to deploy 500,000 PoS terminals in the next 5 years for the customers of SBI and its five associate banks.
Cash Withdrawal limits & commission
Ezetap Chota ATM
Through this solution, credit and debit card holders can swipe their card to carry out three types of transactions – Sale, Sale + Cash withdrawal and Cash withdrawal only.
As per SBI’s Chhota ATM FAQs (pdf), cash can be withdrawn in multiples of Rs 100. There is a minimum daily withdrawal limit of Rs 100 per card holder and a maximum daily limit of Rs 1,000 per card holder, in line with the RBI guidelines.
There is also an additional 1% charge on customers having State Bank group debit cards to a minimum of Rs.7.50 and maximum of Rs 10 per transaction. For other bank holders, this charge will be decided by their respective banks. As for merchants, they will receive a commission of Rs 5 per cash withdrawal transaction.
In January last year, Ezetap had partnered with Citibank to launch a mobile payment solution for merchants targeting credit and debit card holders in India. As part of the partnership, merchants were expected to receive real time information during the payment and collection process, when customers transact using Ezetap. Citibank had then claimed to have partnered with companies like Shoppers Stop, Bajaj Allianz, Flipkart, BookMyShow and Vodafone to deploy this solution for payment and collection.
The company had also launched a debit card supporting mobile PoS solution in July last year and had acquired Hyderabad-based loyalty platform Clinknow in June this year to launch an integrated payments and loyalty solution for merchants across India.
Ezetap has raised around three rounds of investments until now – a strategic undisclosed investment from American Express in March this year, a $8 million investment in Series B funding led by Helion Advisors with participation from existing investors Chamath Palihapitiya’s The Social+Capital Partnership and Berggruen Holdings in February this year and $3.5 million in series A funding from Peter Thiel, Chamath Palihapitiya, Nicolas Berggruen and David Sacks in November 2011.
(With Inputs from Vikas SN)
India POS Devices
All three major POS devices providers in USA have business offices in India. Their business has boomed since demonitization was announced in November 2016. But there is shortage of these devices in India. On Feb 1, 2017, Government slashed import duties on POS devices. But procurement times are several months long. Devices are manufactured in China.
There are other manufacturers in Asia who provide POS devices.
- PAX Technology (China)
- SZZT Electronics (China)
- Fujian Newland (China)
- CyberNet (South Korea)
- Bitel (South Korea)
- Shenzhen Xinguodu (China)
- Castles Technology (Taiwan)
- New POS Technology (China)
There are other devices which are required for a complete solution. There are:
- POS Terminal (CPU)
- Barcode Scanners
- Data Collection Devices
- Handheld Devices
- Mobile Computer
- Receipt Printers
- Bar Code Printers
- Cash Drawers
- Check Readers
- Touch Screens
- Signature Capture Device
- Payment Terminals
India m-POS Devices
EZEPAY has linked with State Bank of India to bring Micro ATM solution to get cash from POS devices. In USA, this service is known as Get Cashback option in all POS devices at the merchants. Another Mini ATM solution is from Oxigen known as OxiShaan. SBI has tied with Oxigen to provide miniATM solution known as MobiCash. Oxigen has a business correspondent relationship with SBI.
- mSwipe Wisepad
- MRL Posnet PayTivo
- Paymate India PayPos
- Mobi Swipe (Ingenico)
- Essae (hardware)
- PayUMoney Pos
- Oxigen OxiShaan
- MTS mPos
- Paynear One
- CirQ Pos
- HDFC PayZapp
- Pine Labs
- SBI MAB Pos
- ICICI MBS MPos
- Union Bank of India POS
- Axis Bank
- Ezee Pay
PBOC and Union Pay control following networks:
- nationwide inter-bank system (the existing EIS will be replaced by the next-generation CNAPS)
- regional (cities and counties) payment systems (LCHS)
- commercial banks’ intra-bank payment systems.
- Internet Banking Payment System (IBPS)
- Interbank Bankcard Transaction Clearing System (IBTCS) – Union Pay
From Chapter 2: Payment Systems of China
The China National Advanced Payment System (CNAPS) is composed of the High-Value Payment System (HVPS), the Bulk-Entry Payment System (BEPS), and the Settlement Account Processing System (SAPS).
HVPS is an RTGS that performs real-time processing of large-value funds on a gross amount basis, and has the same functions as Bank of Japan’s financial network system (BOJ-NET).
BEPS is for small-value funds, with daily netting night batch processing, and has the same function as Data Telecommunication System of All Banks in Japan.
SAPS is the system for common operations related to settlement accounts, including receipt and payment of money, settlement of LCHS, and management of overdraft limits. Although such a SAPS function makes up a part of the entire payment system in many other countries, CNAPS uses each of them independently.
Local Clearing House System
The Local Clearing House System (LCHS) is for local payments related to exchange, bill, and check transactions within the same region (cities and counties). There are approximately 2,300 clearing houses throughout the country, and although most LCHS sites are owned and managed by PBC, some are jointly owned by participants. All receipts and payments of funds on a written basis are cleared and settled via LCHS.
Commercial Banks’ Intra-office Payment Systems
China’s four largest banks have the most extensive centralization and integration hardware and software, on which each spends RMB1–3 billion annually, in their efforts to consolidate computer service centers and improve nationwide networks. If a credit remittance is performed within the same bank, it can process the transaction within approximately 24 hours. Although these banks can carry out payments within two or three hours, based on priority-processing agreements for such transactions as urgent large-amount securities settlements, the determination of priority order still often requires manual processing. Large private banks—such as Minsheng Bank of China and Shanghai Pudong Development Bank—have focused on systems investment, made efforts to centralize data on customers who are subject to international standards, and have focused on Internet banking services to make up for a lack of branches. Most banks’ customer account databases are still dispersed, and real-time processing is not possible. Databases should be combined in host centers.
National Interbank System
The National Interbank System (NIS) conducts manual inter-bank payments between distant places. After a payment instruction, either cabled or written, is sent by a sending bank directly to a receiving bank, daily netting is performed for funds payment and the final balance of payment. At each stage, notification of payments between correspondent banks are cabled and completed between PBC branches. After all crediting data are sent to NIS’s computer center and inspected there, checking sheets are sent to the sending and receiving banks. NIS’s status has decreased.
Non Bank Payment Networks
- Tencent Tenpay
Key Sources of Research:
A Guide to Debit and ATM Card Industry
Fumiko Hayashi Richard Sullivan Stuart E. Weiner
Federal Reserve of Kansas City
Mobile Payments in the United States at Retail Point of Sale: Current Market and Future Prospects
Marianne Crowe, Marc Rysman, and Joanna Stavins
Public Policy Discussion Papers.
Federal Reserve Bank of Boston 10:2 (2010)
Competing Technologies for Payments: ATMs, POS Terminals and the Demand for Currency
Point of Sale (POS) Systems and Security
NON-BANKS AND RETAIL PAYMENTS: INNOVATIONS IN CHINA AND THE UNITED STATES
BY NICHOLAS BORST
Federal Reserve SF
Best Retail POS Software | Point Of Sale Software in 2017
Cards, ATMs, POS will be redundant by 2020 in India, says Niti Aayog CEO
‘India needs 20 m point of sale terminals’
Innovative payment systems for financial inclusion
Concept Paper on Card Acceptance Infrastructure
RBI concept paper looks to boost card payments at POS terminals
Update: Card payments on POS terminals suffered outages and failures over the weekend
By Shashidhar KJ ( @KJshashi )
on November 14, 2016
Why it is difficult to scale POS machines in India
By Shashidhar KJ ( @KJshashi )
on October 19, 2016
Paytm has more offline merchant transactions than online: CEO Vijay Shekhar Sharma
By Shashidhar KJ ( @KJshashi )
on September 26, 2016
Paytm Has Just Created Millions Of PoS Across India With A Single Move; Every Paytm User Can Now Accept Card Based Payments
SBI’s ‘Chota ATM’ Costing $8 Coming To Every Nook & Corner Of India
Ezetap ties-up with SBI to launch PoS and ATM solution Chota ATM
By Vivek Pai on October 6, 2014
CASH@POS by State Bank of India (SBI)
Oxigen Launches Mini ATM & Mobile PoS Device OxiShaan
By Apurva Chaudhary
on September 14, 2012
Introduction of Chhota ATM: Evolution of the Financial Inclusion Programme
National Financial Switch
VARIOUS MODES OF ELECTRONIC FUND TRANSFERS
List of mPOS Machine & Solution Providers in India – How to buy one?
Indian Payments Industry: Mobile POS Solutions
More Info on POS Hardware options – A USA based company
Risk Management and Nonbank Participation in the U.S. Retail Payments System
By Richard J. Sullivan