E-Commerce has broken the political borders and offers products & services across different country borders. This has resulted in a high volume of cross-border goods and payment flows. 

Cross border payments have become an integral part of the day-to-day activities of global businesses. Small Businesses’ zeal to expand their business beyond their country boundaries has been well supported by ongoing digitalisation and high-end technological capabilities across multiple sectors and industries. However, it continues to face significant challenges owing to complicated cross-border mechanisms. The Small businesses face challenges in making or receiving payments internationally because of dealing in different currencies and country specific rules and regulations for international payments. This has created a need for a more agile and frictionless cross border payment framework making cross-border payments as simple as domestic transactions.

What are Cross-border payments?  

Cross-border payments are defined when both the parties i.e. buyer and sellers involved in the transaction are registered in different countries. Most popular cross border payments methods are wire transfer, credit cards and alternative payment methods- mobile wallet, low value payment method. All interaction for payments happens between buyers and sellers through their respective Banks. The Banks communicate with each other through the SWIFT mechanism when it comes to international transactions. 

In Traditional cross-border payments of correspondent banks, the number of intermediary banks depends on the relationship of the buyer’s and seller bank’s with the correspondent bank. As the number of intermediary banks increases, costs associated with fees and commissions also increase. A Bank can track the transactions till its immediate bank. It becomes difficult for the originating bank to track the transaction once the payment goes to the next bank in the sequence. There is no standard procedure for cross-border payments due to different rules and regulations of each country.  Evolving customer requirements, instantaneous fund transfer, cost reduction, complete transparency and technological innovation has initiated the process to improve cross-border payments as a whole.

Cash Flow in Cross-border Payments

When a customer makes a purchase, there’s a complete back-end process wherein money gets transferred from the buyer’s bank account to the seller’s bank account. This process becomes very complex when it comes to cross-border payments. In international transactions, currency exchange rates and foreign transaction fees are also involved along with the fees or commission charged by the different bank in the value-chain. In cross border payments domestic and international financial institutions are working together to make the transfer of funds.

When a purchase is made, if the buyer’s and seller’s bank have a direct relationship payment is done very easily and seamlessly but in the absence of direct relationship intermediary bank’s role becomes important. These intermediary banks are called correspondent banks.

Major Banks across the globe have their own branch or correspondent bank’s branch in another city. In such cases, the funds will first move from the Buyer’s bank branch to the Bank’s own branch or its Correspondent bank’s branch in the seller’s country. This fund is further transferred to the seller’s bank who will then credit the seller’s account. There are many entities, different currencies, exchange rates and transaction fees involved in the single international transaction which make the process slow and opaque in nature. The more the number of correspondent banks in the chain, cost and complexity of transaction keeps on increasing

In the Era of Globalised Digital Economy, international payments still felt backward and analogue.

A Revolution in Cross Border Payments  

The future of cross-border payments is clear wherein the world requires ability to move funds instantaneously, seamlessly with full transparency and 24*7 access. As the payment industry started moving forward on this journey, an array of new industry initiatives and emerging technologies are transforming the payments process. Fintechs using emerging technologies like blockchain, artificial intelligence, machine learning have started offering faster, agile and seamless solutions to the financial institutions to cater the emerging needs of customers.

Currently multiple paths are being used by the payment service providers such as Real-time payments, SWIFT gpi, SWIFT’s transaction manager, artificial intelligence, blockchain and digital currencies- cryptocurrency, central bank digital currency and stable coins. These new ways in cross-border payments would provide opportunities to make cross-border transactions faster, more frictionless, efficient, transparent and cost-effective like domestic transactions. Fintechs act as catalysts for innovation and bring global payments together through various approaches. Banks have started collaborating with fintech to mend their strengths and optimize their offerings by enhancing the payments infrastructure with latest technologies.

This revolution will transform the landscape of cross-border payments and empower the end user with full control on sending and receiving international payments at any point in time with complete transparency related to fees/ commissions charged and traceability of transactions in the system.

As per Deloitte report – B2B and P2P payments with blockchain would result in a 40% to 80% reduction in transaction costs and take an average of four to six seconds to finalize (compared to two to three days using the standard transfer process).

In Today’s world of Digitalisation, the Government of India (GoI) is taking steps to provide the infrastructure and technology to promote the digital payment ecosystem. GoI has initiated steps like BHIM Aadhaar Pay, an alternative for online and card based payment to popularize digital payments in Rural India which forms 65% of Indian Population. Aadhaar pay is still not accepted by the merchant and the customers of rural areas because of lack of any awareness about Aadhaar Pay solutions and its benefits. In the absence of any publicity campaigns about Aadhaar Pay in print media or broadcast media, customers find it difficult to trust Aadhaar Pay.  

What is Aadhaar Pay?

Aadhaar Pay is a smartphone app for individual merchants developed by National Payments Corporation of India (NPCI). Using this app, merchants can receive instant payments in their bank accounts from the customers having an account with any of the banks. Aadhaar Pay uses Aadhaar number along with validation using biometric authentication or OTP sent on the Aadhaar linked mobile number. This is extremely helpful in rural contexts, since most rural users do not remember their password and PIN. 

How does Aadhaar Pay work ?

Rahul is an owner of a kirana store in a small village of India. Mohan is a regular customer and purchases all the household goods from his shop. Today while making payment for the goods, Mohan realised that he had forgotten his wallet at home and requested Rahul to make a note of the bill amount and he will clear these dues tomorrow. On hearing this, Rahul informed Mohan about the concept of Aadhaar pay. At first, Mohan was confused because he had never heard about it. However, after Rahul explained to Mohan that he can use aadhar based payment process to make direct payment from his bank account without the need of an ATM card or a smartphone, Mohan decided to give it a try. 

Rahul logged into Aadhaar Pay through a mobile app of his bank using his Aadhaar number and typed the bill amount. Thereafter, Mohan typed his Aadhaar number and selected his Aadhaar linked bank name and completed the transaction by authenticating with a fingerprint. After the completion of payment both Rahul and Mohan instantly received confirmation messages on their phones.

Mohan’s story highlights the need for a “payment solution” that would simplify and digitize transactions especially for those with low literacy levels in rural areas.

Aadhaar pay will help merchants to receive funds on a real time basis and no MDR is charged by the bank. Currently, approximately  96 crore bank accounts are linked with Aadhaar including 75% of Jan Dhan Yojana accounts. Some of the largest banks in India such as State Bank of India, ICICI Bank, Andhra Bank, Syndicate Bank, IndusInd Bank and IDFC First Bank have gone live with Aadhar Pay. 

Despite its high utility and ease of user experience, the reliability and security of Biometric authentication pose a high challenge to its wider acceptability. The task becomes particularly challenging when there have been cases of leakage of Aadhaar data. UIDAI has tried to mitigate such concerns by ensuring that the Aadhaar database is not directly connected to the service provider and all the authentication is done through APIs only. Another main concern is that many people in India do not have clear fingerprints due to the nature of their work causing high authentication failure during fingerprint impressions on the biometric reader. However, this problem has drastically reduced as Biometric readers have evolved ever since and now new biometric readers including iris scan are being used which are more reliable.

Challenges faced in Implementing Aadhaar Pay

Technical Challenge

According to UIDAI, ~ 16 lakh Aadhaar authentication requests fail every week mainly due to problems faced in capturing fingerprints mainly due to very high match ratio (98%) being set in certified Biometric readers.

 Administration Challenge

Only prerequisite for Aadhaar pay has been linking a Bank account number with Aadhaar. However, the Honourable Supreme Court of India has made the linking non-mandatory in its judgement. 

Key to the success of any new tech enabled platform is the absolute trust and confidence of customers and service providers that their privacy will be protected and transaction is secured. To make Aadhaar pay more secure and safer than card payments, there should be proper laid down procedures for Certification and Testing of third party apps used by merchants for payments. This would build confidence in authenticity and reliability of Aadhaar pay and would promote its use amongst the mass population. 

Way Forward

Based on our market understanding and research, we conclude that the potential of Aadhaar Pay is still underutilised and the idea of cashless India can still be achieved with Aadhaar pay with support from all stakeholders. GOI and banks should create awareness and incentive schemes for Aadhaar Pay amongst merchants and customers especially for rural areas using both print and digital media.

We feel that Aadhaar Pay will create an ecosystem especially for rural demographics wherein customers have ease of payments and merchants have quick access to the payment with a comparatively low- cost payment solution. 

Buy Now Pay Later (BNPL), as the name suggests, facilitates users to buy products now and pay at a later stage. The facility offers the advantages of a credit card without carrying the card at the time of payment. This concept is similar to the local Indian concept of the “Khaata system” – the consumer purchases items from the shopkeeper on credit. The settlement is done on a monthly or weekly basis.  

BNPL and Millennials

BNPL is available to users of demographics. But it has the highest acceptance amongst “millennials” because of their high willingness to spend coupled with lower availability of resources & non-availability of credit. 

Pay later without credit assessment enables Millenials to avail credit services without having a good credit score. Millennials are also attracted to exciting discounts and cashback offered by fintech and retail companies for using their BNPL services.

In the era of digitalization, BNPL brings the new generation credit facility to its users with a more secure, easy and quick process to sign-up with just a few clicks in less than 30 seconds.  

Advantages of BNPL

Users can avail of the Credit facility with no hidden charges, at zero interest rate fee, and with an easy EMI payment option that helps them buy the products immediately without spending any upfront cash in real-time. There is a minimal penalty levied in case of late payment. 

A customer can sign up with different fintech at the same time and avail of higher credit limits. In the current scenario of increasing cyber fraud, BNPL eliminates users’ risk by not exposing sensitive data such as bank account and card details.

Several fintech companies provide BNPL services to change the shopping experience for their users. It allows them to enjoy credit facilities at various e-commerce websites and offline in-store purchases POS by QR code. Retail stores or e-marketplaces provide the BNPL facility to their customers by themselves or through partnerships with fintech providers. 

BNPL services empower their customers by getting the products/ service accessible in the most convenient manner, especially during a pandemic situation, which develops further trust and loyalty between the merchant and the customer. 

This flexible payment option reduces the cart abandonment rate and provides a better customer experience, thus increasing customer penetration. Some market players offer high discounts, cashback and loyalty rewards for using the BNPL payment option, enabling them to increase customer’s shopping basket size and purchase frequency with this easy and seamless checkout option. 

Disadvantages of BNPL

Though a boon to many, ease of accessing “Buy Now Pay Later” services at the checkout could become a temptation for young consumers to spend more than they can afford. It may eventually become a part of their lifestyle and lead to excessive impulse shopping and eventually fall into a debt trap. 

People use BNPL facilities at the time of cash crunch and when they have sufficient cash since it provides them with an easy, secure, convenient, and quick checkout mechanism. 

BNPL users have been continuously increasing across the globe. At present, one of every five digital users has used this facility during this pandemic. 

Bottom Line

Every product or service bears its pros and cons. It depends on users’ consumption behaviour to use the positives to their advantage and avoid falling on the negative side. For those who extensively use free credit available facilities and get in the trap of a vicious debt cycle, BNPL could be troublesome.

However, BNPL has come out as a blessing for users facing liquidity crunch to get the essentials products during the lockdown.