Bringing Offline Digital Payments to 500Mn people (#45)
RBI's push to enable no-internet digital payments and the proposed solutions
Welcome to the 45th issue of Unit Economics. In today’s write up, I look at the developments in offline payments space in India and share my thoughts on the framework that the Reserve Bank of India (RBI) pushed into effect recently. Dive in!
The first week of the new year was quiet but significant for Indian payments. On 3rd January, the RBI released the Framework for Facilitating Small Value Digital Payments in Offline Mode, which laid down compliance requirements for payment institutions to participate in the system. This has been years in the making. How? and why does it matter? Let me explain.
Digital Payments in Offline Mode: Key Developments
In May ‘19, offline and feature-phone-based payments had become a topic of intense discussion for the RBI under digital payments. The discourse was driven with the goal of making India a ‘cash-lite’ economy, but large areas with low or no internet connectivity – despite the Jio speed bump - made the shift to prevailing methods of digital payments a challenge.
The idea of offline payments, i.e. money transfers without an active internet connection, gained more ground as RBI highlighted it as one of the key innovation goals under its first cohort of applicants for Regulatory sandbox in Nov ‘19.
Within a year, in Aug ’20, the central bank had progressed to propose a pilot scheme for such payments, intending to fasten the offline experiments and find a way to enable secure payments through cards, wallets, and mobile devices.
By Nov ’20, six entities had been selected under the first cohort of Regulatory Sandbox for the ‘Test Phase’, with each of the six focusing on offline payments. And by Dec ’20, all six had begun testing their products. Who were these six?
National Support Consultancy Services Pvt. Ltd.
The NSCS team had come up with a product called ‘eRupaya’, which would facilitate offline P2M transactions in remote areas by distributing NFC-enabled prepaid cards and POS devices. The transaction experience is expected to be similar to a contactless card payment that we are used to today.
Nucleus Software Exports Ltd.
Their product ‘PaySe’ promises to digitize payments through a smart card that would also use NFC for offline payments. A key strategy of the team has been to utilize Self Help Groups in rural areas that would help convert physical cash to digital (as shown here).
Tap Smart Data Information Services Private Ltd.
Their product ‘CityCash’ relies on offline NFC technology too for micropayments through its prepaid card. However, the team has given higher priority to public transport (esp. buses) and person-to-government (incl. direct benefit transfers) payments use cases than others and expect these use cases to be the biggest beneficiaries in tier-2 and tier-3 cities.
Naffa Innovations Pvt. Ltd.
Their product ‘ToneTag’ goes away from the NFC standard and instead uses sound waves to transfer data over IVR between devices, asking that the user dials a toll-free number at the point of sale and enters a PIN to authenticate the transaction, all while the merchant communicates the amount via sound waves by entering it on the POS device. The good part about the solution is that it only requires the user to access a feature phone, and does not force a change in payment form factor as a card would.
Ubona Technologies Pvt. Ltd.
Their product works similarly to offer voice-based UPI payments using mobile devices. To make adoption easier, the Ubona IVR offers users a choice of language while making payments. A common theme here for ToneTag and Ubona is the existing capability of both companies in communication solutions that extends much further from payments.
Eroute Technologies Pvt. Ltd.
Their product ‘HindPay’ offers a menu-based user interface to facilitate UPI payments over mobile devices, incl. feature phones. The menu is, interestingly, overlaid on the screen through a smartcard placed on a mobile sim.
These experiments, if successful, are hoped to allow more than 39% of the population, which continues to operate without internet services, an alternative to the costly cash payments. Most of this population belongs to the semi-urban or rural areas, with a good portion spread over 6 lakh+ villages.
In Dec ’20, murmurs of other offline pay pilots were also heard. The experiments, it appeared, would be conducted using a prepaid card and involved participants such as Visa, Yes Bank, and Yuva Pay (card issuer).
By July ’21, RBI had overseen three such pilots in different parts of the country for small-ticket offline transactions, covering a volume of 2.41 lakh transactions for a cumulative value of INR 1.16 Cr – giving transactions an average ticket size of a little under INR 50.
There are no details of the results of the pilots, and of the participants that conducted the tests. However, in Sept ’21, the RBI did mention that products of all six participants selected for the sandbox were found ‘viable’. We do also know that the learnings from the experiments helped the central bank design the framework for such small ticket offline payments.
So, what does the framework for offline payments say?
The framework mandates that the authorised issuers or acquirers (banks or non-banks) that wish to provide/enable payment solutions in offline mode must comply with multiple requirements, some of which are worth discussing:
“Offline payments may be made using any channel or instrument like cards, wallets, mobile devices, etc.”
Takeaway: India today has ~1.18 Bn mobile devices, and more than 57% of these
are feature phones. The likes of ToneTag, Ubona, and HindPay can leverage this ready distribution to take the low-cost offline payments to masses, and over time – the affinity to digital payments will help users become more open-minded of cards and wallets. Fortunately, the RBI was able to recognize innovators for all form factors, which covers the risk of failure of one of the payment methods.“Offline payments shall be made in proximity (face to face) mode only.”
Takeaway: the use of NFC or sound waves for payments can only be made when the two participants are in proximity to each other. Although the USSD facility of UPI does provide that facility to transact offline and remotely, the user experience has been poor so far over USSD. Moreover, it appears that the proximity rule was forced due to security concerns that remote payments might pose, especially for transactions without AFA.
“Offline payment transactions may be offered without Additional Factor of Authentication (AFA).”
Takeaway: this allows payment providers to enable offline transactions for users without the need for an additional factor of authentication, including UPI PIN. The rule lends convenience, and possibly higher adoption for the payment systems – requiring users to only ‘tap-and-go’ or ‘dial-and-pay’. It does, however, pose some security risks and likely burdens the acquirers who might have to deal with more cases of fraud.
“Payment instruments shall be enabled for offline transactions based on the explicit consent of the customer.”
Takeaway: like overseas use on cards, the offline payments – which might become just another feature for existing payments apps – are being kept as an opt-in feature and would require the user’s consent. This is again in favor of consumers, who will be safer from some of the dubious engagement tactics of payments providers.“The upper limit of an offline payment transaction shall be ₹200. The total limit for offline transactions on a payment instrument shall be ₹2,000 at any point in time. Replenishment of used limit shall be allowed only in online mode with AFA.”
Takeaway: the low per-transaction limit may appear conservative. However, for areas with low internet access, research suggests that a ₹200 value transaction is often high value, and most transactions fall within ₹1-₹50 range, i.e. less than seven-tenths of a dollar.
Moreover, by limiting the wallet balance to ₹2,000 for offline transactions, the extent of losses on misplacement of device or card is restricted. This, however, also deters large value B2B transactions in the form of credit repayments or wholesale payments. My guess here is that the limits, once user feedback is received, will be increased over time to allow for bigger P2G and B2B transactions.The method of replenishing the limit through AFA does allow a suitable security check for overuse but is a little counter-intuitive given that it would require online access. The implication in remote areas for the rule would be that replenishment of the limit would require small centers with internet connectivity to be set up (or merchants might take the role), wherein the users can go to replenish their costs at a nominal fee. This opens room for fraudulent practices, wherein the representative might charge abnormally high fees for loading the cards, phone wallets and seek to benefit from the ignorance of users. Communication from payment providers in regional languages should be a high priority to avoid this.
The issuer shall send transaction alerts to users as soon as transaction details are received. There is no compulsion to send alert for each transaction; however, details of each transaction shall be adequately conveyed.
Takeaway: on similar lines, alerts for transactions would be key to track account balance and payments. Many of those shortlisted by RBI promised that the transaction failure rate would be lower for offline payments due to no dependence on network failures for authorization. But unless we do have working models in public space, it is a little tough to gauge how important these alerts would become in case of differing payment statuses for the users.
Thoughts on the road ahead and the challenges
There should, no doubt, be appreciation for how quickly the RBI has moved from idea to pilot and framework of offline payments. Given the large population that continues to remain outside the digital payments umbrella and the success of similar models in Africa, especially M-Pesa (>48 Mn users), we can be confident that there is merit in pursuing small-value offline digital transactions.
The merchants and users would both equally benefit from saved costs and better personal finance accounting that digital payments allow. Moreover, with the costs of cash approximated to be ~1% of GDP, there are externalities for economic growth associated with the initiative.
But, as you would expect, there are considerable challenges in taking it to hundreds of millions of users.
Unfavorable unit economics: The MDR on offline transactions is expected to be close to zero (if not zero), which should deter the payments players - that are more keenly looking at their unit economics today – to venture into the ecosystem. This is also the reason why such areas have remained underpenetrated by traditional and even the new-age financial institutions.
Customer support overhaul, lack of trust: With no/low internet, the grievance redressal and dispute resolution methods must evolve as well. Imagine the pain that we still face with customer support on many digital apps, and replace your environment with one where the user is more cost-sensitive and does not have access to the internet. A poor experience with an offline digital transaction will likely erode the trust sufficiently to churn a user in such a scenario, especially given the trust issues associated with digital technology in semi-urban and rural areas.
Tough to beat cash: There still exist gaps for these offline payments solution to match the speed, dispute-free experience, and convenience of cash, which is what they are competing against. To force the hand of users, it might help to transfer the G2P payments (subsidies, direct transfers, etc.) in the form of card issuance or wallet loads at the point of transfer. Unless there is such a government distribution push for offline digital payments, the adoption and engagement can potentially remain weak against the strength of cash.
Offline payments is not a new subject to be fair. The need has been felt for long due to the large rural population, and there have been sporadic debates on the topic over the last decade. But with the speed of innovation in payments infrastructure (especially with UPI), the high skill levels of teams at Fintech companies, and the monetary plus regulatory support from government and RBI-alike, no other time has made the opportunity look more real.
Over the next few years, as the projects go public and the above challenges are tackled, let’s hope that we revisit the impact of these developments more frequently and favorably.
If you have any views or feedback to share on the topic, feel free to add a response below or to share your thoughts with me over Linkedin. In case you feel your friends or family would be interested in reading about payments, feel free to share the blog with them as well. See you in a couple of weeks!
Great read Prince. My uncle works in Ubona and I've seen pilot cases of what they're trying to achieve. Although it would be a nightmare to what we're used to (each IVR based UPI transaction takes around 1.5mins to complete - that too, if your UPI is registered in Ubona), but it does seem promising to the target market - again, provided there is REALLY a need. Otherwise, cash still seems pretty easy.