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DISRUPTIVE DEVELOPMENTS ON ELECTRONIC PAYMENT SYSTEMS TO BOOST CASHLESS TRANSACTIONS

The rising tide of real-time transactions reflects the growing consumer demand for convenience. This has resulted in numerous innovations and rolling out of disruptive payment technologies and infrastructure as we speak. This development is mainly driven by ubiquity of smartphones and other Internet of Things (IOT), which has catalysed the consumer expectation for immediacy. It is imperative to note that the on-going dramatic changes reflect the digitisation of the supply chain, often called ‘Industry 4.0’ in which immediate payments enable corporates to collect and analyse financial transaction data in real-time, derive financial insights immediately, and drastically reduce the efforts involved in reconciliation.
 
In that context, CEO of LankaCLear, the operator of Sri Lanka’s National Payment Network LankaPay, Channa de Silva observes that a flawless and secure electronic payment network is a critical component that helps drive a modern economy, which is, to lean less on cash and cheques and more towards electronic payment instruments.
 
Sri Lanka’s stance

The electronic payment ecosystem in Sri Lanka has been continuously evolving since its debut in 1993. Originally introduced by the Central Bank of Sri Lanka (CBSL) as Sri Lanka Interbank Payment System (SLIPS), subsequently handed over to LankaClear, the infrastructure has grown from strength to strength and now accommodates much more including real-time payments.
 
Playing a strategic role in bringing the electronic payment infrastructure to be on par with the needs of a modern day customer is LankaClear, the catalyst of change in the local Payments Industry. While  a number of milestones have been achieved in the evolution process of electronic payments, it is the introduction of the ‘T + 0’, that put Sri Lanka under fresh spotlight as it became the first country in South Asia that enabled the same day retail electronic transfer facility. With the public being offered the facility of faster transfer of funds between banks, the usage of SLIPS has grown exponentially. What initially started off as a solution for bulk payments such as salaries, now is a solution widely used for many payments such as Peer-to-Peer (P to P) transactions, bill payments and credit card payments etc.

Progressing to real-time payments

Redefining the electronic payment landscape was the Common Electronic Fund Transfer Switch (CEFTS), which went live last year with six commercial banks and two financial institutes getting on board. Today, the network has expanded to connecting 17 banks and financial institutes. The CBSL has issued a directive for all banking institutions to be connected to the network by September 2016 in order to facilitate the growing consumer demand for real-time payments.

In a nutshell, CEFTS is essentially a system that allows real time payments, which means a transaction will be at its rightful destination in a fraction of a second after the request is made. “There is already an exponential growth in the real-time interbank payments flowing through the LankaPay network. When customers make payments via their Internet banking portal, they have the option of making them via SLIPS or CEFTS” noted de Sliva while providing insights as to how the ‘futuristic’ technology will work. 

Customers are charged a maximum fee of Rs. 50 per transaction for both these routes, however, some banks choose to absorb this fee either partly or entirely, to encourage online fund transfers.
 
Usage: room for improvement

According to many estimates around the region, even though customers are presented with the option of using secure real-time payment instruments, less than 5% of the total population use the established electronic modes. A staggering 95% or more still engage in cash transactions according to de Silva. The worldwide average is also estimated at a very high 85%. “Although there are 14 million debit cards issued in the country, the payments transacted via Point of Sale (POS) network is in single digit percentages. The situation is even worse with mobile payments, the volumes are significantly lower than expected,” said de Silva while highlighting consumer behavioural patterns in this regard. According to the payments bulleting of CBSL around 125 million transactions take place using electronic instruments.  Based on this we have estimated that, out of the total retail payment transaction volumes taking place per year, more than 3 billion is transacted via cash.  We have further estimated that cash-based transaction percentage to be as high as 98% for low-value payments, typically below Rs. 10,000, with the volume accounting for almost 80% of the total retail payments.
 
Moving forward

In an effort to capitalise on the current consumer behaviour trends, LankaClear explores three key aspects, usability, security and cost, to boost the usage of online payment instruments. While covering low value transactions means a greater proportion of the general public is likely to be accounted for and the financial sector is keen to adopt instruments for this segment that would promote cashless payments. The most likely instrument to become widely adopted is the Smart mobile phone. The smart phone penetration is currently estimated at 4 million and is expected to reach 10 million in the very near future, thus, the financial sector has understood the need to capitalise on this factor.
 
In that context, LankaClear chief stressed that it is imperative to have applications that the general public can use in a simple, effective, fast, local language enabled and not too complicated to manure.

“Usability has to be the number one factor, since if the customers find the applications difficult to use they won’t opt for it and will continue to use cash. The applications should be enabled with one-click payment capability, however, that should not compromise the security of the financial transactions either. Hence, security is ranked as the second most important factor so that highest priority is still given for the applications to be made simpler and not too cumbersome to use. We are in the process of drafting and enabling a base line security standard for mobile payment applications with the approval of CBSL and agreement with member banks to ensure security standards are maintained.
 
Then comes cost factor. The cost of a transaction must be reduced from the current Rs. 50 to a nominal amount, especially for low value payments” explained de Silva, charting the way forward. Asserting the need to reduce the fees, de Silva shared that member banks have unanimously agreed to charge less for transactions below Rs. 10,000 to encourage electronic transactions.  If the payment is below Rs. 1000, the customer transaction fee should be minimal.  
 
“All the members of CEFTS are in agreement and on-board towards the reduction of transactions fees for low value payments as they are struggling to get mobile application adoption to grow. That’s what happened in the telecom industry a few years ago. When the IDD charges were dropped by 10 fold, the volumes grew exponentially by 50-60 times.  The same success rates could be replicated in the financial sector, which will help push our efforts for the adoption of mobile payments. In the future, it will be more of a volume game than a per transaction game,” he added.
 
Increase partnership

De Silva stressed that it is imperative for banks to partner with the IT industry players to come up with more applications that are user-friendly, yet secure, which would facilitate electronic transactions utilizing the banking ecosystem. He opined that if applications are developed by third parties and a revenue sharing model is adopted among the parties, it would reduce the investment burden for banks. Hence, the banks would be more favourable towards pursuing such a model.

“It will be a continuous revenue model for all parties concerned. This is the model we would like to encourage. If the banks have to go and invest upfront, they will struggle to realise an acceptable ROI since the volume growth is difficult to be accurately estimated. A revenue sharing model is what we think is best for the industry. Hopefully, we will see more of these types of business models emerging in the medium to long term” he shared.

 It was noted that with the pace at which technological innovations are taking place today, what is current will not remain to be so for too long. A number of disruptive technologies are already making inroads and is creating a significant threat to the players who are still depending on the traditional payment instruments in the financial industry.

“Unless such a high level of efficiency, responsiveness and security is maintained, the payment industry would soon be overtaken by nimble footed and tech savvy non-financial entities. The current level of technology innovation is unprecedented and disruptive. Hence, it is imperative that the financial industry must keep pace with the changing technology landscape in order for not to be left behind” asserted de Silva.
 



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