First ever holistic survey of Indian Banks with respect to their perspectives on Payments as a business. 29 private sector and public sector banks were surveyed.

1. Confederation of Indian Industry
Payments
Business in
Indian Banks*

2. 2 Payments Business in Indian Banks*

3. Contents
06 ------------ Executive Summary
Background of the Survey ------------ 07
08 ------------ Objectives of the Survey
Survey Methodology ------------ 09
10 ------------ Macroeconomic Trends in Payments
Payments Business and Technology in Indian Banks ------------ 14
17 ------------ Exploring Enterprise Payments
PricewaterhouseCoopers 3

4. Foreword
The Indian Banking industry is in for exciting but challenging times. The current economic turmoil across the
globe offers a host of opportunities for the Indian banking industry to grow as the Indian economy is better
positioned compared to many economies.
The rising income levels of people are providing ample scope to design and develop a wide range of personal
financial products and fee-based services. The focus of the Central Government on infrastructure development
and rural economy, health and education, offers exciting business opportunities for the Indian Banks.
Similarly, growing international operations of Indian business houses are supporting Indian banks with global
opportunities.
Constant design of new products and services and focus on efficient customer service and concurrently
pursuing global aspirations has to be the mantra for success for Indian banks in the future. While the recent
market turmoil has dampened the mergers & acquisitions climate in the banking space, the upcoming
economic upturn in the Indian banking sector should lead to a heightened level of mergers and acquisitions;
this will further intensify the competition for the domestic banks. However, the interest rate environment
remains somewhat uncertain. Indian banks, having just suffered through the downturn, and experienced
the spread crunch (although mild by Western standards), are likely to look for ways to be less dependant on
interest income and rely more on fee-based sources of revenue. They are also likely to institutionalize their cost
reduction efforts that they have had to master during the economic slowdown. Banks know that technology
can be a great enabler in reducing costs as well as in accelerating revenue accretion through opportunities
in “Straight Through Processing”, preventing customer churn, and increasing cross sell and up-sell within
the existing customer base. Thus, banks will be looking to further automate their processes and integrate
technology into their core business and management processes.
Confederation of Indian Industry aims at improving efficiency across all business sectors to improve
competitiveness. Banking being a key driver of growth, we look at different aspects of banking for improving
services to the economy. In our endeavour to understand the Banks’ technological preparedness for attaining
efficiency, and tap into a significant source of fee-based income, we felt there was an imperative need to
explore a core area of banking that has, until recently, remained somewhat of an “orphan” within the hierarchy
of a typical banking organization. Thus, we felt this was an opportune time to conduct a comprehensive
payments survey in India, to understand how equipped Indian banks are to leverage this area of opportunity.
PwC has been our knowledge partner for this study. We express our sincere thanks to the Executive Directors
and IT heads of all the Banks, who wholeheartedly supported our endeavour by providing their inputs. We hope
this study will help the banks to improve technological efficiency and thus serve the customers in a better way.
It would definitely complement our efforts for ensuring “Better Banking for Economic Development”.
With proper strategies and execution processes in harnessing technology and human resources, developing
market segments across length & breadth of India, extending banking services to all sections of people, the
Indian banking sector will be able to position itself amongst the best in the world and take on the competition
from the global banks in a big way.
Mr Mukul Somany
Chairman
CII Eastern Region

5. Acknowledgements
At the outset I take this opportunity on behalf of my team to thank all banks who took part in the survey. The
insights and views expressed by participating bank have shaped the broad contours of this report.
We at PricewaterhouseCoopers, in our endeavour and mission to help our clients, present our findings on the
payments business in Indian banks. We are hopeful that the banking sector would consider these findings to
shape the way forward for their payments business.
This report has been prepared under the oversight guidance of Neel Majumder, Financial Services Lead, IT
Effectiveness, within the Performance Improvement Group in PwC. Rachna Nath, Harsh Bisht and Sivarama
Krishnan, Executive Directors, PwC, provided the organizational and review support to this effort.
The report team included Ranadurjay Talukdar and Susmita Majumder, both Senior Consultants with the
Performance Improvement Group of PwC.
They have been ably assisted by Manjari Sogi, Summer Trainee with PwC, in collating and analyzing the
primary survey data.
Last, but not the least, was the contribution from CII’s end. We thank Abhishikta Chowdhury and Riddhita
Banerjee for their efforts in coordinating the survey and gathering responses from banks.
Although we have tried to be critical in analyzing the various aspects of payments business, we are cognizant
of the fact that there might be issues and aspects which may not have been included because of a multitude of
reasons. We request the readers of this report to let us know about any issues or aspects which you feel have
not been addressed properly in this report. This would serve as an improvement opportunity and ensure that
the next time we work on a similar report, it would help us serve you and the community better.
We also thank Confederation of Indian Industries (CII) for giving us the opportunity to present our findings and
selecting us a Knowledge partner for the event.
Ambarish Dasgupta
Executive Director
PricewaterhouseCoopers

6. 1 Executive Summary
We explore why payments are a big deal for banks.
We try to understand how banks in India view
payments and how open they are towards taking an
enterprise-wide view of the payments business.
The area of Payments is becoming increasingly important While in the developed economies, the concept of a “Payment
for the Indian banking sector. With the volatility in the Czar” has existed for some time, at least in the larger banks,
interest rate regime, and the resulting uncertainty in Net such a concept appears not to have reached most of the Indian
Interest Income for banks, banks are increasingly looking counterparts. However, most banks still view their payments
at fee-based products for assured revenue sources. In the businesses, not as businesses, but as individual products
midst of this uncertainty, the revenues that banks earn from and channels. Most banks in India do not track the revenues
processing payment transactions stand out as a beacon of at the payment product level. Thus, banks appear to grossly
light. However, the revenues accruing from such transactions, underestimate the revenue they receive from their payment
as well as the underlying costs associated with processing products and fail to appreciate the complex interplay that can
these transactions, can be optimized if the banks start looking happen between different payment products and channels that
at payments as a core “business” of theirs, and mot merely could impact their top line and bottom line.
as a panoply of service offerings. As long as the payments
From the cost perspective, we found that although the majority
business remains an “orphan”, fragmented into different
of the banks claim to track payment product costs at the
Lines of Businesses with individual owners, with no enterprise
activity level; only 30 to 35 percent of the banks were capable
perspective to the intricate dynamics between the different
of tracking the unique costs for each type of product.
products and delivery channels, revenue optimization will
remain a far fetched goal. Similarly, when the processing The rest used standard fixed and variable costs for their
units for the variety of channels and products are distributed payment products, strongly indicating that they might be
across different business units, with no underlying integration using gross cost allocations as a substitute for activity-driven
architecture, it will be difficult to achieve cost optimization as costing. With respect to technology architecture, most banks
well. Therefore, the banks need to view payments in a more agreed that the disparate payment applications and systems,
holistic manner, which brings to us the concept of “Enterprise built on legacy platforms, are unsustainable in the long run,
Payments”, derived from the need to view Payments business and thus had plans to upgrade their payments architecture.
across lines of service, across product and channel and even With respect to security and fraud, most banks surveyed felt
customer group boundaries such as retail and wholesale that they were quite up to the task of controlling the security
payments. While the RBI has acted as the wise shepherd in environment. However, as the section on fraud and security
terms of driving modern payments instruments and channels, in our document illustrates, the issues and challenges may be
and ensuring that low-cost, convenient payment instruments more complex than what the banks think. Finally, the bright
are not accessible only by the privileged few, banks also need spot of the survey was the finding that most of the banks
to reorganize their own houses so that they can profitably surveyed do indeed feel that adopting an enterprise view of
meet the challenges thrown at them by the visionary actions payments makes sense due to the positive impact on top
of the RBI. line growth, cost reduction, and better service levels for their
customer. As one of the largest banks in India has already
The results of our survey, which we believe is the first of its
embarked on this journey, it is anticipated that many of the
kind in the public domain, show Indian banks mostly trailing
other large banks will follow suit.
their global counterparts in terms of being organized to
seize the opportunities afforded by looking holistically at the
payments business.
6 Payments Business in Indian Banks*

7. 2 Background of the Survey
This section explains the reasons why we undertook this
survey. it explores the importance of payments in the
economic well-being of our nation. It touches upon some
of the recent payment initiatives globally. We look at why
payments are an important business for banks. We study the
key drivers in the payments business in India.
Payments touch everything we do in our everyday lives - from The economies of scale associated with more efficient
paying our bills, buying goods and services for our household modes of making payments has ensured that banks focus on
to receiving our salaries. In every payment we make, we make promoting superior payment products.
our contribution to the consumption demand in the economy,
And of course, technological advancements-while not as
thereby boosting the GDP of our country. Thus, a robust system
disruptive as some initially feared-are clearly spelling out the
that brings speed, convenience and security to our payments is
charter for the financial sector in the long run. Over the next
the backbone for the economic well-being of a nation.
decade or so, we will see millions of devices connected to IP
Globally, the focus today is on integrating payment platforms networks, a lot of them payments-enabled. The customer of
that brings a large number of payers and payees under the next generation will be able to transact anywhere, anytime
the same umbrella. The Single Euro Payments Area (SEPA) – via cell phones, PDAs, desktops and remote sensing devices.
initiative for the European financial infrastructure involves the The challenge for the banks is expected to get tougher as
creation of a zone for the Euro in which all electronic payments wireless device manufacturers and telecom companies play an
are considered domestic, and where a difference between increasingly important role in payments.
national and intra-European cross border payments does not
Traditionally, it has been systemically important payments
exist. Another initiative is underway in China, with the formation
systems that have garnered greater attention; however, with
of China Union Pay, which will be the singular payment network
a gradual focus on financial inclusion, the existence of an
for processing and managing all electronic transactions
efficient retail payment system is being looked upon as a
originating in China. The introduction of Faster Payment
crucial public good. The formation of the National Payments
Service (FPS) in the United Kingdom will now make it possible
Corporation of India is a step towards bringing the disparate
for person-to-person or business-to-business payments
retail payment systems under a single umbrella.
between banks to happen in near real time. Even in India,
efforts are on to create India Pay, which will be an indigenous Last year, one of the largest banks in the country initiated
payment system for India, which is expected to drastically a massive exercise that is currently underway, to align its
reduce transaction costs for electronic payments. payments business to global best practices and identify
redundancies and inefficiencies in its payments products.
From a business perspective, payments are increasingly
While the state-run banks were the last to join the payments
becoming significant for Indian banks. Faced with an uncertain
bandwagon in India, it is significant that the biggest of them
interest rate regime and fluctuating capital markets, Indian
has been the first to take the plunge to redesign its payments
banks are understandably looking towards assured fee-based
business. It is only logical to assume that other major banks
revenue from payment services. There are discernable efforts
would follow suit in the next few years, thereby heralding a
to migrate customers from availing of traditional methods of
new way of looking at the payments business in India. While
making payments like writing a cheque to superior methods
private banks had pioneered the payments revolution in India,
like transferring funds online, for the incremental savings that
public sector banks are becoming increasingly competitive in
can be accrued in the process is significant.
the payments space, especially in the Debit Card payments
The last decade has witnessed phenomenal changes in market.
the architecture, technology and strategic initiatives in the
In such a backdrop, we felt an imperative need to conduct
payments business in India. The widespread adoption of
a comprehensive payments survey in India. We decided to
electronic clearing and settlement networks has provided
analyze the business and technology issues pertaining to
the foundation for this metamorphosis. The Reserve Bank of
payments and explore aspects of enterprise payments, which
India has played a crucial role in this regard, having mandated
would enable banks to view their payments holistically.
banks to route high-ticket transfers through RTGS and having
introduced NEFT and NECS services. We see a gradual rise in
the number of customers who choose to abandon cash and
cheques for cards and other electronic payments media.
PricewaterhouseCoopers 7

8. 3 Objectives of the Survey
This report aims to identify and understand business and
technological issues and aspects pertaining to payments
business in Indian banks. It also explores the concept of
“Enterprise Payments” .
Survey Objectives
The survey was conducted keeping in mind three major
objectives, namely:
• Business issues and aspects pertaining to the Payments
Business in India
• Technological issues and aspects pertaining to Payments
Business in India
• Exploring the concept of “Enterprise Payments” and
ascertaining the readiness of banks to migrate towards
such a framework in the future
Each of the objectives have been further explained below,
where we have explained the various sub-objectives that
together give us a perspective on the research objectives
Business Issues pertaining to “Payments”
• Analyzing broad structure of payments business
• Method of tracking revenue from payments business
• Method of tracking revenue from payment products
• Cost structure of payments business
• Considerations for pricing payment products
• Understanding of business units responsible for
fragmented sections of payments business
• Analysis of transaction volume & value for payment
products across delivery channels
Technological Issues pertaining to “Payments”
• Understanding of interoperability issues pertaining to
underlying technologies for payments business
• Exploring security aspects of payments and upgradation
of payments infrastructure
Exploring the Concept of “Enterprise
Payments”
• Triggers for migrating towards “Enterprise payments”
• Improvement opportunities across functional areas
through “Enterprise Payments”
8 Payments Business in Indian Banks*

9. 4 Survey Methodology
This section explains how the target sample for the survey
was chosen, provides details about the questionnaire used
for the survey and details the exclusions and assumptions
pertaining to the survey.
Survey Objectives
To conduct this survey, a questionnaire was designed which
was circulated amongst senior Business, IT and Operations
executives of major public, private and foreign banks in India.
In addition, we also conducted detailed discussions with
the Chief General Manager, Department of Payments and
Settlement in RBI.
The primary data gathered through the survey was further
supplemented through secondary research from industry
sources and PwC knowledge bases.
Responses to the questionnaire were collected through emails,
telephonic conversations and face to face interviews.
Target Sample
The target sample of banks for the survey was finalized through
the following steps:
• Stratification of the population of commercial banks in India
in terms of Public Sector Banks, Private Banks and Foreign
Banks (28 banks in each stratum)
• Simple Random Sampling of 10 banks from each stratum
Thus, our sample for the survey comprised of 30 banks.
About the Questionnaire
The questionnaire mostly comprised close-ended questions
that were specifically designed to analyze the various aspects
detailed in our survey objectives. For most of the questions,
we also asked participating banks to offer their opinion on the
issue being addressed through the question. This offered us
valuable insights on the functioning, and attitude of the banking
community.
Exceptions and Assumptions
• The findings of the report are based on the analysis
and insights of the survey and are intended to serve as
indicators for further discussion.
• Some of the data do not represent the view points of all the
respondents because some banks refrained from divulging
information regarding certain questions.
Survey Confidentiality
The identity of all banks which participated in this survey
has been kept anonymous. Any reference to the banks’
responses is represented in terms of overall numbers,
averages or other pertinent statistical measures and no
reference to individual banks has been made anywhere in the
survey findings.
PricewaterhouseCoopers 9

10. 5 Macroeconomic Trends in
Payments
This section talks about the bigger picture – how payment products
have evolved in India over the years, the role played by the regulator
in shaping the payments landscape and an analysis of business
volumes and transaction values of payment products in India.
Evolution of Payments in India
As business needs and available technologies have changed,
so has the landscape of payments business in India. The
timeline below gives a chronological snapshot of the evolution
of payments in India.
2008 -2 009
• 2008 – CTS • 2008 – CTS
2004 - 2005 • 2009 - Mobile• 2009 - Mobile
Banking,
• 2004 – RTGS Satellite
Banking,
2001 • 2004 – RTGS Satellite
• 2005 – NEFT Banking
• 2005 – NEFT Banking
• Internet
1995 to 1998
Banking • Internet
• 1995 - EFT Banking
• 1996 - ECS Debit
• 1995 - EFT
• 1998 - ECS Credit
1996 - ECS Debit
1998 - ECS Credit
Role of RBI
RBI has played a catalytic role over the years in
institutionalizing the framework for development of safe,
secure, sound and efficient payments system for the country
along with initiation of various institutional, procedural and
operational measures to strengthen and refine payment
systems. The salient developments by RBI chronologically are
as shown in the following figure:
Integrated Clearing Payment and Guidelines to Pre-
Facilities Corporation of Settlement paid Payment
Scheme India Ltd (CCIL) Systems Act Instruments
1940 1986 2001 2005 2007 2008 2009
Uniform Board of National Payments
Regulations and Regulation and Corporation of
Rules (URR)
Supervision of India (NPCI)
Payment and
Settlement Systems
(BPSS)
10 Payments Business in Indian Banks*

11. Paper and Electronic Payments
The two subsequent charts illustrate how paper based However, this has happened almost entirely due to RBI
payments have fared vis-à-vis electronic payments in the making it mandatory for banks to route high ticket transfers
recent past, in terms of transaction volume and transaction through RTGS. This becomes abundantly clear when we
value. While paper based payments, which are essentially study the share of RTGS transactions amongst total electronic
payments made through cheques, still command a lion’s share transactions. Just about 1% of electronic transactions are
in terms of volume, electronic payments overtook cheque done through RTGS; yet, RTGS accounts for 96% of the value
payments in terms of value in 2006-07 and command a bigger of payments made electronically. This has been illustrated in
share of the total payments pie today. the subsequent chart.
Transaction Volumes of Electronic Vs Paper Breakup of Electronic Payments in Terms of Value
Payments
100%
2,500,000 Total Payments
Volume in 000s
80% Card Payments
2,000,000
60%
Total Electronic
1,500,000 40%
Payments Retail Electronic
1,000,000 20%
Payments
Total Paper
500,000 0%
Based Payments 04-050 5-06 06-070 7-08 RTGS
0
04-05 05-06 06-07 07-08 Year
Year
Transaction Value of Electronic Vs Paper Payments
70,000,000
Total Payments
60,000,000
Value in Rs. Crores
50,000,000 Total Electronic
40,000,000 Payments
Total Paper Based
30,000,000
Payments
20,000,000
10,000,000
0
04-05 05-06 06-07 07-08
04-050 5-06 06-070 7-08
Year
PricewaterhouseCoopers 11

12. A Deeper Look into Electronic Payments Volume of Retail Electronic Payments
While RBI’s mandate has ensured that RTGS accounts
for 83% of the value of Systemically Important 250,000
Volume in 000s
Payments System (SIPS) in India, it is noteworthy Retail Electronic
200,000
that it only commands a mere 21% of the volume of Payments
150,000
transactions carried out through SIPS, the remaining ECS Debit
79% being done through high value cheques. 100,000
Increasingly broader coverage of Core Banking Systems 50,000 ECS Credit
across Indian banks will facilitate greater usage of
0
electronic funds transfers. The integration of the RTGS 04-05 05-06 06-07 07-08
04-050 5-06 06-070 7-08 NEFT
system with the RBI’s internal accounting system (IAS)
has enabled straight through processing (STP). Also, Year
with the integration of the RTGS-IAS and the securities
settlement system (SSS), automatic intraday liquidity
(IDL) is now available. The challenge for RTGS lies with
Value of Retail Electronic Tr ansac tions
respect to payments between INR 1 lakh and 10 lakhs
(above which RTGS is mandatory), a segment where
900,000
high value cheques continue to be the preferred mode 800,000
Value in Rupees
of payment. 700,000
600,000 EC Debit
S
On the retail payment front, paper based means of
Crores
500,000
EC Credit
S
payment is still the preferred choice for a majority 400,000
NEFT
of customers, primarily because there has been no 300,000
200,000
mandate from RBI regarding usage of electronic modes
100,000
for person-to-person (P2P) or person-to-business (P2B) 0
payments. Electronic retail payments account for 27% 04-050
04-05 5-06
05-06 06-070
06-07 7-08
07-08
in terms of volume and 12% in terms of value amongst
all retail payment transactions in the country. Year
Amongst the retail electronic payment services, the
growth of the much vaunted NEFT service, which Retail payments through cards have been in vogue even
replaced the technologically inferior EFT service in before any of the other electronic payment options made
2005, has been slower than that of ECS Credit. The their appearance in India. While credit cards still constitute
overall growth in retail payments has resulted primarily the bulk of card payment transactions, the growth in the
from greater off take in ECS Credit transactions, which base of debit cards has been significant over the last
has seen greater use due to ECS credit becoming few years, primarily due to a majority of Public Sector
the instrument of choice for salary disbursements. In banks replacing ATM cards of their existing customers
addition, stock exchanges have mandated the refund of with PoS enabled Debit Cards. In fact, the base of debit
oversubscription amount of IPOs through ECS Credit, cards is nearly four times than that of credit cards in India
further contributing to its offtake. The introduction of the currently. However, usage of debit cards at PoS outlets
technologically superior NECS service is expected to is still significantly lower than credit cards, contributing a
further lower the manual intervention, and consequently, mere 18% of total card transactions, as illustrated in the
the turn around time, for ECS transactions. However, subsequent chart.
in sharp contrast to earlier years, NEFT grew by 81%
in terms of value in 07-08 over the previous year, an
indication of its growing usage. This is expected to
further boost retail electronic payments.
12 Payments Business in Indian Banks*

13. Card Transactions by Value
80,000
Value in Rupees
60,000
Card Payments
Crores
40,000 Credit Cards
20,000 Debit Cards
0
04-05
04-050 05-06
5-06 06-07
06-070 07-08
7-08
Year
Possible explanations for low debit card usage include a
greater fear of misuse compared to credit cards, since debit
cards link directly to bank accounts. Other factors include
low customer awareness (since debit cards are still primarily
positioned as ATM cards by a large section of Indian banks)
and lesser incentive for card users for using a debit card in
place of a credit card.
Thus, the challenge for retail electronic payments primarily
lies in bringing a greater share of P2P, P2B and B2P payments
under its ambit. The opportunities in cards business are also
massive given the low card and PoS penetration in India.
The cost of POS terminals is still prohibitively high for a large
section of the target retailers. Lower cost hardware and
applications such as IP (Internet Protocol) based terminals
and mobile devices that could be used as POS terminals
themselves can play a large role in expanding the acceptance
of POS amongst retailers. In addition, increasing marketing
efforts from banks and network associations, coupled with
efficient, robust and secure architecture at the back end are
expected to charter the future path on the retail payments front
PricewaterhouseCoopers 13

14. 6 Payments Business and
Technology in Indian Banks
This section brings out the key findings from the survey
we conducted and tells us how banks in India view their
payments business.
Business Structure
We tried to understand the broad contours of the payment how specific customer groups respond to individual payment
business in Indian banks through our survey. We probed banks products. Only a handful of the new Private Sector banks and
on how they structured their payment business, how they the foreign banks tracked revenue for customer groups.
tracked revenues and costs and what were the key triggers We also studied the broad heads under which the banks’
that shaped business decisions in payments. tracked their revenue from payments. The chart below
illustrates the broad revenue heads.
Method of Structuring Payment Business Reve nue Heads
% of Total Responses
100% 88%
Both
80%
24% 63% 63%
Payment 60%
Products 42 40%
42% 20%
0%
Float RevenueF ee RevenueP er Transaction
Payment Revenue
Channel s 34%
Types of Reve nue
Broadly speaking, banks tend to structure their payments Significantly, more than one-third of banks surveyed did not
business in terms of payment products and payment track either float revenue or revenue earned per transaction
channels. This was amply supported through our survey, from their payments business. Most of the banks opined
which revealed that 24% of banks structured their business that float revenue that could be attributed to payments were
on both product and channel lines; 42% structured their considered, for revenue tracking purposes, under the broad
business on product lines while 34% structured their heads of savings or current accounts. Similarly, while per
business on channel lines. transaction revenue is crucial for card payments and even for
RTGS payments, data pertaining to the same was not tracked
The Revenue Angle by banks.
When it came to tracking revenue from payments business, A direct result of not tracking crucial revenue areas under
one-third of the banks revealed that they only tracked payments resulted in majority (57%) of banks indicating that
revenue at a macro level, i.e., at the level of a broad line of less than 10% of their total revenues could be attributed to
business within the bank, like assets or liabilities. Half of the payments. This has been illustrated in the subsequent chart.
banks that tracked revenue at a macro level also additionally
tracked revenue from payment channels. Significantly, none Contribution of Payments to Overall
of these banks tracked revenue from payment products. Reve nue
When probed deeper, it emerged that these banks get
MIS reports on volume and value of NEFT/RTGS/Cheque
transactions, but do not track the revenues that arise out
of these products. However, “Cards” is usually a Line of 14%
Business in most banks and hence for cards business,
revenue is actually tracked at the product level. 57%
14%
However, 57% of the total number of banks surveyed
revealed that they tracked revenue at the product level, while 14%
only 10% of the banks tracked revenue in terms of customer
segments. Since revenue is rarely tracked at the level of
customer groups, it makes it difficult for banks to understand Less than 10% 10 to 20% 21 to 30% 31 to 40%
14 Payments Business in Indian Banks*

15. A significant proportion of banks do not track revenue for product
individual payment products. Even among the ones that track, profitabili ty
model linked
float income originating out of payment products like cards and to General
per transaction revenue earned from electronic transfers are Ledger
often ignored. Thus, it is not surprising that banks in India have
not woken up to the impact that payments have on a bank’s completely disagree
top line and bottom line. activity-
based disagr e more often than
e
costing agree
The Cost Perspective neither agree nor disagree
The survey touched upon several aspects of costs relating to
agree more oft en than
the payments business. As the subsequent diagram shows, allocation- disagr e
e
banks still approach the costs for their payments business based completely agree
in a traditional manner, where fixed and variable costs are costing
calculated. In many cases, it is likely that many of the cost
components are simply allocate instead of the actual costs
relevant to each payment product being tracked.
Cost Structure for Payments Business The responses indicate that most banks tend to follow
allocation-based costing when it comes to payments, which
80%
75% is the traditional manner of allocating costs into direct and
indirect buckets. Thus, banks do not track costs that are
% of tot al responses
specific to activities under each payment business, but
45%
35%
instead consider these as direct or indirect costs pertaining
30%
to a particular line of business. An activity-based costing
exercise for payments would have told banks how costs
are distributed across payment products and channels
fixed variable unique cost unique cost shared cost and would have been a better input for shaping strategic
cost cost for payment for payment for payment
products channels products and decisions.
channels
Pricing Considerations
Unique costs that are attributable to specific payment Pricing of payments products is a very complex issue and
product or channels are tracked by only 35% and 30% of the takes into account a multitude of factors. The subsequent
surveyed banks respectively. Tracking of these costs would chart shows the factors banks consider while taking their
allow the banks to better understand how individual payment crucial pricing decisions.
products earn revenue vis-à-vis the cost the bank incurs in
offering them. Pricing Consideration
This viewpoint is further supplemented by the chart below,
where we have captured the banks’ viewpoint on the
following broad parameters: 95%
85%
• Whether profit models used by banks for individual 65%
products are linked to the bank’s GL, which would make 60%
50%
profitability calculations a lot more robust and reflect the 35%
most recent reality
• Whether the costing for payment products is activity- Settlement Settlement Transaction External Premium Customer
based or allocation-based. Time Risk Size Network Fee Service Fee Relationshi p
percent of total Responses
It is noteworthy that 85% of banks keep the customer in
mind while pricing their payment products. However, exactly
how the customer relationship is considered while pricing,
given that banks do not have databases of price vs. price,
is a puzzle. It is also interesting to note that the customer
orientation in payment product pricing does not extend to
tracking of revenue from payments, as explained earlier.
PricewaterhouseCoopers 15

16. Technology Architecture Fraud and Security Aspects of Payments
Advancements in technology have made it possible for banks Most banks surveyed expressed confidence in the security
to offer a multitude of payment products to their customers. of their payments-related data, as depicted in the previous
However, our survey brought out that there are issues in terms diagram. However, the issues and challenges may be more
of interoperability of these underlying technologies used for complex than what the banks think.
different payment products. For instance, the Core Banking The banking industry has been the darling for fraudulent
System is usually different from the system used for Cards attempts ever since they came into existence. Over time it
business in almost all the banks surveyed. Moreover, these just became more sophisticated with the emergence of net-
disparate systems are seldom interoperable, as indicated by a banking, mobile banking etc.
large number of banks surveyed.
Even India has felt the pangs as several Indian banks have
come under more than 400 phishing attacks during the past
Technology in payments few months with the number rising sharply in Sept-Oct, 2008,
definitely yes yes cant say no definitely no according to industry lobby NASSCOM. It doesn’t matter if it
is a state owned bank or a private bank. Criminals using the
Do banks intend to upgrade payments Internet have attacked banks such as state-owned Bank of
infrastructure in the near future India, private lender HDFC Bank, India’s largest private lender
ICICI Bank among others.
Are banks confident of the security of Instead of looking in isolation at the credit card, debit
payments-related data
card, pre-paid card and the online banking frauds, a better
perspective emerges if we look at it together as electronic data
Are application softwares used in
frauds. Human mind, by nature, will always look for loopholes
payments business interoperable
to exploit the banking system for personal gains. Also, the level
0% 20% 40% 60% 80% 100%
of innovation used to perpetuate these frauds is quite mind-
boggling.
High rate of technological obsolescence demands regular India wears both the mantle of frauds – as a country swiftly
and continuous upgradation by banks of their infrastructure. climbing up the ranks in partaking in financial fraud on the
This brings in the problem of replicating high-end technology Internet as well as falling victim to it. India occupies the 14th
requirement across large user base and also throws up the position globally in hosting phishing sites. The city of Mumbai
challenge of ensuring integrity of different systems through accounted for 30% of all phishing Websites in the country,
their continuous upgradation against money-laundering and Delhi for 29%, and Chennai and Bangalore hosted 12% each
financing of terrorism. However, majority of banks showed an of all phishing Websites as of 2007.
inclination towards upgrading their technology infrastructure in A study done by the CAG on potential trade on the Internet
the near future. and e-commerce websites had showed that 73 per cent of
them allowed several modes of payment, only 7 per cent
Financial Inclusion and Technology offered guarantee for products sold and 60 per cent had no
mechanism to register complaints. There were very few redress
Almost all banks surveyed emphasised that benefits of
mechanisms, and even their implementation was not enforced.
superior delivery channels like Internet banking and mobile
The number of cases (e-fraud) that the Central Bureau of
banking percolated primarily to urban consumers. Adequate
Investigation had registered was less than 50, and only one
infrastructural facilities to reach out to remote rural areas in
had reached the prosecution stage.
cost effective manner through the use of smart cards, hand-
held devices and other cost effective delivery channels were With an increase in the spate of attempted fraud tools and
found to be lacking in most banks. Majority of banks agreed techniques to collect, protect, store and present, electronic
that the current payments infrastructure still has some way to evidences are something that banks have to invest in. This will
go towards achieving financial inclusion. also impact their organizational policy guidelines and tighter
handshake between various departments. Frameworks related
to collection of the electronic evidence should be incorporated
and ingrained across the organization. Apart from IT and
security, the legal team will have to be a major stakeholder in
the framework definition so as to protect the various privacy
related issues. All the above will help in submitting the electronic
evidence in a comprehensible manner in court of law.
16 Payments Business in Indian Banks*

17. 7 Exploring Enterprise
Payments
This section is based on our survey findings and tries to
establish a context for Enterprise Payments in Indian banks
Understanding Enterprise Payments Triggers for Migrating to Enterprise Payments
The concept of enterprise payments arises from the We asked the banks about the possible reasons that could
observation that all payment methods share a common make them migrate towards enterprise payments. The diagram
set of data elements and functions. While a cheque and a below encapsulates their responses:
credit card may seem very different on the surface, they
are actually quite similar. Both have a source of funds, a
Possible Reasons to migrate to Enterprise
security model, and a clearing and settlement network.
payments
Once the check is truncated into an electronic message,
it becomes possible to process it through the same 90%
80%
infrastructure used for the credit card.
70%
There are also common trade documents that govern the 60%
transaction and drive the payment, regardless of method: 50%
purchase order, invoice, and remittance advice. These 40%
documents may have different names depending on the 30%
application, but they maintain the same functions. For 20%
example, in consumer bill payments, the invoice is called a 10%
bill or statement. These documents can be transmitted as 0%
Lower Shifting
Regulations
New
Others
electronic messages just as a payment instruction can be. Prices Payment Payment
Percentage of Banks 63% 53% 47% 79% 11%
Therefore, an enterprise payment system refers to
the integration of disparate payment functions and
applications, and leveraging the same to achieve higher
returns and competitive advantage. Crucially, introduction of newer payment products and
channels and lower prices emerged as the primary triggers
Banks around the world are experiencing profit pressures that might make banks gravitate towards enterprise payments.
related to their payment systems, such that continuing with Newer payment products like introduction of additional variants
the existing silo infrastructure is increasingly untenable. of card products and introduction of newer payment channels
Among these pressures are lower prices, shifting payment like mobile banking will mean that the disparity in underlying
mix, regulations etc. technological architecture will only get wider. Hence, it makes
Hence, it becomes imperative to understand whether sense if disparate payment systems are integrated, for it
the Indian banking system is awake to the possibilities of will provide banks a common platform for offering a diverse
enterprise payments. range of payment solutions. Consequently, integration of such
diverse systems will lead to significant savings in terms of cost
in the long run, which emerged as the second most important
trigger in the survey.
Majority of banks agreed that disparate systems were leading
to duplication of work, with similar functions being performed
by different departments.
Are Disparate Payment Systems leading to
duplication of Work?
No
32%
Yes
68%
PricewaterhouseCoopers 17

18. Superior Risk Management through Enterprise
Payments The Payments Hub Concept
One of the key benefits of an enterprise payment system is in The concept of the Payments hub comes in the backdrop of
the introduction of superior risk management measures across an increasing number of choices for the customers to make
the bank. Majority of the banks agreed with this observation. their payments, which has led to tremendous complexity of
relationships between channels, instruments and customers,
as shown in the subsequent diagram.
Will Enterprise Payments
Improve Risk Mitigation?
Channel
Web site
Web site Phone/ Branch teller/ Mobile
ATM (Biller or Mail
(bank) IVR Drop Box phone
payee)
No
20%
Instruments
Account to ATM/
Credit cards Cheque RTGS NEFT ECS
Account Debit cards
Yes
Customer
Corporate
80%
Retail
In many cases, these relationships are maintained and serviced
Key Benefits of Enterprise Payments by many banks as separate payment silos, with separate
processing entities for each payment method. Such disparate
Based on the survey responses, the following emerged payment infrastructure has caused the bank to face significant
as the key benefits that could accrue to banks through challenges, some of which are:
enterprise payments are: • Infrastructure duplication, due to hardware and software
• It would be possible to develop an enterprise payment systems provided by different vendors, cause huge
financial model, which would tell the bank a consolidated maintenance problems and cost and redundant back-office
“Profit and Loss” position from all payments-related staff required to monitor and maintain the infrastructure
businesses. The model would also tell banks about
the cost structure of their payments business - which • Technology legacy, since outdated or soon-to-be-obsolete
costs are fixed or variable over changes in volumes, and technology platforms support the silos that are difficult to
which are unique to a particular product or channel (like support. This means that banks cannot make changes to
network or association fees) or shared across multiple payment systems quickly and easily, and they are unable
products and customers (like branches and payment to gain an integrated view on the customer over different
processing centres). channels and track payments end to end
• Studying the payments P&L would tell the bank • Lack of scalability, since most of the payment systems and
about the underlying drivers of payments business. architectures were designed at a time before the current
Understanding how to manoeuvre each of these discrete volume in electronic instruments and the future growth were
drivers can have significant impact on the profitability of not anticipated. The current volumes and the future levels
a payment product. of electronic payments have the potential to overwhelm the
payments systems resulting in the failure of the banks to
• Simplification of the underlying architecture will lead provide guaranteed uptime of its payment systems. A loss
to reduced transaction costs, benefits of which can be of uptime would result in loss of revenues, penalty costs
passed on to the end consumer which will consequently and most importantly, the loss of customers
drive up usage.
• Lack of Straight Through Processing (STP), since many of
• Integration of underlying systems would allow for the payment systems cannot provide the high STP rates
superior MIS, which would help the bank understand that are required to run a profitable payments business,
customer behaviour better. Consequently, it would banks need to employ a large back office staff to either
bring about a greater customer orientation in product assist in manual re-keying of transactions, or to repair
offerings. erroneous entries
• Since underlying systems are integrated, it is possible • Costs related to payments processing are spiralling due
to have an enterprise wise KYC/AML platform which to the silo nature of the payment systems, the duplication
would allow for transaction level and client level flagging of infrastructure, people and processes. It is increasingly
if fraud occurs in any of the payment products used by a getting harder to pass along costs to the customers since
customer. customers are becoming savvier and more aware, and
regulators are mandating price controls.
18 Payments Business in Indian Banks*

19. Thus, the need of the hour is an IT infrastructure that will help It is in this context that the concept of a Payments Hub
reduce costs by enabling payment efficiencies and decreasing emerges, allowing consolidation of multiple payment systems
system duplication, improve customer satisfaction with faster into one centrally managed mid- office payment system,
market response times, and enhance liquidity management thereby improving efficiency, reducing cost, enabling more
through better monitoring and control. transparency in processing and improving customer service.
It is possible to have a solution based on the fact that different The payment hub is built entirely on a Service Oriented
payment types share a common set of data elements: Architecture (SOA) delivering common, reusable services
• Source of funds consisting of a comprehensive data model; choreographed
payment business process and configurable services including
• Security model
parsing, validation, cost based routing, warehousing security,
• Clearing & settlement network auditing and other services that are typically associated with
Moreover, different payments share common process the payments life cycle.
steps, covering the life cycle from messages to settlement. Architecturally the Payment Hub is positioned between the
In addition, all payment methods require services such as back office at the core of the bank and the different delivery
pricing, limit checking, balance validation, and risk and fraud channels.
management.
Without any direct connections between components, it is
Within each silo are duplicated services that could be possible to modify or replace one component without affecting
leveraged across silos, such as AML, credit checking, fraud the others. This allows the bank to focus on areas of maximum
detection, etc. that are candidates for reuse. benefit with reduced cost and risk.
These common data elements and process steps make
centralized management of payment systems possible
because they enable a common message and database
schema, as shown in the subsequent diagram.
Receiving
Receive Exception
Transmit to bank
Payment Settlement Processing
Network processes
Request (if applicable)
payment
Check against fraud and compliance filters Risk management
Demand for real - time, accurate information by clients
SWIFT
Unique functions
Payment Hub Payment
Database
RTGS • Pricing
• Risk & fraud management
ECS
• Security
NEFT
Network Access
ss ise
ce rpr
Mobile Phone
Ac nte
E
Web Site -B ank Channel Management
Deposit systems
Web Site -B iller or Payee
Branch Teller/ Drop Box Application Services General Ledger
ATM
Reconciliation
Phone/IVR
PricewaterhouseCoopers 19

20. The key Components of any Payment Hub are Channel • Improved ability to respond to increasing regulatory
Adapters and Business Process Manager, which have been requirements
explained below. • Ability to identify new revenue sources
Channel Adapters: Channel adapters form the interface • Operational benefits:
between Bank Payment Hub and outside world. All incoming
payments to the system, including payments from customer • Increase ability to fix problems faster
and payments entering from clearing and settlement systems • Produce accurate, timely management reporting
are handled by these adapters.
• Reduce cost of system integration
Business Process Manager: It defines the core functionality of
the Payment Hub system. It makes sure that payments that • Quicker product development and roll-out
enter the Bank Payment Hub follow a configurable workflow • Reduce cost of compliance through speedy , one-time
and defined set of business processes. It allows the alteration changes to parameters affecting all payment accounts and
of workflow and business processes without affecting the methods
other parts of the system.
• Increase system uptime
• Broadly, the benefits from a payments hub are:
• Improved ability to manage intraday liquidity
• Strategic benefits:
• Ability to meet processing deadlines confidently
• Improved visibility in key payment areas
Full service banks offering retail banking through diverse
• Lower cost of processing channels and corporate cash management and treasury
• Increased flexibility to deal with market conditions operations can expect to significantly benefit from a payments
hub. Only time till tell whether the concept will find acceptance
• Improved customer service, higher retention in India.
20 Payments Business in Indian Banks*

21. 8 Charting the Future
This section is based on our understanding of the future
through discussions with the banks and the RBI.
It is evident that payments will continue to evolve in the years On the aspect of mitigating security risks in payment, it is
to come, both in terms of how we pay and where we pay. This important to periodically review contracts with technology
survey was conducted to understand the bank’s view of how partners to ascertain whether the contracts are waterproof.
payments are structured today and what developments could Audit authority needs to be established to ascertain auditability
be expected in future. of security breach. Application softwares need to be tested
against vulnerabilities like backdoor windows. Legal cushion
The Banks’ Perspective needs to be set up to ensure that the bank is legally protected
against the existing compliance framework.
With speed and efficiency increasingly becoming the
buzzwords that shape customer solutions, banks will need to
revisit their payments portfolio. It is evident that mobile devices The Regulator’s Perspective
and the Internet will become increasingly popular as delivery Through our discussions with RBI, we got valuable inputs on
mechanisms for payment solutions. However, there will always how the regulator views the future of payments in India.
be customer segments that will prefer to transact through a On the business aspect, RBI revealed that they would shortly
cheque, or go to a branch to withdraw money. Hence, banks be releasing an updated version of the payments vision
will need to create a mapping of their payment portfolio with document, which would chart the path beyond 2009. An
their customer segments and decide on the product strategy immediate area of concern is authentication of cross-border
accordingly. payments, hampered by KYC/AML considerations, which
From the point of view of saving costs, banks will need to would lead to significant expansion in the realm of payments.
increase their efforts in migrating customers from paper-based A crucial driver for payments might be the National ID Card
payments to electronic payments. If a customer pays his phone initiative currently underway, which would eventually give every
bills through cheques, a bank spends a few rupees in cost and Indian a unique identification number. Government payments
a few paisa in incremental revenue. If the same customer can might largely be driven through the unique ID initiative.
be made to pay through his debit card, there will be significant However, since banks are the end-users, it is ultimately
reduction in cost and significant increase in incremental their prerogative to efficiently use the national ID number for
revenue. However, this will require a fundamental change in superior payments solutions for their own customers.
consumer behaviour, which can happen only if the banks and
the regulator offer a secure, robust and efficient network, in An extremely important consideration for the future payments
addition to incentives in terms of convenience and benefits to framework would be its efficacy in ensuring financial
the customer. inclusion. While several public sector banks have taken
significant initiatives in this area through introduction of mobile
Since customer orientation will eventually drive business kiosks and the banking correspondent model, there is a lot that
volumes, migrating to enterprise payments will possibly be is left to be done in the area of financial inclusion. Since mobile
an option that banks will not be able to refuse in the years to penetration is the highest in rural India compared to any other
come. A framework that will reduce costs, bring about superior communication channel, mobile banking could possibly be the
KYC/AML checks, help banks know customer behaviour better channel that brings about greater inclusion of the unbanked
and give an overall idea of the profitability of their payments population in India.
business does sound like a good idea. However, taking
the big leap from legacy systems and traditional business
mindsets can only happen if the banks are convinced of the
benefits that can accrue to them. For that, a crucial driver
would be increased acceptance of electronic payments by
consumers across India. The RBI plays a crucial role here, for
it is ultimately the entity that shapes the future of any financial
offering in India. Formation of the NPCI is a right effort in that
direction, for it will bring in a new focus on retail payments,
which should also see the electronification that has been
brought about by the introduction of RTGS in Systemically
Important Payment Systems.
PricewaterhouseCoopers 21

22. About Confederation of Indian Industry
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive
to the growth of industry in India, partnering industry and government alike through advisory and
consultative processes.
CII is a non-government, not-for-profit, industry led and industry managed organisation, playing
a proactive role in India’s development process. Founded over 114 years ago, it is India’s premier
business association, with a direct membership of over 7800 organisations from the private as well
as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies
from around 385 national and regional sectoral associations.
CII catalyses change by working closely with government on policy issues, enhancing efficiency,
competitiveness and expanding business opportunities for industry through a range of specialised
services and global linkages. It also provides a platform for sectoral consensus building and
networking. Major emphasis is laid on projecting a positive image of business, assisting industry to
identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the
country carry forward our initiatives in integrated and inclusive development, which include health,
education, livelihood, diversity management, skill development and water, to name a few.
Complementing this vision, CII’s theme for 2009-10 is ‘India@75: Economy, Infrastructure and
Governance.’ Within the overarching agenda to facilitate India’s transformation into an economically
vital, technologically innovative, socially and ethically vibrant global leader by year 2022, CII’s focus
this year is on revival of the Economy, fast tracking Infrastructure and improved Governance.
With 64 offices in India, 9 overseas in Australia, Austria, China, France, Germany, Japan, Singapore,
UK, and USA, and institutional partnerships with 213 counterpart organisations in 88 countries, CII
serves as a reference point for Indian industry and the international business community.
22 Payments Business in Indian Banks*

23. About PricewaterhouseCoopers
PricewaterhouseCoopers Pvt. Ltd. (www.pwc.com/india) provides industry - focused tax and
advisory services to build public trust and enhance value for its clients and their stakeholders.
PwC professionals work collaboratively using connected thinking to develop fresh perspectives
and practical advice.
Complementing our depth of industry expertise and breadth of skills is our sound knowledge of
the local business environment in India. PricewaterhouseCoopers is committed to working with
our clients to deliver the solutions that help them take on the challenges of the ever-changing
business environment.
PwC has offices in Ahmedabad, Bangalore, Bhubaneshwar, Chennai, Delhi NCR, Hyderabad,
Kolkata, Mumbai and Pune.
Contacts
Jairaj Purandare Ambarish Dasgupta
Executive Director Executive Director
Financial Services Leader Performance Improvement Practice
Tel: +91 22 6669 1400 Tel: +91 33 2357 3397
Email: jairaj.purandare@in.pwc.com Email: ambarish.dasgupta@in.pwc.com
Sivarama Krishnan Rachna Nath
Executive Director Executive Director
Risk and Regulations, IT Effectiveness,
Performance Improvement Practice Performance Improvement Practice
Tel: +91 22 6669 1350 Tel: +91 33 2357 3199
Email: sivarama.krishnan@in.pwc.com Email: rachna.nath@in.pwc.com
Harsh Bisht Neel Majumdar
Executive Director Managing Consultant
Banking and Capital Markets Leader Performance Improvement Practice
Tel: +91 22 4007 4602 Tel: +91 33 2357 3196
Email: harsh.bisht@in.pwc.com Email: neel.majumdar@in.pwc.com
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon
the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to
the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers, its members,
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on the information contained in this publication or for any decision based on it. Without prior permission of PricewaterhouseCoopers, the contents of this
presentation may not be quoted in whole or in part or otherwise referred to in any documents.
PricewaterhouseCoopers 23

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24 Payments Business in Indian Banks*