Payment Solutions Market in India

March 2001
A. Payment Types
Paper Payments India is one of the few countries in the world to have a significant paper payment volumes (probably after US, UK, Japan) though Indian economy is still predominantly cash-centric. Primary paper instruments used are cheques, drafts, pay orders and interest/dividend warrants. Volumes are estimated to be around almost 3 million per day (Source: RBI Annual Report) with almost equal split between Mumbai, other metros (New Delhi, Calcutta, Chennai) and remaining cities. Significant part of this paper payment is automated using MICR based cheque processing systems. Image based cheque processing has been introduced in all metros and a few other centers. All the cheque processing based clearing houses is either managed by RBI or designated banks on behalf of RBI. Settlement is done only by RBI or by SBI where RBI does not have its presence. Electronic Payments ATMs ATM penetration has increased significantly in India, especially in metros and mid-sized cities, in last 2 years. This is primarily due to the fact that newer private banks are finding this as very cost effective mechanism as opposed to setting up a branch, which has its own challenges. ATM population is around 3200 today and estimated to be growing at around 25% per year. Number of ATM transactions in India is around 800,000 per day. Credit Cards Credit card payments have gained a reasonable acceptability and penetration in last 5-7 years. Though credit card volumes are not high (around 1 to 1.5 million card holders) as compared to developed economies, there is definitely an increased awareness in recent years, which has lead to a lot of institutions (dominantly banks/FIs but a few others as well) offering credit cards to its customers. General acceptability at merchant locations is also growing reasonably. Debit Cards Debit cards are very recent phenomena with a few foreign/private banks venturing into this payment type. Volumes are moderate (at less than 200,000) and transactions may not be significant as of now. However, there is likely hood that this will increase in near future as the acceptability picks up.

ACH/ECS There has been a push to move paper payments to electronic mode by RBI in recent years. For this purpose, RBI introduced Electronic Clearing Service (ECS) in select cities to make repetitive payments (both debit and credit) electronic. RBI is also working on setting up a National ACH network and is likely to be implemented (at least pilot phase) in 4Q2001. The number of ECS transactions was around 16 million (Source: RBI Annual Report) in 1999-2000. Credit/Debit Bureaus As of now, there is no credit/debit bureau in India to facilitate payment guarantees for other payment mechanisms such as e-check or cheque truncations. RBI has directed banks/FIs to get together to come up with a credit/debit bureau and wants Indian Bank Association to step in as well. It is understood that a few banks are working on this concept but may be in preliminary stage.

B. Key Players
Cheque Processing RBI/Banks As mentioned earlier, RBI or its designated banks do clearing and settlement work. All the MICR/Image based cheque processing centers are owned and managed by RBI (in four metros) and public sector banks (in 14 other cities). Technology Vendors Key vendors in this area are IBM, NCR and HCL InfoSystems. IBM has supplied cheque processing solution to RBI for all the high volume centers (four metros) running on its mainframe systems and high speed document processors. NCR has significant share in providing its solution to no. of public sector banks and also introduced first cheque imaging based processing in India. HCL Infosystems has provided its solution to a few banks but not a very keen player in this market. Cheque imaging is currently confined to processing only and no bank offers cheque images to its customers. Third Party Processors There are no independent third party processors in India. ATMs & ATM Switching

Banks/FIs Individual banks own all the ATMs and they are also ATMS card issuers. Almost all banks that have critical mass in terms of ATM installations have gone in for setting up ATM switches themselves. However, since no. of ATM transactions are quite moderate currently, most solutions are mid-sized and not high end ones. Technology Vendors There are 2-3 main solution vendors who are active in Indian marketplace. Financial Software & Services (FSS) FSS represent ACI in India and have almost 90 % market share with ACIs Base24 product. They have 19 installations in India with individual banks. They have strong implementation capability as they have development and support centers in Chennai and Mumbai. Oasis Technologies Oasis is represented in India by IBM India and they have one installation but not yet gone live. Shared ATM Networks There is only one shared ATM network in India by name SWADHAN. This is jointly owned by IBA, HMA and FSS and called as India Switch Company. When it was set up, it was supposed to provide shared ATM access to customers of public sector banks primarily, but its growth has been less than expected. This initiative was supposed to be rolled out in major cities in India but has not really taken off. Credit/Debit Card Processing Banks/FIs Almost all the credit/debit cards issued by banks/FIs in India are either MasterCard or VISA affiliations. Most of the processing/settlement is done using MC/VISA facilities, which are located outside of India. A few banks such as Citibank, HSBC etc. have provided POS devices to merchants but most of the POS devices are provided by a third party provider Venture Infotech. Paper charge slips are quite common since affordability of POS devices is still an issue with merchants. Most banks play role of acquirer but Citibank happens to be largest acquirer being earliest entrant in this market and good POS network. Technology Vendors As mentioned earlier, very few banks process their transactions themselves so there has not been much market for credit card processing applications. Amongst some who have some presence are EuroPay They took over US-based Arksys Inc. and they have positioned ITM product of Arksys in Indian market but have no installs currently. They are also looking at Shared processing facility in India thru a joint venture. Third Party Processors Venture Infotech (VI) initially a joint venture with Equifax, is key player as third party processor. VI has good no. of POS devices that they have placed with merchants and work on per transaction model with tie ups with banks/FIs. VI uses MultiXPac as

solution to provide online authorization, merchant processing, giving acquirer facilities to banks, settlements between institutions and routing to MC/VISA. ACH/ECS RBI/Banks Currently RBI/Banks are playing key role in ECS processing since there is NO ACH set up. RBI processes the ECS transactions submitted by sponsor banks on behalf of their corporate customers. But ECS is primarily many-to-one (Debit) and one-to-many (Credit) model only and is not capable of handling person-to-person payments since there is no many-to-many capability. RBI is currently implementing ACH to overcome this challenge and facilitate person-to-person payments. ECS reach is in 6 centers only. Technology Vendors Right now no single vendor is geared up for addressing this market and provide solutions since ACH is not in vogue. However, once ACH infrastructure is made available there will be at least a few vendors who will offer solutions and services in this area. TCS is currently in process of developing ACH backbone on behalf of RBI (with messaging/routing and security functionalities) and likely to put it on stream by 4Q2001. Third Party Processors There are a few ECS third party processors but these are essentially subsidiaries floated by banks to address repetitive payments aspect for their retail and corporate customers. BillJunction.com (a entity floated by ICICI) is quite active in this arena.

C. KEY PAYMENT GROWTH AREAS

High Value Payments RBI has embarked on a time bound program to establish a high value payments network in form of Real Time Gross Settlement (RTGS) which will be available to entire banking industry for funds transfer, specifically interbank transactions. RTGS project requires not only backend processing application to be available but there will also be requirement for a front end gateway for banks to use this system. ACH Processing As mentioned earlier, ACH infrastructure is being set up by RBI and once that is available for banking industry there will be a good possibility to offer ACH based solutions and services. Technology vendors (in partnerships with banks/FIs) can offer products conforming to Indian ACH standards as well run processing centers on behalf of banks/FIs. In short term, ACH gateways, front end applications will be in demand but as volumes grow and gets critical mass then processing outfits would be feasible.

Credit Card Transaction Processing Currently, most of the credit card transaction processing is done outside of India by foreign banks or by lone third party processor (VI) within India. However, as volume of credit card holders grow and transactions increase there will be Indian banks/FIs looking at this as a opportunity to become acquirers (and get larger pie) and tie up merchants in their network to provide online authorizations and other value added services. Credit/Debit Bureaus Currently there is only generic interest in this area with not much being done on this front. But as more electronic payment infrastructure is available driving larger electronic transactions (as opposed to cash/paper today) then guaranteeing payments will pick up and lead to necessity of credit/debit bureaus. Payment Gateways Clearly as newer payment mechanisms are available a payment gateway kind of solutions will be needed in real sense. Currently it is confined only to credit/debit card based transactions.

D. Key Factors Affecting Payment Systems Market

Indian marketplace presents some of the unique opportunities in payment technology however there are some key factors which will determine volume & value of business in short term (3-4 years) scenario Speed at which RBI is able to get payment infrastructure projects up and running notably RTGS and ACH Capability of Indian banks/FIs to adapt to these new payment mechanisms. Primarily rollout issues which will determine availability of these mechanisms to retail/corporate segment There are still legal challenges to be overcome such as changes in relevant laws especially Indian Evidence Act which make electronic means as admissible evidence RBI regulations such as restrictions on independent payment gateways (only gateways set up by banks/FIs are permitted). Adaptation of electronic payments by retail segment and moving consumer behavior from cash-centric transactions

E. Where eFunds India Can Play

High Value Payments EFunds India is already partnered with Logica India and given a joint bid to RBI. Competition is from IBM India. Should we win the bid it will give eFunds a unique capability in high value payments apart from current strong retail payment portfolio. This project also has capability of taking eFunds into every bank in India thus giving us access to entire banking/FI community for other payment product and services.

ACH Processing EFunds has a good positioning in this space, as we are involved in US ACH market quite extensively. We can leverage eFunds products (like e-check, WebACH etc.) by suitably customizing them for Indian ACH formats and offer it to the market. EFunds can also offer setting up for ACH gateways (with few banks) and leverage its expertise from US and other international markets. Credit/Debit Card Processing We can address such opportunities by offering Connex and other related products in the market. Also, setting up or running existing processing outfits might be a good option to consider. Debit/Credit Bureaus As mentioned earlier, once ACH and other electronic payments become critical in terms of volumes and value, we can offer our capabilities (both products and services) to customers and address these opportunities. Other Related Segments Apart from normal payments market, eFunds is uniquely positioned to cater to ALL banks in India in form Centralised Funds Management System (CFMS) we are building for RBI. This will enable eFunds to provide a front-end application and services to all banks and we can then leverage our core strengths in retail payments.