Offline digital payments: What does it mean, and how does this work?

Proximity payments have got a huge leg-up. Tap-and-pay will now be on steroids

Did you know that the currency in circulation (CIC) was Rs 3,004,604 crore as on January 28, 2022 — more than double the Rs 1,310,181 crore at the time of demonetisation in FY17? That’s because, despite the burgeoning volume of digital transactions since, low-value payments continue to be made in cash. The cure for this: offline payments.

On January 3 this year, the Reserve Bank of India (RBI) waved in offline payments through cards, wallets, and mobile devices, with immediate effect. This will help circumvent poor internet and telecom connectivity. Offline payments are subject to a limit of Rs 200 per transaction and an overall limit of Rs 2,000 a day. But, first things first: offline is not really offline. So, what does it mean, and how does this work?

“When you make ‘offline’ payments, it’s so in a manner of speaking. It’s not that there is zero data exchange. Your card details on the magnetic stripe are being read when it is swiped on a point-of-sale (PoS) terminal at the merchant outlet,” explains Raj N Phani, founder-chairman of Zaggle, a B2B firm in the digital payments and analytics space, which has a $250-million capital float lined up.

He adds: “It’s just that settlement of the transaction will happen later. Or that, in principle, your transaction is through as far as you are concerned.”

Ketan Patel, chief executive officer (CEO) of Mswipe — a leading deployer of PoS terminals — demystifies offline with a common-world example: “When you use your plastic on a flight, it happens offline; and it is settled when you touch down.” Simply put, the initiation of a transaction happens in real-time, but the settlement takes place with a delay.

What will offline payments do?

Let’s situate offline in the wider digital payments universe which has been buoyed by new and innovative payment products, higher smartphone usage, and also a felt need for faster payment modes (yes, 5G will be another variable).

Prior to 2010, digital transactions saw single-digit growth. Between 2010 and 2016, this rose to 28 per cent, doubling to 56 per cent in 2016-17 owing to demonetisation, says PwC’s The Indian Payments Handbook: 2020-2025. Covid-19 upped the shift to digital payments. “These factors are likely to create a revenue pool of Rs 2,937 billion by 2025 for payment players — a figure that stood at Rs 1,982 billion in 2020,” notes PwC. And this was before the offline mode entered the picture.

The groundwork for offline payments had been proceeding in the background. In December 2020, five villages were adopted in Karnataka as part of RBI’s pilot scheme. Visa and YES Bank (with the latter’s digital wallet, Yuva Pay), teamed up to test digital payments via feature phones in a non-internet setting. The RBI’s framework for offline incorporates the feedback received from such pilots held between September 2020 and June 2021.

Ear to the ground

With organised retail set to lift off in a big way, banks are re-setting their sights. “We have done a pilot with the National Payments Corporation of India (NPCI) and Visa. We have on-boarded around 1,000 merchants for the offline programme,” says Sanjeev Moghe, executive vice-president, and head of cards and payments at Axis Bank.

And what kind of numbers do we have from the merchant level? There are close to five million PoS terminals and over 30 million merchants who use QR codes today. According to Mswipe, digital retail payments have already seen a 400 per cent growth in the last five years, and this is projected to quadruple over the next five years to reach the $1-trillion mark.

“It already makes up for close to 20 per cent of consumer payments, from just 5 per cent five years ago. BNPL (buy now, pay later), too, is on the rise, and as consumers shift to credit cards from debit cards, offline payments will be their preferred option,” says Patel. He points to the “the lower cost of internet data and higher usage of smartphones, which will also fuel the pick-up in offline payments.”

Take PayNearby, which offers offline AePS (Aadhaar-enabled payment systems). The AePS is a bank-led model which allows interoperable financial inclusion transactions at PoS terminals through business correspondents (agents of banks), using Aadhaar. It facilitated cash withdrawals during the pandemic, especially of the government’s disbursement of Rs 1.75 trillion into the Jan-Dhan accounts of those who were out of work and in need of cash.

“Offline payments will empower regional rural markets to leapfrog into the digital payments race, and lead to higher volumes of digital transactions in the hinterland,” reckons Anand Kumar Bajaj, founder-managing director and CEO of PayNearby. “This will eventually bridge the rural-urban digital divide,” he adds.

Then again, there is the National Common Mobility Card (NCMC) interface developed by the NPCI. The NCMC will facilitate the activation of  ‘One-Nation-One-Card’ for on-the-go payments. “If you want to pay frequently for your rides (say, Rs 10 for a bus, Rs 30 for an auto-rickshaw, and another Rs 30 for the metro ride), opening an app and paying it online is more cumbersome than paying out cash,” says PayCraft’s chief experience officer, Ambarish Parekh. PayCraft was part of the specifications drafting committee for the NCMC.

Now, imagine a solution where the customer can just keep tapping a card (“tap-and-pay”) on a device without the need for a PIN. “It essentially helps complete a transaction in less than 500 milli-seconds! Now, we are talking about this convenience to the customer for frequent low-value payments, and then we should be able to see a surge in such payment transactions, too, which otherwise are done in cash,” adds Parekh.

There are other gains to be had related to cash-handling: costs for counting, sorting, handling and supervision of counterfeit and soiled notes. “Also, many banks have introduced cash-handling fees on bundles of lower denomination notes. It also entails risks of exposing the employee, the cash, and the business to liabilities that may not be recoverable,” explains Bajaj.

Some proprietary industry studies have estimated the cost of cash handling at anywhere between 4.5 per cent and 12 per cent, whereas for digital payments it is a mere 2-3 per cent. Just how offline play impacts the usage of automated teller machines, and the cash management industry, will require gazing into a crystal ball.

That said, the promise of offline payments also raises a deeper question. The CIC of Rs 1,651,244 crore in the year preceding demonetisation represented a huge uptick from Rs 1,055,828 crore in FY12, but not as much as the 129 per cent jump to Rs 3,004,604 crore in end-January this year, from Rs 1,310,181 crore in the demonetisation year (FY17).

Did India really need to take the demonetisation pit-stop at all? Was offline payments the answer that was blowing in the wind all along, and did we miss it because the issue of how to tackle a large amount of currency in circulation was not framed properly? It’s certainly something to think about.