The Reserve Bank of India (RBI) published the Payment System Report 2024 on January 27.

• Payments form the backbone of any economic activity. They are increasingly being recognised as a means of achieving financial inclusion by ensuring that economic benefits reach all segments of society. 

• Digital payments in India have grown exponentially in the last decade. While in 2013 there were 222 crore digital transactions valued at Rs 772 lakh crore, it has increased 94 times in volume and more than 3.5 times in value to over 20,787 crore transactions valued at Rs 2,758 lakh crore in the year 2024. 

• In the last five years alone, digital payments in India have increased 6.7 times in volume and 1.6 times in value. This amounts to a five-year Compound Annual Growth Rate (CAGR) of 45.9 per cent in terms of digital payments volume and 10.2 per cent in terms of digital payments value. 

Evolution of payment system

• The tale of payments and settlements is as old as the history of exchange of goods and services among humans. But, as societies grew in complexity, so did their needs around money and payments. Society moved from simple bartering to developing currency notes and coins in myriad forms. 

• Later, increasing mobility of people spurred the trade among different societies and it necessitated the development of more efficient payment mechanisms which did not require carrying vast quantities of coins. 

• Thus, the language changed from ‘promise to pay’ to ‘an order to pay’. These pay orders are very similar to present day drafts or cheques. The most important category of credit instruments that evolved in India were local language bills of exchange. 

• Given the immature legal framework of the period, such informal letters would have been difficult to enforce.

• Subsequently, as the banking system evolved, a legal framework was provided by enactment of the Negotiable Instruments Act in 1881 (NI Act), which formalised the usage and characteristics of instruments like the cheque, bill of exchange and promissory note. 

• With the advent of computers and expansion of banking services across the country, foundation for a more comprehensive electronic payment system was laid out in the form of Electronic Funds Transfer (EFT). However, there was no statute specifically designed to facilitate and oversee EFTs when it was started. 

• The services were arranged by drawing up contracts between the parties to govern their mutual rights and obligations. There was a need for a separate law dealing comprehensively with payment systems which covered certain transactional issues like payment finality, rights and obligations of the parties involved in electronic funds transfer, netting aspects, etc.

• Hence, India enacted a separate law for payment and settlement systems which has enabled an orderly development of the payment ecosystem in the country. 

• The Payments and Settlement Systems Act, 2007 (PSS Act) for the first-time recognised payments as a function different from a bank’s core functions, such as lending and accepting deposits. 

What is the role of BPSS?

• The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) is a central authority that has been established by RBI under the provisions of PSS Act, with the ability to regulate and supervise payment and settlement systems.  

• The BPSS, chaired by the RBI Governor, formulates policies for the regulation and supervision of all types of payment and settlement systems, sets standards for existing and future systems, authorises payment and settlement systems, determines criteria for membership to these systems and decides on continuation, termination and rejection of membership. The BPSS meets quarterly and reports annually to the RBI Central Board. The Department of Payment and Settlement Systems (DPSS) of RBI serves as the Secretariat to the BPSS and executes its directions.

Payments landscape in India

• The RBI regulates, supervises, and licenses payment system operators, ensuring safety, security, efficiency, and effectiveness of the payment ecosystem as well as protecting the interests of the consumers. 

• The payments landscape in India consists of diverse options offered by banks and non-banks. During the last decade, the payment landscape has witnessed rapid expansion in terms of availability, user adoption and acceptance infrastructure. 

1) Real Time Gross Settlement (RTGS): Introduced in March 2004, it is India’s Large Value Payment System (LVPS), owned and operated by RBI. As the name suggests, transactions are settled in real-time on transaction by transaction and on a gross basis. RTGS also facilitates settlement of Multilateral Net Settlement Batch (MNSB) files for other ancillary payment systems, such as those operated by Clearing Corporation of India Limited (CCIL) and National Payments Corporation of India (NPCI). Since December 2020, RTGS is available on 24x7x365 basis. India is one of the few countries with such facility. During the calendar year 2024, there were 29.53 crore transactions worth Rs 1,938.21 lakh crore through the RTGS ecosystem.

2) National Electronic Fund Transfer (NEFT): Introduced in 2005, it is a retail payment system owned and operated by RBI. It enables the transfer of funds from one financial institution to another on Deferred Net Settlement (DNS) basis, that is settlement in batches. Since December 2019, it operates on a 24x7x365 basis in 48 half-hour batches. As of December 2024, NEFT had 235 direct members and 1,928 sub-members. During the year 2024, there were 926.84 crore transactions worth Rs 432.79 lakh crore through the NEFT ecosystem. 

3) Cards: Typically, card payments were the most reliable and widely used option for digital payments across various jurisdictions. However, with the introduction of Unified Payments Interface (UPI) and its phenomenal growth in recent times, card usage has seen a significant shift. While the use of debit cards has declined, credit cards have grown more than 15 per cent on a year-on-year basis in recent years. With effect from January 1, 2019, RBI has mandated the use of only EMV Chip and PIN based debit and credit cards. During the year 2024, there were 447.23 crore and 173.90 crore payment transactions worth Rs 20.37 lakh crore and Rs 5.16 lakh crore through credit and debit cards respectively.

4) Cheque Truncation System (CTS): The RBI introduced CTS in 2008 with an aim to substantially improve the cheque clearing timeline. CTS enables use of the image of cheque for payment processing thereby eliminating the need for physical movement of cheques, with associated benefits of reduced turnaround time for clearing of cheques, particularly more so in case of outstation cheques. This helped improve cheque collection time from more than a week to just one to two days. Further, CTS 2010 standards for cheque design were introduced to reduce the risks in an image-based clearing system. During the year 2024, there were 62.59 crore cheques worth Rs 71.80 lakh crore processed by CTS.

5) Prepaid Payment Instruments (PPIs): In 2009, RBI issued guidelines to ensure orderly development of the PPI ecosystem. These are instruments that facilitate purchase of goods and services, financial services, remittance facilities, etc against the value stored therein and can be issued in the form of smart cards, payment wallets, and in any such form/instrument which can be used to access the PPI and use the amount therein. No PPI shall be issued in the form of paper vouchers. During the year 2024, there were 698.88 crore transactions worth Rs 2.23 lakh crore through the PPI ecosystem.

6) Immediate Payment Service (IMPS): Introduced in 2010, it is an instant payment, electronic funds transfer service that is available on 24x7x365 basis to facilitate inter-bank (account to-account, account-to-wallet and wallet-to-account) fund transfers. It can be accessed on multiple electronically enabled channels such as mobile, internet, ATM and SMS. India was the fourth country after South Korea, UK and South Africa to introduce such a payment system. During the year 2024, there were 593.83 crore transactions worth Rs 70.71 lakh crore processed through IMPS.

7) Aadhar enabled Payment System (AePS): It is a bank-led payment service that was started in 2011 to enhance financial inclusion in the country. It enables bank customers to use their Aadhaar number as identification to access their Aadhaar-enabled bank account and perform basic banking transactions such as balance enquiry, cash deposit, cash withdrawal, and remittances through Business Correspondents (BCs). The biometric based authentication is done by Unique Identification Authority of India (UIDAI) while NPCI does the switching, clearing and settlement of financial transactions. In the year 2024, as many as 2.4 crore transactions were conducted through AePS (Fund Transfer) and BHIM Aadhaar Pay, amounting to a total value of Rs 71,000 crore.

8) National Automated Clearing House (NACH): Launched in 2016, it is a centralised electronic clearing system operated by NPCI. It facilitates automatic clearing of inter-bank, high volume electronic transactions, which are repetitive and periodic in nature. The NACH system was developed to unify and standardise interoperability of all electronic transactions with rules and compliances across all banking and transaction related services. It has two variants — NACH (Credit) and NACH (Debit). It facilitates distribution (one to many) of subsidies, dividends, interest, salary, pension, etc based on account number and bank code and also collect (many to one) from consumers for bill payments pertaining to telephone, electricity, water, loans, investments in mutual funds, insurance premium, etc, based on customer mandate. ABPS (Aadhaar Bridge Payment System) is an important ancillary payment system built over NACH system. It enables payment based on Aadhaar, India’s unique identity number, and is a key system for government benefit transfers. Since August 2021, NACH was made available on all days of the week. In the year 2024, as many as 321.91 crore transactions with a total value of Rs 5.14 lakh crore were processed through APBS. Meanwhile, NACH Credit recorded 165.01 crore transactions worth Rs 16.33 lakh crore, and NACH Debit saw 190.17 crore transactions amounting to Rs 20.69 lakh crore. 

9) Unified Payments Interface (UPI): Launched in 2016, it is a mobile-based, 24x7x365 fast payment system which enables users to send or receive money and make person-to-person (P2P) or person-to-merchant (P2M) payments instantly through a Virtual Payment Address (VPA), mobile number or by scanning a Quick Response (QR) code. The unique feature of VPA based transaction is the secure aspect of UPI architecture as it removes the need for sharing account or bank details to the remitter. It can be used over smartphones (app based), feature phones (Unstructured Supplementary Service Data based — *99# and UPI123Pay) and at merchant location (app based). UPI is now one of the most preferred payment solutions in India, with over 16 billion transactions every month. In the year 2024, UPI recorded 17,220.80 crore transactions with a total value of Rs 246.83 lakh crore.

10) Bharat Bill Payment System (BBPS): Launched in August 2016, BBPS offers anytime and anywhere interoperable bill payment service to customers using multiple payment modes as well as through a network of physical agent locations for a variety of services, including electricity, water, gas, telephone, DTH, and insurance, etc. The recent cross-border bill payment facility in BBPS enables Non-Resident Indians to undertake utility, education and other bill payments on behalf of their families in India. In the year 2024, BBPS handled 217.47 crore transactions amounting to a total value of Rs 7.68 lakh crore.

11) Trade Receivables Discounting System (TReDS): The TReDS platforms facilitate financing of trade receivables of Micro, Small & Medium Enterprises (MSMEs) from corporate and other buyers, including government departments and Public Sector Undertakings (PSUs). It is a platform for uploading, accepting, discounting, trading and settling invoices/bills of MSMEs and facilitating both receivables (factoring) as well as payables factoring (reverse factoring). In the year 2024, TReDS platforms recorded 45.05 lakh invoices uploaded with a total value of Rs 1.69 lakh crore. Of these, 42.86 lakh invoices were financed amounting to Rs 1.60 lakh crore.

12) National Electronic Toll Collection (NETC): It offers an interoperable nationwide toll payment solution including clearing house services for settlement and dispute management. FASTag is a device that employs Radio Frequency Identification (RFID) technology for making toll payments directly while the vehicle is in motion. It can be affixed on the windscreen of the vehicle and enables a customer to make the toll payments directly from the underlying payment account which is linked to FASTag. Use of FASTag has revolutionised toll payments in India. In the year 2024, NETC processed 405.93 crore transactions, amounting to a total value of Rs 69,900 crore.

Expanding payments ecosystem across jurisdictions

In the last two decades, domestic payments ecosystem across jurisdictions has been revolutionised with the introduction of real-time national payment systems, especially the fast payment systems (FPSs). There are more than 70 domestic FPSs across the world. Naturally, FPS interlinking arrangements between different jurisdictions have emerged to be one of the most promising and viable solutions for enhancing cross-border payments.

By shortening the transaction chain through use of payment service providers instead of the traditional correspondent banking model, the interlinking arrangements can offer increased speed and efficiency at low cost. 

Recently, an increasing number of countries have started exploring interlinking arrangements with other jurisdictions. While some of the linkages are direct — bilateral arrangements between two countries, others are multilateral arrangements involving multiple countries in hub-and-spoke model through a common intermediary (the hub), which takes care of clearing and settlement responsibilities.

Project Nexus

To enhance cross-border payments, the Bank for International Settlements (BIS) Innovation Hub, Singapore had developed Nexus as a multilateral network connecting domestic instant payment system (IPS) networks of participating countries. The network has been envisioned as a central hub which can connect the fast payment system of multiple countries enabling faster cross-border payments. It is designed to accommodate the inherent differences of individual instant payment systems instead of mandating homogeneity requirements. The project aims to support the G20 targets of improving the cost, speed, access and transparency of cross-border payments. 

India joined Project Nexus to enable instant cross-border retail payments by interlinking domestic fast payment systems. This will facilitate multilateral linkage of fast payment systems of four ASEAN Nations (Malaysia, Philippines, Singapore and Thailand) and India. An agreement to this effect was signed at the BIS on June 30, 2024.

UPI has also been facilitated to be accepted in many foreign countries at merchant locations through scanning of QR codes. This facilitates person-to-merchant (P2M) transactions through QR codes at merchant locations for the Indian citizens travelling to other countries using their UPI powered mobile apps; and foreigners travelling to India using their FPS apps through QR codes in India. 

Acceptance of Indian RuPay Cards has been enabled in Bhutan, Nepal, Singapore, Maldives, Mauritius and the UAE for use at ATM and PoS terminals. Issuance of RuPay cards is live in Bhutan and Mauritius; the arrangements enable acceptance of Mauritius and Bhutan RuPay cards in India as well.

As per the MoU signed between RBI and Central Bank of the UAE (CBUAE) in July 2023, CBUAE has developed its domestic card scheme ‘JAYWAN’ based on RuPay technology stack. Soft launch of the JAYWAN card was done in February 2024. Parallelly, discussions between the operators are going on for enabling bilateral acceptance of RuPay and JAYWAN in each other’s jurisdiction, once the full-scale roll out of JAYWAN cards is complete.