Financial Inclusion

The major issue in financial inclusion is non-availability of last mile

connectivity. In addition to that some of the issues faced by Banks are listed
below;

Major challenges for Banks for inclusive growth are

1. KYC for the resident in rural and semi-urban areas
2. Cost of enrollment
3. High maintenance cost
4. Small ticket size per transaction
5. Need for communication modes in local languages
6. Affordability of the product/service
7. Need for local acceptance and involvement of locally accepted people
8. Need for all scale coverage even in the areas without power and
telecom

The need of the hour is leveraging technology in Indian banking for providing
affordable and cost-effective banking services to the masses through multi-
delivery channels

Ways of achieving it:

1. Coverage of post offices under electronic payments networks via
our Bank’s payment gateway in remote areas on a shared services
model
2. Simplified KYC for opening no-frills accounts with UID and its robust
authentication mechanism. This would result in quicker opening of
accounts. Correspondents would data enter complete details into
their systems and this can be interfaced with the back office
systems via off-line interface. Adoption of correspondent model
whereby they act as touch points with the resident for account
opening, deposits, payments and loans. Verification and
authorization for acc. Opening and transactions happens at Bank’s
back office. This model would be on a pre-payment basis with the
Business Correspondents. This is currently being made operational
by National Payments Council of India;
a. 100% electronic financial inclusion can be achieved only when -
rural shops,PDS Shops become part of the POS network by
taking the lead role as Business Correspondents. At present the
per-transaction cost in handling POS Terminals is high and thus
the small retailers are loading the handling costs on the end
customers. NPCI has piloted collectively with some select Banks
an initiative “Aadhaar Enabled Payment System” (AEPS) and
expected to be rolled out across the country pretty soon
b. AEPS is a bank led model, which allows online financial inclusion
transaction at PoS (MicroATM) through the Business
correspondent of a bank using the Aadhaar authentication. At
present AEPS service can be availed by customers at their
respective bank business correspondent outlets
c. The four Aadhaar enabled basic types of banking transactions are
 as follows;
i. Balance Enquiry
ii. Cash Withdrawal
iii. Cash Deposit
iv. Funds Transfer between aadhaar accounts
d. The only inputs required for a customer to do a transaction under
this scenario are
i. Identifying the Bank to which the customer is associated
ii. Aadhaar Number
iii. Fingerprint captured during their enrollment
3. Easy to use ATMs (dispensing & collecting) with operating
instructions & commands in local language and the finger print/iris
scan for authentication as an add-on would greatly facilitate
financial inclusion especially at rural areas.
4. Banks can tie-up with ITC to work alongside their e-Choupal project
which has presence in more than 10lakh villages on a shared model
5. Banks must focus on more than one delivery channels
a. ATMs
b. Contact less/biometric smart-cards
c. Correspondent model with a handheld device (which has off-
line interface to the Bank’s Back office systems)
d. Mobile phones
6. Tie-ups with nearest other Bank Branches for Cash Receipt/Deposit
at non ING Vysya locations and our ING Vysya bank branches
along with the hand-held device through business correspondents.
This has to happen only after getting into a contractual obligation
and mitigation of all risks

Mitigation of risk in payment systems

1. Systemic risk
 a. Interbank transactions at all places to be migrated to RTGS
System (already implemented)
2. Liquidity risk
a. Advanced queuing mechanism on the payment gateway helps in
resolution of any rejections due to lack of funds. Quaestor
Liquidity Manager (QLM) application at our ALM Desk in FM
Front Office addresses the issue of liquidity risk and also to
avoid any gridlock situation
3. Credit risk
a. Migration of all large value payments to RTGS with immediate
finality (already implemented by RBI)
b. Full collateralization of exposures (partly happening in CCIL at
Financial Markets, Mumbai)
c. Credit exposure limits that a counterparty can take in the system
based on participant’s creditworthiness (implemented for
settlements through CCIL and SWIFT on K+ at Financial
Markets. Limits are updated and maintained by Counterparty
Risk Unit)
d. The need for counterparty to have sufficient funds available or
else a fully collateralized credit line before making any payment
4. Operational risk
a. All key areas and functions of systems should be secured in
terms of access controls
b. Regular reconciliation of
i. RTGS/NEFT inwards against settled transactions at
RTGS Operations unit and
ii. CCIL/SWIFT settlements to ensure that the total volume
of securities maintained in the accounts of participants
equals the volume of securities deposited by the issuer
c. Contingency, backup, recovery and capacity- stress plans are
generally the major mitigation techniques used. The systems
must be immediately available and fully operational in case of
emergency in order to recover operations and data processing
without interrupting the settlement process for long (Our RTGS
suite has been classified as critical and the Disaster Recovery is
within 2Hrs)
5. Legal risk
a. For enhanced security of messages, PKI based digital
signatures to be introduced

Future of payment systems

Over the last decade or so, a quiet but noticeable transformation has been taking
place in the world of payments. The nature and extent of this transformation is
not uniform across all geographies but for the "first time, all markets – rich or
poor, small or large, developed or developing – have the opportunity to
participate in this transformation through innovative use of technology, fresh
ideas and pragmatic yet creative business models.

Payment technologies of the future are;

1. Mobile based
2. Internet based
3. Contactless/NFC Based
4. Security/authentication based

Explanation in brief for some of the above future payment technologies are;
1. Mobile payments would definitely be the future; even National
Payments Council of India (NPCI) is gearing-up for introducing 24x7
payment system via Mobiles in India and it is in the Pilot phase.
2. Mobile Payment System Based on RFID: How it works?
a. Setup: First the user signs an agreement for mobile payment
with telecom and also with bank. Then software and the
certificate is downloaded. Then the keys will be generated
and the mobile payment device is achieved
b. Payment: First the information on the tag is read and is sent
to the mobile payment platform. Then mobile payment
platform sends the payment information. Now the client
enters the type of payment, Bank name and password. Now
if bank validates the information is transferred into
merchant’s account. In this payment system the transactions
are conducted online. Payment is made from bank account
c. Security: Security measures in this system are ID
certification, encrypted information transportation, verification
of the data integrality, confidentiality of data and anti-denial
requirement.
3. Near Field Communication technology (data exchange over short
distances) using mobiles might well be the next generation payment
system
a. What exactly is NFC?: NFC means near-field
communication, ie data exchange over short distances.
Equips you from a phone with an NFC chip, it can
communicate with a receiver or with other mobile phone, so
as to exchange data. NFC is particularly useful in that it
offers the possibility to pay by mobile phone.
b. How do you pay by NFC mobile phone?: Imagine a
business that is equipped with an NFC-receiver at the
checkout. The customer selects the goods to be bought and
go to the checkout. The cashier scans the merchandise, the
customer takes out his cell phone and holds it in front of the
receiver. The receiver detects the phone in the split second
and charged to the customer’s account from the
corresponding amount.
c. How safe is NFC?: For some it is the future, for other
reasons of data protection very serious. Although there is an
 encryption of the data could, for example, engineered
devices easily retrieve more data than allowed. It is also
known that even the best encryption can be cracked.
Another negative aspect is that NFC can also be used for the
transmission of advertising. Especially from Apple is
expected when the iPhone 5 should be equipped with an
NFC chip, Apple’s own advertising platform iAd used for the
transmission of advertising on the smartphone
4. Sound Based e-Commerce via Mobile phone: How it works?
a. The sound based system is a wireless web service. The
basic operation is that the mobile produces sound which is
converted into a number (probably credit card number),
which gives the user details to the shopkeeper. Web services
are network-based application components with services-
oriented architecture. Customers who receive a unique
sound-based file to their mobile phones through a web
service are converted customer’s payment information
5. Biometrically authenticated payments from ATMs