88. Net-Banking 2.0 (?)

In last two decades, we witnessed great many changes in the payments domain… Volume numbers have reached astronomical figures and innovations, policies, guidelines, licences.

Even the payment modes have evolved… Cards got 2FA and tokenization (and ten other things that came with it), UPI was born and became omni-potent and Omni-present superhero in no time (but still needs pocket money from its guardians) and wallets reached nirvana (no one cares including those wallets)

But… net-banking (NB) has remained pretty much the same.

Although NB volumes have dropped drastically, NB still continues to be there with its own USPs (for high ticket transactions, flat rate on few sectors, TPV feature etc.).

NBs didn’t witness big innovations except a few sporadic ones — SDK to optimise bank pages (of Juspay) and AppTo App switching for a couple of banks (by Minkasu).

So everyone knew net-banking would die in a few years until out of the blue RBI mentioned about it in ‘Payments Vision 2025 document’ that was released in 2022.

Create payment system for processing online merchant payments using internet / mobile banking (para 4.3.4)

And in Feb-2024, the RBI Governor announced interoperability for Net-banking.

Before we talk about the possible interoperability for NB, let’s understand a little about NB and its complexities and for that, you can start with the previous article on NB (this article)

Challenges in Net-Banking:

I think NB is more versatile, complex and more challenging than all other payment modes put together.

• Integration: Varies from bank to bank (in nutshell 40–45 different integrations)
• Commercial: Just like other modes, even NBs have sector specific pricing which can be % of transaction value or flat fee per transaction. But every bank may have different commercial (e.g., few banks will offer 1.5%, few 1.2% and other 1%)
• Commercials to PA: Few banks work on fixed fee (e.g., 1.5%, 1.1%) and few banks work in revenue sharing model (60:40, 50:50), few bank will have revenue sharing model with minimum value (e.g., 60:40 for bank and PA but the bank should get 0.50%)
• Settlement time: Varies for each bank. At times, banks may miss giving settlement to PAs
• Performance: Not consistent — Varies drastically from bank to bank
• Authentication Methods: Customer ID + Password, OTP, Security question, grid challenge (worst of them is Remembering password… horrible… who does that?)
• Lack of risk checks: Many banks do not have fraud/risk checks — which is more important for NB considering average ticket sizes are higher
• Limited capabilities: Many banks do not even have capabilities to identify each merchant or issue separate MID/TID and predominantly depend on PA partners to do the right thing. So definitely there will some revenue leakages
• Refunds: No definite Turn Around Time (TAT) or tracking mechanism
• Dispute Management: No framework for handling dispute or chargeback

Here is one strange example: Citi bank net-banking flow was nothing but debit card flow. So if a merchant enables Citi net-banking then incur cost of 1.50% but if same user goes through regular debit card flow then merchant will incur DC charges of 0.40% or 0.90% (for amount up to Rs.2K or above Rs.2k respectively). But still merchant would insist on having Citi net-banking option.

Strange na? But back then it was normal :)

NB is versatile mainly because it is a bilateral arrangement between the payment aggregator and a bank. But somehow, Payment Aggregators (PAs) unified this versatility on a single platform and managed it for a couple of decades (Kudos!)

Let’s look at challenges faced by PAs:

A PA has to do separate integrations and set-up processes with each bank and there are 40–45 banks (thank god for mergers, acquisitions, consolidations and closures — we are left with much lesser number of banks)

Earlier days it made sense for banks to do integration with PAs as there were few PAs but then more PAs entered the scene. And every new PA wanted to integrate with banks directly.

At the same time,there is no upside for the banks to do integrations with every new PA for the obvious reason (i.e. new PA won’t add new customers or volume, the same volume will shift from one PA to another)

But new PAs wanted all net-banking banks to show they have ‘holistic’ offerings.

So what did these new PAs do?

Answer: Russian Nesting dolls… i.e. use another PA(s) netbanking stack/platform. The PA who is offering its stack to another PA will offer higher commercials with margins (so new revenue stream)

Alternatively, PAs also work on a hybrid model where they do integration with top 5–6 banks and use another PA’s NB stack for smaller banks.

Also, I won’t be surprised if a PA uses another PA which in turn uses another PA for net-banking.

No unified processes, no clear frameworks for settlement, refunds or dispute management and on top of all this, there is concern with transparency (PAs using other PAs). So the RBI announced an interoperable model.

Interoperable NB model

Interoperable platforms are not new to us… Visa MasterCard did it a few decades ago and then came NACH, BBPS, UPI.

I presume, NB interoperable platforms will be fashioned after one of these models… mostly likely BBPS or NACH models.

Although NACH model is much closer to NB model and NACH already has net-banking flow (for mandate registration) but if news and rumours are to believed then it will go in BBPS way.

On one side, there will be few sponsor banks / acquiring banks (who will behave similar to COU or NACH sponsor bank) and on the other side there will be net-banking banks (issuing banks or destination banks) and a central entity will provide the switch (interoperable connections) and act as clearing house.

It is possible that new entities, such as bank aggregators / TSPs, can be introduced who will integrate with banks and which can connect with Switch/Clearing House. This can expedite integration of banks onto the platform.

Just like any other interoperable model, we can expect NB interoperable model to standardise:

• Settlement time
• Uniform commercials — Most likely commercials will reduce (it happened with UPI, NACH so it may happen for NB as well)
• Better management of Merchant Category Codes and related pricing
• Dispute management framework and TAT (Turn Around Time)
• Streamlines refunds with clear TAT and tracking
• Harmonise the reversal of failed transaction and related penalties
• Similar authentication steps (Do not expect it to be better or come even half way closer to UPI)

Impact on the ecosystem participants:

• Old PAs may lose more and new PAs will get some advantages
• If commercial models are optimised, then few big banks (who have premium pricing) and PAs will lose revenue.
• In theory, this new platform may open a path for new banks, such as cooperative banks (that have internet banking facilities)

Note: It may take a while for all banks to come onboard on the new platform till then old PAs and banks maintain their dominance.

Why am I mentioning about commercials impact:

NBs are still lucrative payment modes with good margins, especially in % (percentage) fee models that are applicable in eCommerce, Travel, D2C gaming sectors.

Pricing in decreasing order:

International cards > Corporate credit cards > Credit EMIs, cardless EMIs, BNPLs > Retail Credit Cards > wallets > Net-banking > Debit cards > UPI

And in terms of volume, Net-banking may be 4th position (after UPI, Debit card, credit card).

So Net-banking mode does earn good revenue and margins for banks and PAs.

Hey so what will be the role of a PA?

One of the values of PA is that they aggregate multiple payment modes including net-banking. With the interoperable model, an acquiring bank who already has card and UPI acquiring, can become NB acquiring/sponsor bank and offer all (important and semi-important) payment modes to merchants.

So will acquiring banks make PAs/FinTechs redundant?

Hmm… (and more Hmm…)

There is no simple answer… It is as complex as the NB itself but for now, I will go with an easier answer.

Hey… but how can you be dependent on one acquiring/sponsor bank?

So a PA will come in and aggregate multiple acquiring/sponsor banks to provide redundancy.

Hey.. hey… what if the PA goes down?

A TSP will come in and put a wrapper around multiple PAs and acquire banks and provide routing logic and what not.

Hey… hey… hey… what if the TSP goes blank?

I don’t know… take it as a sign from the Universe and stop buying whatever that unnecessary thing you are buying.

NB volumes are reducing and so are the revenues and clearly there is not much upside for the maturity of participants. So does it make sense for the banks to make this extra effort?

Considering RBI wants this to happen so banks will definitely do it… but it may take months or couple of years to onboard all banks.

The bigger point is irrespective of the size, a payment system has to be regulated, it should have uniform processes when it comes to settlements, refunds and dispute management. Thus, it is an important initiative.

PS: I will write an article when NB interoperability becomes the reality.