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The Reserve Bank of India (RBI) issued a framework on January 3, 2022, allowing the citizens of India to make small-value offline digital payments.
Offline digital payment refers to a transaction that doesn’t require internet or telecom connectivity to process a payment. Under this framework, individuals can,
- Use instruments or channels like cards, wallets, or mobile devices to make offline digital payments
- Make offline payments of up to INR 200 per transaction
- Spend a total of INR 2000 per instrument until the balance in the account is replenished
- Replenish the used limit in online mode with additional factor authentication (AFA)
Ideally, RBI introduced this concept to boost digital payment penetration in the semi-urban or rural areas with poor or no internet or telecom connectivity. It believes that India can achieve its goal to become a cash-lite or cashless economy only when its rural population participates in full strength.
This blog dives deep into the basic concept of offline digital payments, its framework, the reasons behind its introduction, and its future contribution.
Reasons Behind The Introduction Of Offline Digital Payment
India is home to 1.39 billion people. Of these, nearly 65% of the population resides in rural areas and only 35% occupy the urban landscape. Where India is gearing towards becoming a cash-lite economy, digital payment penetration remains only 16% in rural areas compared to 45% in urban areas.
Cash remains the primary mode of transaction in a large part of rural India. Three primary reasons behind the urban-rural divide include,
- Lack of digital literacy
- internet and telecom facilities
- basic banking services
The government of India along with many Fintech and telecom players is taking multiple steps to educate the rural population about the advantages of contactless payments. However, several challenges still persist.
To increase this penetration and shift the mindset of the semi-urban and rural population – from cash to digital transactions – the RBI has taken some necessary steps.
Offline Digital Payment Ideal Formation and Key Developments
Since 2016, the RBI along with the Government of India, has taken many initiatives to transform India into a digitally-empowered economy. The introduction of offline digital payments is one such example of these initiatives.
Issue at Hand
In 2019, officials at RBI realised that the active digital user base in India is very small. It’s only about 120 to 150 million users compared to the country’s entire population.
They needed an innovative payment solution that would:
- Boost the use of digital payments and reduce cash flow, especially in the rural areas
- Educate the masses about the advantages of using digital payment modes
- Quicken the financial transaction process and help India become a cash-lite economy sooner than expected
The officials then drafted the scope to introduce an offline digital payment scheme, especially to enable the underserved population of the country to get into the habit of cashless payments. The idea was then presented as a part of one of RBI’s key innovation goals in November 2019, under its first cohort of applicants for the Regulatory Sandbox. The idea gained much support and popularity.
Within the next 9 months, the central bank proposed a pilot plan to test the success or failure of their scheme and find ways to ensure secure offline digital transactions via different payment methods.
In the testing phase,
- Three pilots were conducted between Sepeterm 2020 and July 2021 in different parts of the country
- 6 entities were selected by RBI to carry out the experiments
- 6 lakh plus villages became a part of the testing phase
- A volume of 2,41,000 transactions was recorded for a total value of INR 1.16 crore
- The average transaction ticket size was approximately INR 50
- Yes Bank, Visa, and Yuva Pay (card issuer) were active helping bodies/participants in the experiments
By September 2021, the RBI concluded its test and released a statement of successful experimentation. They claimed that such a solution would help in India’s overall progress and educate the rural population about new and better means to transact.
The learnings from the test were then utilised to create the final framework for small-value offline digital payments. But, who ideally, carried out the experiments? Let’s take a look.
Entities And Technologies Involved in Offline Digital Payment Testing Phase
RBI selected six distinct entities to carry out the test and submit their observations. These six entities include,
- National Support Consultancy Services Pvt. Ltd. (eRupaya)
- Nucleus Software Exports Ltd. (PaySe)
- Tap Smart Data Information Services Private Ltd. (CityCash)
- Naffa Innovations Pvt. Ltd. (TongTang)
- Ubona Technologies Pvt. Ltd. (BHIM Voice)
- Eroute Technologies Pvt. Ltd. (HindPay)
How Do Offline Digital Payments Work?
Each of these six entities primarily used three technologies to make offline digital payments possible.
Near Field Communication (NFC)
An umbrella of short-range wireless technologies that:
- Ideally works only in close proximity range (a distance of 4cm or less) to initiate a connection
- Allows users to make secure transactions, exchange digital content, and connect two electronic devices through a touch
- Ensures a transaction experience similar to today’s contactless card payment service
- eRupaya, PaySe, and CityCash are some products built on NFC technology
Sound wave technology
An extremely viable alternative to digital payment solutions.
- Eliminates the need to have a smartphone or internet to complete transactions
- Leverages sound ways to carry out transactions between customers and merchants/service providers at the point of sale
- Ensures secure and encrypted process that reduces the risk of transaction failures
- TongTang is built on sound wave technology
Voice/Menu-based transaction system
Use voice or menu-based user interface to commence UPI payments
- Though built on a legacy idea, the interestingly overlaid menu makes it easy to use
- Allows users to use voice commands to carry out various banking activities
- Eliminates the need to have a smartphone to avail offline digital payment services
- BHIM Voice and HindPay are two products built on voice/menu-based technology
What Does The Offline Digital Payment Framework Entail?
After receiving encouraging feedback from the pilot experiments, RBI formulated a framework to carry out offline digital payments in India.
It states that the authorised issuers or acquirers (banks or non-banks) can provide or enable payment solutions in offline mode for their customers. However, they must comply with some mandatory requirements. These are as follows:
- Offline payments can be made using channels or instruments such as wallets, cards, mobile devices, etc.
- All offline payments must be made in close proximity or in face-to-face mode only.
- Transactions would not comply with Additional Factor of Authentication (AFA) as in the case of online digital payments.
- Authorised issuers or acquirers may enable offline transaction facilities only with the explicit consent of the customer.
- Customers can make offline payments up to INR 200 per transaction. The total limit is set at INR 2000. A user can replenish the limit only in online mode with AFA.
- Transaction alerts will be sent to users as soon as transaction details are received by the issuer.
- The acquirer will bear all liabilities in the case of any technical or transaction security issues arising at the merchant’s end.
- Offline payments will be covered under RBI’s limited customer liability provision.
Offline Digital Payments Via Different Channels & Instruments
UPI Offline Payments
As per NPCI’s official website, *99# service has been launched to take banking services to every nook and corner of the country.
Users can avail offline banking services via UPI by simply dialing *99# on their mobile phones and transact via an interface menu that gets displayed on the mobile screen. The service is currently available for live TSPs only.
However, a user must first download the BHIM UPI app and complete the one-time registration process to avail the service. Once done, listed below are some key services that they can avail.
- Send and request money
- Check account balance
- Manage profile
- Check pending requests
- Check past transactions
- Set or change UPI PIN
At present, *99# service is offered by about 83 leading banks along with all major GSM service providers. The service can be accessed in 11 different languages along with English and Hindi.
Offline Digital Payments via Cards
Besides UPI, users can use debit and credit cards to make offline payments. Card companies like VISA are introducing chip-based debit, credit, and prepaid cards. These cards will allow users to make payments,
- Even in places with no or low internet connectivity
- Up to INR 200 per transaction
- Up to INR 2000 per day
All transaction details will be shared via SMS with the users. Per-day transaction limit will replenish as soon as the user comes into internet proximity.
Top 3 Offline Digital Payments Challenges That RBI Must Address
RBI deserves much respect and appreciation for introducing the concept of offline digital payments in a country where cash remains a major mode of payment. This necessary shift will not only help reduce the flow of cash and black money in the market but increase the adoption of digital modes of payments across the nation.
But, as we always say, every pro has its con. There are some considerable challenges that the central bank will face to enforce the use of offline digital payments in its target segment.
Unsuitable unit economics for payment players
Merchant Discount Rate (MDR) is one of the primary sources of income for payment players. In the case of offline payments, MDR is expected to be negligible (if not zero). This means near to zero revenue generation from offline payment streams. Precisely the reason, not many payment players (traditional and new-age financial institutions) have bothered to enter this market and cause disruption.
Lack of customer support service
With low or no internet and telecom connectivity, RBI will face a huge challenge to redress grievances and resolve disputes. This is another reason why the rural public is also currently hesitant in adopting the concept of offline payments. A poor experience with an offline digital transaction can ruin a user’s experience, erode trust, and even cause bad publicity, harming the central bank’s efforts.
Cash will continue to exist
Indians are used to dealing in cash. It’s also one of the easiest, fastest, and dispute-free modes of payment. Eliminating cash and forcing people to adopt online payment modes can create hostility, especially among the rural population. Unless there’s a push from the government’s end to enforce the use of offline digital payments, the adoption and engagement will continue to remain weak against the use of cash.
Role Of Fintechs In Promoting Offline Digital Payments
The central bank and Indian government are rigorously working to incorporate the use of digital payment modes across the nation. However, lack of the right technology and not understanding the basic smartphone dynamics is restricting them from making the progress they anticipated.
This is where Fintechs come into play. Fintechs are bridging the gap and working closely with the two entities to create safe, secure, and convenient banking and digital payment services.
These assisted payment companies are further onboarding thousands of brick-and-mortar stores to help people withdraw cash and transfer funds using assisted mode. Many Fintechs have also deployed dedicated kiosks, point-of-sale (PoS) devices, and micro ATMs across many rural areas to digitally collect mobile bills, utility bills, etc., from remote villages.
The Future Of Offline Payments In India
The Indian payments industry is constantly changing. It’s introducing new and improved payment methodologies to boost digital payment adoption across even the remotest of areas and reduce cash flow in the economy. Offline digital payment is one such addition to the family of this ongoing revolution.
The initial concept focuses much on getting the semi-urban and rural population aboard this mission and educating them about this new payment technology. However, it’s only a matter of time to see even the urban population using this payment method to process transactions in times of internet and telecom connectivity issues. The scope of this technology is humongous and the future is very high.