Electronic Payment: The Way Of The Future - Raj Jain, Chairman and Managing Director, RS Software

Could you tell me how the industry and the back-end of the whole technology sector in the financial world works?

Our company is focused on a very specific segment in the financial services, which is electronic payment. No matter what a person does, he/she has to make a payment for it, whether that is in cash or kind. When I say kind, I mean loyalty points, rewards, etc. All these are part of the digital payment eco-system. Banks are the major players globally when it comes to payments and money because consumers repose their trust in banks when it come to money. They don’t think about Telco or Walmart when it comes to money. To give you a better idea of this industry, I will come to the back-end system again. The electronic industry originated from the 1970s, and since then it has grown by 10000 per cent and the revenues of all the stakeholders in the industry put together come to about USD 1 trillion.

In terms of the back-end systems for payments, every single payment transaction has to get authorised, cleared and settled. As an example, if you swipe your card which you use to pay for coffee and let’s say you use an ICICI Bank card to pay. Your transaction goes and comes back in micro-seconds after validating that you are good to sign for the value of the transaction. That transaction travels on what is called a payment rail, which is something which a major payment network provides. This could either be a MasterCard or Visa or American Express, depending on what card you are using. Riding on the payment rail or the payment network, the transaction goes to your bank, gets authorised, comes back on the same rail to the place where you are physically present, you sign it and you move on. Let’s assume the hotel has an account with another bank, say Axis Bank. So, how the money moves from ICICI Bank to Axis Bank is called settlement and clearing. At the end of the day, Axis Bank has your part of the money (along with that of the millions of others who using the cards). The money involved in all this is thus pretty high.

So, who are the players involved? I started with you being in the coffee shop – this is the merchant. Your bank, say ICICI Bank in this case, is the ‘issuer’ as it has given the card. Axis Bank, the bank of the merchant in this case, is called the ‘acquirer’ because they are going to get the money. Now, Axis Bank may not be processing on its own, so it has an independent third-party processor called the ‘acquiring processor’. Likewise, ICICI Bank may not be processing on its own; and the party doing the outsourcing is called the ‘issuing processor’. Together all these players are the stakeholders of the electronic payment industry. Together their revenues are USD 1 trillion a year. This seems like an impressive number to go after. However, this represents only about 15 per cent of the payment value across the globe. 85 per cent of the transactions are still done using paper money. In India, that figure is about 92 per cent, showing there is a lot more work yet to happen in the industry.

We believe that these core systems of authorising, payment and settlements are the major backbone for the movement of digital money across the globe.

How do you fit into the whole ecosystem?

We have 20 years of experience in core systems. Now what are core systems? Authorisation, clearing and settlement, right?

The next thing is what is facilitated by the human greed factor. Fraud is a common factor among global markets. Although the percentage varies, it is universal. And this has to be managed through risk management systems.

Now, if you see that your account has been compromised, you would call the bank and tell them a particular transaction is not yours. From the time that you call the bank to intimate them till the bank will be able to credit the money back to you, it is called a dispute management system.

Apart from these, there is also the aspect of testing. In the payment world, testing is extremely crucial because electronic payment transactions are a highly perishable business activity. Any flaw in the transaction process can lead to loss of customers. All these major providers, be it a network or a processor, have a huge capital investment up-front for infrastructure, and hence, the volumes in this model are critical. Also critical is reliability, ensured through testing. And thus testing becomes extremely crucial in this industry.
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Next is the undiscovered wealth of the electronic payment industry, and that is model data that has become unavailable, which is analytics. This is becoming a large part of this whole payment ecosystem as well.

We are in all of these components, starting from authorisation, clearing and settlement, risk management systems, to dispute management system, testing and analytics. From the back-end perspective, every stakeholder needs to build these capabilities. They then connect to the core banking system.

Where do you see opportunity in the existing system?

A bank may have multiple relationships with clients. It may have issued a card, given a mortgage loan to buy a home, given an auto loan or a personal loan or it may even be managing some of your money. Each of these areas of business have got to be managed though separate systems which all go into the back-end. At the moment, these systems are working independently and are not connected through an ERP, which would give the bank a single picture of a customer. And that is where the trend is heading. All these systems built in mature markets over the last 40 years, have to be re-engineered and then brought together to a single platform. And there is opportunity here.

Moreover, people are becoming increasingly tech savvy. If I were to visualise what the scenario would be like five to seven years down the line, phones and social media would be like distributors of payment and banks would be like manufacturers of payment. So there is immense opportunity here as well.

Where does the payment mechanism in India stand versus that in a developed nation?

In the US, you have over a trillion dollars of cash in the system at a consumer level. But still the dominant part of almost about 60 per cent is electronic payment. There are fundamental changes taking place there.

‘Square’ is a company that has come up with a software and a small hardware component which is able to enable a small ‘mom-and-pop’ merchant to download that software and acquire that physical hardware easily and hence accept electronic forms of payment. With this, they are going after 35 million casual merchants (like we have the kirana stores in India, in the US they have casual merchants). Now, Square is going after those numbers so when you start incrementally increasing that penetration as well, your 60 per cent will continue to rise even higher. 

As a contrast, that 60 per cent number is just at eight per cent in India. So, we have a long way to go. In countries like India, Africa or many parts of Europe, the infrastructure is yet to be built. That is where the opportunity lies for the company to build expertise in the core system of the payment world that connect money and the consumer.

At the moment, about 84 per cent of your earnings come from the US. What are your plans for the Indian markets?

We don’t really work in the Indian domestic market as such. We believe that India has potential as yet, and as the potential rises, we are preparing ourselves to participate over here.

In India, two things can happen. One is clarity at the government and the RBI levels in terms of how they are planning to facilitate the growing electronic system and card payments. I think India is a great candidate for this. Just as we saw a jump in several cycles in telecom in the mid ‘90s, the same could happen in electronic payments, where we can end up moving on to mobile and e-commerce as alternate mechanisms of electronic payments. We have our concept patent approved, and this would combine mobility and analytics. Combined with the progress on the payments side, there is great opportunity for monetisation through a platform. We believe India will have a lot of this opportunity, which is where we are preparing ourselves to play.

We have presence in India, capability to work out of India and we also do domestic projects. What does it take for us to scale it up to a level higher than we are already at? I think it’s a function of the market. As demand builds up, our ability to execute would be very high.