Electronics Based Payment Systems in Banks: 6 Types

This article throws light upon the six main types of electronic based payment systems used in India. The types are: 1. Retail Payment Systems 2. Electronic Retail Payment Instruments 3. Card Based Payment System 4. Real Time Gross Settlement System 5. High Value Clearing Systems 6. NEFT.

Type # 1. Retail Payment Systems:

Retail payments are transactions which can typically be classified as, (i) Person to Person, (ii) Person to Business – (e.g., bill payments), (iii) Currency withdrawals (ATM/debit cards) and (iv) Advances (credit cards). These payments generally refer to obligations arising from retail commercial and financial transactions which can be either one-time person to person (or business) payments or recurring bill payments (or domestic remittances from person to persons) or payments to Governments.

These transactions need not be of small value alone, but are generally of low average transaction value but high transaction volumes. They also involve a much broader range of payment instruments and transaction systems.

The instruments used to effect these payments differ based on the requirements.

They can be currency, paper based instruments like cheque and demand drafts, electronic message based systems, cards based systems and off-late Short Messaging System of mobile phone. These instruments (excluding currency) along with the systems and procedures of clearing and settlement arrangements for these instruments constitute the retail payment systems.

The most popular means of retail payment instrument is, the Currency which is the legal tender.

The main advantage of currency vis-a-vis other payments instrument is:

its universal acceptance, immediate final settlement and relatively lowest cost to the payee for upfront payment (cost would be involved when the payment has to made at a particular location). The major disadvantage of currency is – carrying of large quantities of currency to make payments would involve transportation issues and is also a security risk.

Further, holding large quantities of currency does not fetch any return – the interest foregone because of currency holding is a cost to the holder of currency. While currency as a payment instrument would have no perceptible cost to the payer, the processing of this instrument involves a cost to the society.

Next to currency the other paper based payment instruments viz., cheques have been a common mode of payment instrument for the business. The general public prefers this mode mainly for payment of utility bills etc.

The developments in technology resulted in numerous innovations in the payment system area. These innovations resulted in systems which are more efficient in terms of the time and effort needed to process payment instructions.

The innovations started with processing of payment instructions stored in electronic formats in their storage media’s, which were manually transported to processing centers (clearing houses) which further graduated to the transmission of electronic messages in secured formats through secured communication channels.

These innovations have resulted in the payment instruments like – electronic funds transfer systems and card based systems; the latest innovation being mobile phone based payment systems.

Type # 2. Electronic Retail Payment Instruments:

The retail electronic payment systems in the country are National Electronic Funds Transfer System and the Electronic Clearing System.

National Electronic Funds Transfer (NEFT):

This is a message based funds transfer system. The system provides secure one-to-one funds transfer facility for customers of banks. Unlike its precursors the EFT system which provided settlement facility only at few centers, the NEFT facilitates national coverage, with centralized clearing and settlement facility. Further, to provide sound legal basis to the system, the system is provided with Public Key Infrastructure (PKI) based security system.

There are six settlements during a day in this system, thereby facilitating same day settlement of funds, for customers using this facility.

Electronic Clearing Service (ECS):

ECS is a retail payment system which facilitates bulk payments, that facilitate payments from one-to-many and receipts that are from many-to-one. The two components of this system are ECS (credit) and ECS (Debit). This facility is now available at most major centers in the country.

ECS (Credit):

ECS (Credit) facilitates the bulk payments whereby the account of the institution remitting the payment is debited and the payments remitted to beneficiaries’ accounts. This facility is mostly used for making bulk payments, like payment of dividend to investors, payment of salaries of employees by institutions etc. For this purpose, the company or entity making the payment has to have the bank account details of the individual beneficiaries.

ECS (Debit):

ECS (Debit) facilitates the collection of payments by utility companies. In this system the account of the customers of the utility company, in different banks are debited and the amounts are transferred to the account of the utility company. The company providing this facility has to receive the mandate to collect funds from its customer.

On receipt of the mandate the company , advices the consumer’s bank to debit the payment due from the account on the due dates. A copy of the advise is also send to the customer. The clearing and settlement transactions through ECS occur at the respective centers.

A centralized facility is available at RBI Mumbai to receive the ECS (credit) files meant for credit at other 14 RBI centers. State Bank of India (SBI) and Punjab National Bank (PNB) have been advised to commence such service of centralized receipt of ECS (credit) files for 20 SBI centres and 13 PNB centres where the ECS facility is provided by the respective banks.

Type # 3. Card Based Payment System:

Credit and Debit cards have been in use in the country for many years now.

However the card base as well as the usage has picked up only during the last few years. Nearly 2 million cards are added each month and the card base as at the closed of March 2008 was 98 millions. Nearly all the cards have been issued by bank in affiliation with card issuing companies such as Visa, Master Card and American Express.

Many banks converted their ATM cards to debit cards to take advantage of the switching and clearing and settlement facilities offered by Visa and Master Card. Smart Cards are relatively new and only a handful of banks have issued such cards.

Type # 4. Real Time Gross Settlement System (RTGS):

RTGS stands for Real Time Gross Settlement. It is a fund transfer mechanism where transfer of money takes places from one bank to another bank on a real time and on Gross basis.

This is the fastest possible money transfer system through the banking channel. Real time means Payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. Gross settlement means the transaction is settled on one to one basis without bouncing with any other transaction.

Considering that money transfer takes place in the books of the Reserve Bank of India the payment is taken as final and irrevocable. The RTGS system is meant primarily for large value transactions. The minimum amount to be remitted through RTGS is Rs. One lac OR above. The matter is under active consideration of RBI to further lower the remittances limit of Rs. One Lac.

How to Remit/Transfer Money through RTGS:

RTGS facilitates settlement of transactions on a gross basis. This system ensures settlement of payments with no credit risk involved. It is therefore, essentially a system for settlement of large value and time critical payments. The system facilitates Inter-bank as well a customer payments.

The customer payments option of RTGS is widely used by financial institutions (non RTGS members) and corporates. Individuals also use this facility for payments. The lower limit of Rs. One lakh prescribed for transactions through RTGS, limits its role as a retail payment system. Essentially the uses of the system by individuals have been for remittance of amount above Rs. One lakh.

How to Remit/Transfer Money through RTGS:

For remitting money through RTGS one has to furnish:

1. Amount to be remitted,

2. The Account Number which is to be debited,

3. Name of the beneficiary Bank,

4. Name of the beneficiary customer,

5. Account Number of the beneficiary customer,

6. Sender to receiver information, if any

7. The IFSC Code of the receiving branch of the receiving bank.

The information required should be furnished as directed above is well known to you from SI. No. 1 to SI. No. 6. But what is at SI. No. 7 IFSC Code.

What is IFSC Code?

IFSC is a code number provided to each branch of each bank dealing with RTGS remittance. It stands for INDIAN FINANCIAL SYSTEM CODE (IFSC). It is an alpha numerical code designed to uniquely identify the Bank Branches in India. This is 11 digit code with first 4 characters representing the bank code.

The next character reserved as control character (presenting ‘o’ appears in the fifth position) and reaming six characters to identify the branch. The RBI has brought out a list of Frequently asked question about the RTGS which is given in Annexure.

Type # 5. High Value Clearing Systems:

High Value clearing system is the system for clearing cheque of Rs.1 lakh and above, which are payable locally. This clearing which facilitates the same day settlement of cheque, is currently held at 27 major cities in the country. The presentation of cheques under this clearing takes places during the time window 12:00 Noon to 12.30 PM and unpaid returns are exchanged during 3:00 to 3:30 PM.

High value clearing system is popular among the business communities in the centers where they are operational, High Value clearing being an unsecured Deferred Net Settlement System (DNS), with inherent risks, should migrate to RTGS system which is risk mitigated.

Among the Electronic Payment Systems the two systems:

1) NEFT, and

2) RTGS are becoming more and more popular.

Details about these both systems is being provided here.

Type # 6. NEFT:

This is National Electronic Fund Transfer system which enables funds transfer from one Bank branch to any other Bank’s branch and also the same Bank’s Branch. The process of NEFT is new and all branches of all Banks are not covered under this scheme. Only some selected branches of each Bank have this facility.

Under this scheme the beneficiary gets credit of his cheques on the same day or the next depending on the time of settlement. However more and more banks are quickly adopting this system.

Operation of NEFT:

The customer has to fill in an application form giving the particulars of the beneficiary (Bank Branch, Beneficiary’s name, account type and account Number. The customer has to authorize the branch to remit the specified amount to the beneficiary by raising a debit to the remitter’s account (SOME OF THE BANKS ALSO PROVIDE NET BANKING SERVICES FOR THIS SYSTEM).

After receiving the request from the customer the remitting branch prepares a Structured Financial Messaging Solution (SFMS) message and sends it to its Service Centre for NEFT.

The Service Center forwards the same to the local RBI’s (National clearing cell, Mumbai) to be included for the next available settlement. Presenting NEFT is settled in six batches at 9.30 AM, 10.30AM, 12.00 noon, 1 PM, 3PM, 4PM on weekdays and 9.30AM, 10.30AM, 12.00noon on Saturdays.

The Reserve Bank of India at clearing center sorts the transactions Bank-wise and prepares accounting entries of net debit or credit for passing on to the banks participating in the system. Thereafter bank-wise remittance messages are transmitted to banks.

The receiving bank processes the remittance messages received from Reserve Bank of India and effect credit to the beneficiaries account.

The limit of amount under this scheme is at present Rs. One Lac Only. Beyond Rs. one lacs you will have to avail the services of another system known as RTGS.

No foreign remittances can be done through NEFT. The matter is under active consideration of RBI to increase the number of batches.