Digital Payments

Today’s Plan
October 1, 2017
Test 1
December 12, 2017
  1. Background
  2. National Payments Corporation of India (NPCI)
  3. High value Payments
    1. Real Time Gross Settlement System (RTGS)
    2. Securities Settlement System (SSS)
    3. Electronic Clearing Service (ECS)
  4. Retail Payments
    1. Automated Teller Machines (ATMs)
    2. Electronic Funds Transfer
    3. Immediate  Payment Service (IMPS)
    4. The Unified Payments Interface (UPI)
      1. How it works?
      2. Advantages
    5. Bharat Bill Payment System (BBPS)
    6. Mobile Payments
      1. Aadhar Pay
      2. UPI Payments
      3. Bharat QR Code
      4. Digital Wallets
  5. Digital Inclusion
    1. *99# service
    2. RuPay card
    3. Aadhar Payment Systems
      1. Aadhaar Payments Bridge (APB)
      2. Aadhaar Enabled Payment System (AEPS)
      3. microATM
  6. Other Developments
    1. Electoral bond
    2. Digital Currencies
      1. Blockchain technology
      2. Bitcoin

1. Background

In India less than 5% of all payments happen electronically. India is one of the most printed currency-dependent country in the world.

  • The ratio of cash to gross domestic product in India is one of the highest in the world.
  • According to RBI’s estimates, the cash floating in the system is about 18% of the country’s gross domestic product.
  • The number of currency notes in circulation is also far higher than in other large economies. 
  • Some studies show that cash dominates even in malls, which are visited by people who are likely to have credit cards.


There has been a strong growth in digital payments and transactions in the months since the currency swap was announced on November 8, according to Reserve Bank of India data. 

Committee on digital Payments

The committee on Digital Payments was headed by Finance Secretary Ratan Watal to recommend steps for accelerating growth of Digital Payments and changes in the regulatory mechanism under various acts such as the Payments and Settlement Act, the RBI Act, and the Information Technology Act among others.

  • The panel had recommended that the RBI will be the regulator for SIPS (systemically important payment system) and a separate board (Payments Regulatory Board) for retail payments will be created under RBI.
  • It has suggested inter-operability of the payments system between banks and non-banks.

2. National Payments Corporation of India (NPCI)

National Payments Corporation of India (NPCI) is an umbrella organization for all retail payments system in India. It was set up with the guidance and support of the Reserve Bank of India (RBI) and Indian Banks’ Association (IBA). NPCI was incorporated in December 2008.


  • to consolidate and integrate the multiple systems with varying service levels into nation-wide uniform and standard business process for all retail payment systems.
  • to facilitate an affordable payment mechanism to benefit the common man across the country and help financial inclusion.

Services Offered

  • Switching of inter-bank ATM transactions
  • Cheque Clearing
  • Immediate Payments Service (24x7x365)
  • Automated Clearing House
  • Electronic Benefit Transfer
  • Domestic card payment network named RuPay 

3. High value Payments

Systemically important payment systems (SIPS) are payment systems which have the characteristic that a failure of these systems could potentially endanger the operation of the whole economy.

In the large-value payment systems, RBI has implemented Real Time Gross Settlement (RTGS) System, the Securities Settlement System (SSS), Electronic Clearing Services etc

3.1 Real Time Gross Settlement System (RTGS)

Real Time Gross Settlement is a funds transfer mechanism where transfer of money takes place from one bank to another on a ‘real time’ and on ‘gross’ basis.

  • This is the fastest possible money transfer system through the banking channel.
  • Settlement in ‘real time’ means payment transaction is not subjected to any waiting period.
  • ‘Gross settlement’ means the transaction is settled on one to one basis without bunching with any other transaction.

3.2 Securities Settlement System (SSS)

  • SSS provides final settlement for government securities transactions that are settled in the books of the RBI
  • With implementation of the Core Banking Solution (CBS) in the RBI, the securities settlement system has been migrated to the CBS platform.
  • SSS has facilitated seamless transfer of funds and securities for liquidity management purposes.

3.3 Electronic Clearing Service (ECS)

ECS is an electronic mode of payment / receipt for transactions that are repetitive and periodic in nature.

  • ECS is used by institutions for making bulk payment of amounts towards distribution of dividend, interest, salary, pension, etc., or for bulk collection of amounts towards telephone / electricity / water dues, cess / tax collections, loan instalment repayments, periodic investments in mutual funds, insurance premium etc.
  • ECS facilitates bulk transfer of monies from one bank account to many bank accounts or vice versa.
  • ECS includes transactions processed under National Automated Clearing House (NACH) operated by National Payments Corporation of India (NPCI).

4. Retail Payments

The payment and settlement system comprises of various arrangements that is used to systematically, efficiently and securely transfer money/currency, cheques, demand drafts, and money through various electronic channels. The commonly used systems for small scale payments are 

  • Paper Based Payment Systems – Cheques, Drafts, etc. 
  • Automatic Teller Machines (ATMs) 
  • Electronic Payment Systems – Gross Settlement System and Net Settlement Systems. 
  • Immediate Payment Service (IMPS) 
  • Credit cards and Debit cards 
  • Mobile Banking System 
  • Point of Sale (POS) Terminals 

Some of the above systems are discussed below

4.1 Automated Teller Machines (ATMs)

Automated Teller Machines (ATMs) have become an important delivery channel for banking transactions in India, particularly for cash withdrawal and account balance enquiry.

There are three different types of ATMs according to their label, which are as follows:

1. Bank’s own ATMs: These ATMs are owned and operated by the owner bank and carry the Bank’s logo.

2. Brown Label ATMs (BLAs): These ATMs are not owned by the sponsor banks. They are owned and operated by third parties (non-banking companies). They carry the logo of the bank outsourcing the service.

3. White Label ATMs (WLAs): These ATMs are owned and operated by a non-banking company and serve the customers of all banks. These ATMs carry the logo of the company owning them. The role of the concerned banks is limited to providing only the account information and assisting in back end money transfers.

4.2 Electronic Payment Systems 

The two methods available are – Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT)


  • Is one of the most prominent electronic funds transfer system in India . 
  • NEFT system has no minimum or maximum fund transfer limit.
  • Persons with no banks accounts can also use this facility
  • The transactions are processed and settled in batches, hence are not real time.
  • Also, the transactions can be done only during the working hours.
  • Currently majority of interbank mobile fund transfer transactions are channelised through NEFT mechanism. 

4.3 Immediate  Payment Service (IMPS)

NPCI conducted a pilot study on the mobile payment system with the banks like SBI, BOI, UBI and ICICI in August 2010. Immediate  Payment Service (IMPS) public launch happened on 22nd November 2010 

  • IMPS offers an instant, 24X7, interbank electronic fund transfer service through mobile phones.
  • Can be done through mobile, internet and atm
  • Is not only safe but also economical both in financial and non financial perspectives.
  • For IMPS transactions, either the IFSC code of the bank or the bank-generated MMID code is required

This facility is provided by NPCI through its existing NFS switch.

4.4 The Unified Payments Interface (UPI)

The Unified Payments Interface (UPI) is a new system developed by the NPCI and the RBI to aid instant transfer of money using a cashless system.

  • Through this platform, the person can transfer money from his account to other person’s account directly, provided both are connected to the UPI.
  • One just requires a smartphone and a banking app to send and receive money instantly or to pay a merchant for retail purchase.
  • In the long run, UPI is likely to replace the current NEFT, RTGS, and IMPS systems as they exist today.

4.4.1 How it works?

The UPI ecosystem functions with three key players:

  1. Payment service providers (PSPs) to provide the interface to the payer and the payee. Unlike wallets, the payer and the payee can use two different PSPs.
  2. Banks to provide the underlying accounts. In some cases, the bank and the PSP may be the same.
  3. NPCI to act as the central switch by ensuring VPA(Virtual Payment Address) resolution, effecting credit and debit transactions through IMPS.

UPI is built over the IMPS infrastructure. The Virtual Payment Address or VPA is given to the user of UPI payment system. It replaces the bank account details. 

The different channels for transferring funds using UPI are:

    1. Transfer through Virtual ID
    2. Account Number + IFSC
    3. Mobile Number + MMID(Mobile Money Identifier – is a seven digit unique number issued by the bank upon registration)
    4. Aadhaar Number
    5. Collect / Pull money basis Virtual ID

4.4.2 Advantages

  • Currently, NEFT, RTGS, or IMPS systems are used to send or receive money. For all of these, one is required to furnish detailed information of the recipient. For example, for a NEFT transfer, bank account details of the recipient, the IFSC code of the bank, bank account number, etc. are required.For IMPS transactions, either the IFSC code of the bank or the bank-generated MMID code is required. With UPI, only the mobile phone number of recipient is needed and one can send money instantly, any time or day of the week, in a secure environment using just Smartphone.
  • Can use UPI to make a transfer from bank account to the merchant’s account instantly.
  • UPI-enabled platform bank account can transfer up to Rs.1 lakh instantaneously.
  • The cost of each transaction is going to be less than Rs.0.45
  • There is no need to install a PoS machine
  • The most important aspect of UPI is its open architecture. The user interface is fully flexible and banks are free to create most intuitive interface.
  • It bring all the key stakeholders on a common platform, creating a plethora of services that are unheard of in today’s global payment offerings.
  • The transactions highly encrypted and fully secure to use.
  • Money transfers with this interface are secured with the two-factor authentications as mandated by RBI: mobile phone handset and the mobile PIN as the second.

4.5 Bharat Bill Payment System (BBPS)

The idea is to have bills of any type paid from anywhere using an interoperable bill payment network for the whole country. In August 2016, the National Payments Corporation of India (NPCI) had a pilot launch of Bharat Bill Payment System (BBPS). The pilot involved bringing the billers on one side and the bank customers on the other side through their service providers to the central platform.

  • The service providers from biller side and customer side are referred to as Bharat Bill Payment Operating Units (BBPOUs)
  • The central platform being provided by the NPCI is called Bharat Bill Payment Central Unit (BBPCU). 
  • The NPCI organises clearing and settlement of transactions processed through the central unit. 
  • The NPCI has received the final authorisation from the RBI to run the central unit as a strategic business unit (SBU).
  • NPCI will be responsible for setting business standards, rules and procedures for technical and business requirements for all the participants
  • NPCI, as the BBPCU, will also undertake clearing and settlement activities related to transactions routed through BBPS

Currently, only five categories of utility bills are permitted through NPCI — power, telephone, DTH, water and gas. 

  • BBPS will help new operators to offer more efficient solutions.
  • The purpose of BBPS is also to intensify competition among aggregators and bring them all under a national platform.
  • The Ministry of Power has advised state governments to prod power distribution companies to join BBPS.
  • The Ministry of Telecommunications has been given the target of bringing DTH, landline and wired internet connection bills under digital platform
  • Payments may be made through the BBPS using cash, transfer cheques, and electronic modes.
  • NPCI will ensure that queries, requests and complaints raised by customers are monitored and resolved on time.
  • The BBPS will act as an independent brand and is expected to increase the confidence level of the customers with respect to transaction convenience, security, reliability, accessibility and affordability.

4.6 Mobile Payments

India has around 240 million smartphone users and is expected to grow to 520 million by 2020. Various government initiatives like the National Optical Fiber Network initiative and Pradhan Mantri Jan Dhan Yojana will provide a significant fillip in the proliferation of low-cost acquisition infrastructure by allowing smartphones to substitute costlier point of sale (PoS) devices. In India, it is estimated that there are over 25 million merchants and only 1.2 million have card readers. Still a major chunk of risk-averse customers hesitate to use cards. In this scenario mobile payments are the best option for digital payments. The various ways of mobile payments are discussed below.

4.6.1 Aadhar Pay

  • The Aadhaar Pay app lets consumers pay without any physical payment instrument.
  • It runs on the Android platform and has to be installed by merchants.
  • The merchant’s mobile phone needs to be linked to an Aadhaar biometric reader.
  • To make a payment, the consumer has to just enter her Aadhaar number. The fingerprint is the password for the transaction.
  • To use this service, the customer has to first link her bank account to her Aadhaar. 

4.6.2 UPI payments

UPI, which was launched in August 2016, currently has over 35 member banks. To use this service, customers need to have a UPI-enabled app, a bank account and a registered mobile number. 

Bharat Interface for Money (BHIM)

  • Is the Android smartphone application launched by the government
  • Will eliminate the fee currently being charged by the private card companies such as “MasterCard” and “Visa”

Other UPI payments apps

  • There are over 30 such apps available in the country, Google’s  Tez  is the latest to the addition
  • Tez relies on just the phone number to transfer money. So even if you don’t know the UPI account details of the recipient, you will be able to send money by just entering a Tez user’s phone number.
  • Unlike Paytm, it isn’t a digital wallet, so you won’t be able to store money in Tez.

4.6.3 Bharat QR Code

QR code is a machine-readable matrix, which you can scan with your smartphone to pay. At present, various payment companies and banks provide different QR codes. The government launched Bharat QR code to provide a common QR code solution, which will be interoperable across payment networks.

  • Is developed jointly by National Payments Corporation of India (NPCI), Visa, MasterCard and American Express under instructions from Reserve Bank of India (RBI).
  • It works as common interface for the MasterCard/Visa/ RuPay platforms and also facilitate acceptance of Aadhaar- enabled payments and Unified Payments Interface (UPI).
  • It eliminates the need of using card swiping machines for digital payments.

4.6.4 Digital Wallets

A digital wallet refers to an electronic device that allows an individual to make electronic transactions. This can include purchasing items on-line with a computer or using a smartphone to purchase something at a store.

  • An individual’s bank account can also be linked to the digital wallet. 
  • Most banks have their own e-wallets
  • Private companies’ e-wallets are. e.g. Paytm, Freecharge, Mobikwik, Oxigen, mRuppee, Airtel Money, Jio Money, itz Cash, Citrus Pay, Vodafone M-Pesa, SpeedPay etc.

The launch of UPI, BHIM and Bharat QR gave banks a bigger boost, making their apps more convenient, faster and cheaper for customers to use than wallets .

5. Digital Inclusion

Financial Inclusion through ICT is a main aim of digital India program. The methods adopted for financial inclusion are

  • Aadhar platform
  • mobile banking
  • Micro-ATM program
  • Services through Common Service Centres/ Post Offices

The various inclusive projects are discussed below.

5.1 *99# service

One of the innovative payment service launched by NPCI includes *99# service, which works on Unstructured Supplementary Service Data (USSD) channel. When you dial a number that starts with * and ends with #, you are using USSD. *99# service was dedicated to the nation in 2014 as part of Pradhan Mantri Jan Dhan Yojana (PMJDY).

  • USSD is currently the best available communications technology to deliver mobile financial services to low-income customers.
  • With the notable exception of M-Pesa in Kenya, the majority of large scale mobile financial services (MFS) deployments in the developing world use USSD as their primary mechanism for communication between customers and their mobile payments platform. These include bKash in Bangladesh; Wing in Cambodia; EasyPaisa in Pakistan; Tigo and M-Pesa in Tanzania and EcoCash in Zimbabwe.


  • *99# service has been launched to take the banking services to every common man across the country, who cannot afford a smartphone.
  • Banking customers can avail this service by dialling *99#
  • The number is common number across all Telecom Service Providers (TSPs)
  • Key services offered under *99# service include, interbank account to account fund transfer, balance enquiry, mini statement besides host of other services. 
  • *99# service is currently offered by 51 leading banks & all GSM service providers and can be accessed in 12 different languages including Hindi & English. 
  • Works on basic as well as smartphone
  • There is no need to have mobile internet data facility for using USSD based mobile banking

5.2 RuPay card

RuPay is India’s own card payment scheme. The scheme was conceived by NPCI. The card payment network forms the middle layer connecting the card issuing bank and the seller’s merchant bank. 

The Goals are

  • To provide affordable electronic transactions for local banks.
  • To promote financial inclusion.
  • To break the dominance of international majors such as Visa and MasterCard.  


  • Internationally, RuPay cards can be used at all Discover & Diner PoS and ATM networks.
  • Since the transaction processing of RuPay happens domestically, it leads to lower cost for clearing and settlement of transactions.
  • Jan Dhan Yojna has given RuPay a big boost as every account-holder is getting the RuPay card.
  • The direct benefits transfer scheme has also helped in making the RuPay cards active.

5.3 Aadhar Payment Systems

UIDAI has partnered with various stakeholders including RBI, NPCI, IBA and banks to develop two key platforms:Aadhaar Payments Bridge (APB) – A system that facilitates seamless transfer of all welfare scheme payments to beneficiary residents’ AadhaarEnabled Bank Account and Aadhaar Enabled Payment System (AEPS) – A system that leveragesAadhaar online authentication and enables Aadhaar Enabled Bank Accounts to be operated in anytime-anywhere through microATMs.

5.3.1 Aadhaar Payments Bridge (APB)

To facilitate disbursements of Government entitlements like NREGA, Social Security pension, Handicapped Old Age Pension etc. of any Central or State Government bodies, using Aadhaar and authentication.

APB is a repository of Aadhaar number of residents and their primary bank account number used for receiving all social security and entitlement payments from various government agencies.

The key steps in posting payments via APB are:

  • Service delivery agency that needs to make payments to its beneficiaries (such as MGNREGA wages, scholarships disbursement, old age pension etc.) provides APB File containing details of Aadhaar number, welfare scheme reference number and the amount to be paid to its bank (called sponsor bank).
  • Sponsor bank adds bank IIN (Institute Identification Number provided by NPCI to participant banks) to the APB file and uploads onto NPCI server.
  • NPCI processes uploaded files, prepares beneficiary bank files and generates settlement file
  • Settlement file is posted to bank accounts with RBI.
  • Destination banks can download the incoming files for credit processing after the settlement file has been processed.

5.3.2 Aadhaar Enabled Payment System (AEPS)

AEPS is a bank led model which allows online interoperable financial transaction at PoS (Point of Sale / Micro ATM) through the Business Correspondent (BC)/Bank Mitra of any bank using the Aadhaar authentication.

The four Aadhaar enabled basic types of banking transactions are as follows:-

  • Balance Enquiry
  • Cash Withdrawal
  • Cash Deposit
  • Aadhaar to Aadhaar Funds Transfer

The only inputs required for a customer to do a transaction under this scenario are:-

  • IIN (Identifying the Bank to which the customer is associated)
  • Aadhaar Number
  • Fingerprint captured during their enrollment

5.3.3 microATM

  • User provides his/her Aadhaar number, details of financial transaction sought and fingerprint impression at the microATM device.
  • Digitally signed and encrypted data packets are transferred via Bank Switch to NPCI to UIDAI.
  • UIDAI processes the authentication request and communicates the outcome in form of Yes/No.
  • If the authentication response is Yes, bank carries out the required authorization process and advises microATM on suitable next steps.

6. Other Developments

Various developments are happening in the digital payments system. Some of the notable developments are discussed below.

6.1 Electoral bond

Electoral bond is envisaged to curb the unknown cash payments towards the electoral funding. The concept of electoral bonds tries to keep the anonymity of payer and at the same time, brings payments to political parties accountable

  • Bond can be raised from authorised banks which is  redeemable only in the designated account of a registered political party
  • These bonds resemble a promissory note
  • Is not an interest-paying debt instrument 

6.2 Digital Currencies

Digital currencies are the money balance recorded electronically on a stored-value card or other device. Another form of electronic money is network money, allowing the transfer of value on computer networks, particularly the Internet. The prominent digital currency at present is the ‘Bitcoin’. Bitcoin works on the block chain technology.

6.2.1 Blockchain technology

The technology supports  transfer of any data or digital asset. They are a new data structure that is secure, cryptography-based, and distributed across a network. Is a permissionless innovation environment. 

How it works?

  • The technology allows transactions to be simultaneously anonymous and secure, peer-to-peer, instant and frictionless.
  • It does this by distributing trust from powerful intermediaries to a large global network, through mass collaboration, clever code and cryptography enables a tamper-proof public ledger of every transaction.
  • A block is the “current” part of a blockchain which records some or all of the recent transactions.
  • Once the transaction is completed, the ‘block’ goes into the blockchain as permanent database.
  • Blocks are linked to each other (like a chain) in proper linear, chronological order
  • This is done using ‘a hash’ of the previous block, which will be contained in every new block.

How is it different from current payment systems?

  • Blockchain technology allows for instant recognition of the exact size of the block in the chain, since the block is simultaneously updated on all their databases
  • Has unique security features that do not allow tampering with the block.
  • Each block’s movements across the chain can be verified by all parties in the chain 
  • Therefore it creates instant trust without having to rely on a series of trustworthy banks to clear cheques
  • Unlike traditional banking system, cash transactions here are undertaken immediately.

Benefits of blockchain technology

  • Every transaction is secure -protected from the threat of hacking.
  • Every transaction is reliable – ie the transactions are immutable(cannot be reversed).
  • Discards the need of any third-party or central authority for peer-to-peer transactions.
  • It allows decentralization of the technology.
  • Freedom in Payment for users


  • Blockchain is still a (relatively) new technology and is not without its problems.
  • There are ongoing concerns about privacy in the settlement and storage of securities.
  • Banks are also at threat with blockchain, since more and more firms can build systems that can create and exchange ‘blocks’ with one another, without a bank.
  • The anonymity associated with such currencies helps the black money economy.

6.2.1 Bitcoin

It is an attempt by a firm, using blockchain technology, to create a set of shares in a trading entity that had an initial set value and fixed number, in the hope that these shares would become the medium of exchange through which people trade goods and services.

Since the number of shares is fixed, demand for them goes up over a period of time as more and more people use the shares to settle their transactions.


Bitcoin transactions are sent from and to electronic bitcoin wallets, and are digitally signed for security. Everyone on the network knows about a transaction, and the history of a transaction can be traced back to the point where the bitcoins were produced.

Advantages of Bitcoins

  • Allows users to be in control of their transactions.
  • Currently there are either no fees, or very low fees within Bitcoin payments.
  • Due to the fact that Bitcoin transactions cannot be reversed, merchants are protected from potential losses that might occur from fraud.
  • Transactions do not carry with them personal information.


  • Lack of Awareness & Understanding.
  • Bitcoin has volatility mainly due to the fact that there is a limited amount of coins and the demand for them increases by each passing day.
  • Bitcoin is still at its infancy stage with incomplete features that are in development.

Is it legal?

  • This is illegal since it hasn’t yet been regulated by many countries.
  • Sovereign governments don’t like allowing companies to issue their own coin and will eventually regulate such systems.


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