PayTech

Dr. Sanjay Mansabdar

Financial Markets & Fintech
School of Management
Mahindra University
Agenda
• A historical view of payments
• The interface between cash and digital money
• Digital Payments process
• Intermediating the payments process
• Wallets
• Mobile Based Payments
• UPI
• PoS
• Domain specific innovations
PayTech – A historical view
Barter Notes Cards
3000BC 1600 1957

Coins Cheques Digital

700BC 1659 Money
2000-
Payment
Interchanges eg.
Counting Visa, Mastercard,
Abacus Machines, ATMs Amex

Abacus Cheque imaging Modern Fintech

and encoding
 Cash

Debit/ Credit/
IMPS/RTGS Prepaid
Cards

BNPL Ways to Pay Cheque/Draft

Reward
Cards/ UPI
Wallets

Pre-paid/
Crypto wallet
The Cash-Digital Interface
• Cash has some advantages
• Wide acceptability
• Privacy
• Cash is inherently difficult to handle
• The need to count
• The need to secure
• The need to transport
• Counterfeiting
• All of this is easily done with digital money - > The domain of paytech
• Converting cash to digital money
• Legalities involved
The Cash- Digital Interface
• Institutions that operate at this level are typically
• Banks
• Businesses with significant last mile reach e.g. Telecom companies
• Fintechs
• Case Study M-Pesa:
• A digital payment mechanism
• The mobile payments service from Vodafone
• Immense success story in Africa and Bangladesh
• Needs only a feature phone
M Pesa: How it works
M-Pesa
• What pain points does it solve?
• Who is it for?
• What technologies are used
• Feature Phone
• Back end driven by traditional client server architecture
• What market situation has worked
• Light regulation for finance and technology
• Significant Control by one entity over entire process
• What are some of the criticisms
• High transaction cost – rent seeking
• Allegations of impropriety – lack of oversight
• Proprietary system, no interoperability
• Data Privacy questions
India: Addressing the weaknesses of MPesa

• Regulator of
Regulate what • Multiple stakeholders

TRAI Mobile
Operators can NPCI Stakeholders
• Sec 8 RBI • Interbank
Clearing
do company Operator
• Jan Dhan

These have ensured

1. Reduction is costs to ensure that there is no rent seeking
2. Every participating entity is regulated by the appropriate regulator

India has a USSD based payment service that is similar to MPesa and needs only a feature phone
NPCI: The Backbone of India PayTech
This portfolio of technologies
that are a “public good’ along
with the directives of other
regulators have created a robust
paytech back end with
1. Common standards and
interoperability
2. Low cost
3. Multi – Use Case
4. Regulatory oversight

UPI 2.0 that allows for regular

payments like SIPs and EMIs
How do Retail Digital Payments Occur?
INTERBANK SETTLEMENT
Clearing and Settlement
• How money moves between accounts
• Clearing: The reconciliation of what money has to move between what
accounts
• Performed by Clearing Banks
• Settlement: Actual movement of money (entries) between accounts
• Gross Settlement:
• If A owes B Rs 5 from one transaction, and B owes A Rs 2 from another transaction, full
transfer of Rs 5 and Rs 2 takes place
• Net Settlement:
• Only Rs 3 is transferred from A to B
• Netting can happen at several levels
• Gross settlement is high value and requires liquidity support
How to disrupt this?
• Get rid of the • Why pay • Convenience
card Visa/MasterCard
fee? • Replace with mobile
• Use NFC
• QR Codes
• Cost:
Convenience Cost
• NPCI portfolio
• Public Good
Customer Experience • Inclusion:
• People without cards
can participate
Security Inclusion • Use Wallets
• Payments without POS
• A physical device • Include those • Security:
is unsecure without cards,
accounts • PIN
• OTP
• 2FA
• Gateways:
• Multi payment method
PayTech in India
PayTech: E Wallets
• Paypal – the first
• Apple Pay, Google Pay and many more that leveraged some USP like
hardware
• A smartphone based app to
• Store data from multiple cards to use in payments [Don’t have to carry a card and
remember card information]
• A store of digital money [Don’t need to carry cash, no paper receipts]
• Secured by advanced security like biometrics [Can be recovered even if phone is lost,
fraud control]
• Used to make payments in multiple ways, both online and in person [convenience of
using payment method of choice]
• Works on minimum hardware [inclusion]
• Server side or client side data storage
E Wallets
• Standalone Wallets: Paytm
• Typically link up with multiple services
• Wallets by Banks: PayZapp, integrate with banking
• Wallets from Hardware providers: Apple Pay, Google Pay, integrate
with hardware
• Wallets by Businesses: Amazon Pay, PhonePe, Starbucks Pay offer
business specific features
• Wallets from Telecom Vendors help with stickiness with ease of
billing/recharge and loyalty building
Closed, Semi Closed and Open Wallets
• Closed: Can only be used with the issuing business
• Companies offer wallets that need to be topped up before service usage
• Cloud Companies
• Loyalty, no merchant fees
• Semi Closed Wallets: Can be used for transactions with a select set of
merchants/businesses
• AgriFinTechs offer a credit line that can be used only for purchase of agricultural
inputs.
• PayTM
• Open Wallets:
• Can be used anywhere including withdrawal from ATMs
• Generally issued by Banks

• Lines are blurring due to interoperability and innovation – what is Amazon Pay?
• RBI PPI Guidelines
Apps that work with wallets
• Password Managers to store financial data
• Cashbacks, scratch cards, loyalty services, data analytics services
• Reordering for items in store
• E Credit and E Debit Card wallets
• Electronic Account that stores digital money
• Payment in Cryptocurrency

Bottomline – since all commerce depends on payments which are fast

becoming digital there are almost endless integrations of these with a focus
on convenience and inclusion
POS Systems
• Used at points of sale
• Hardware: IoT device that can read cards and bar codes, display a QR Code,
equipped with NFC for multiple forms of payments, a cash drawer, receipt
printer
• Software: integrations with payment solutions, recording payments, taxes,
inventory, analytics
• Innovations possible
• Mobile POS
• No Checkout POS
• Data and Analytics
• Automatic Reordering
• Voice based checkout (merchant)
• Smile based checkout (customer)
Payment Gateways and Aggregators
• Every payment mechanism has a different “logic”
• Clearing
• Settlement
• Information flow is different
• Technology is different
• Gateways are the technologies that implement the flow of one or
more payment method
• Aggregators are the orchestrators of the flow across multiple
payment methods
• Take care of everything for the merchant, including funds transfer
Payment Gateways and Payment Aggregators
Payment Gateways Payment Aggregators
An intermediary (the plumbing of payments) An interface
Limited payment types Multiple payment types
Do not handle payments Handle payments and settlements through sub
merchant accounts
Not much integration needed Significant Integration needed
HDFC Bank, SBI Bill Desk, PayUMoney
Offered by Banks to their Merchant customers Offered by Merchants to their customers
The difference lies in

A. The level and type of integration needed with the merchant

B. The number of payment types
C. The Customer Experience
D. The lisencing and security standards followed
E. Whether or not funds are handled
Remittances
• Remittances are huge for developing nations
• As such regulations on X Border payments are stringent and multiple
jurisdictions are involved
• Technology standards in multiple jurisdictions
• Foreign Exchange Markets are Follow the Sun Markets
• FX conversion an rate management is important and is a serious risk
• As such remittance FinTechs are specialized PayTechs
• Development in India has been relatively slower given regulations on
FX
How do Retail Digital Payments Occur?
INTERBANK SETTLEMENT
Credit Card Payments
• Visa, Master, Amex, Diners Club, Rupay…
• Offer technology standards to banks and merchants (through
payment gateways)
• This is proprietary technology which they charge for
• MDR – Merchant Discount Rate is what gets deducted from the
Merchant receipts
• This cost may make the use of cards unacceptable
The WholeSale Payment System
Trends in PayTech

Regulatory
Ease of Use Partnership is
Influence to
Innovations the Key
increase

Diversification
Fit for purpose
into Related Consolidation
innovations
Business