To negotiate blind curves ahead, focus on offline digital payments

If a decade back researchers were asked what could be the most-promising area of research in the years to come, it’s highly unlikely that they would mention payment systems. Yet, today payment systems have emerged not just as a promising area of research, but also one which sees a lot of action in the space.

We are witnessing tremendous changes in payment habits across economies as the world becomes increasingly digitalised. There is a lot of discussion on new payment methods, on Central Bank Digital Currencies, and so on. Much of this discussion is centred on online payments, where the payments happen over the Internet. However, a few of the recent events point to the continued need for offline payments as well.

In early January, the world was looking for new beginnings after two years of COVID-19. It was around this time that the people of Kazakhstan started protesting over their dissatisfaction with the government. The government reacted by using brute force, which led to riots, and Russia’s intervention.

Lewis Mccellan, the Digital Monetary Institute editor at OMFIF, points out that Kazakhstanis used their debit cards to make payments. However, this was not possible as the riots disrupted the networks which run these online payment systems. This led to long queues for cash outside ATMs. Later, the Central Bank of Kazakhstan announced that as communication channels have been restored ‘international payments and money transfers will be resumed’.

In fact, Kazakhstan is not the lone case study here. In 2019, parts of Japan were hit by a typhoon leading to disruption in online payments. Black swan events, like COVID-19, forced us to change our ways, including our financial habits. While the pandemic forced us to go online like never before, there could be unforeseen events which force us to go offline. What do we do then? The riots and ensuing events once again serve a reminder on the importance of offline payments. There are two ways to ensure offline payments remain part of the payment strategy.

The first way is to keep physical cash for emergencies. The pandemic saw a rise in both digital payments and physical cash across economies. The digital payments rose as people made payments using online payment platforms. The use of physical cash rose as people resorted to keeping cash for meeting emergency needs. In economic parlance, the digital payments served the function of medium of exchange, whereas cash served the store of value function.

The second way is to think of offline digital payments. Mccellan writes about a Swedish digital cash platform, Crunchfish, which has developed an offline payments system. The system allows one to keep digital cash in an offline mode, and make payments in case of any trouble in connectivity.

On this offline digital payments front, India and the RBI could again be seen as examples for the world to follow.

In 2018, an RBI Working Group on FinTech and Digital Banking (chair: Sudarshan Sen) recommended establishing regulatory sandboxes. Regulatory sandboxes were defined as, ‘Live or virtual testing of new products or services, in a (controlled) testing environment, with or without any ‘regulatory relief’’.

In 2019, the RBI established the first sandbox on retail payments. The RBI invited retail payment innovations under three product heads: Mobile payments including feature phone-based payment services, offline payment solutions, and contactless payments. In 2020, the RBI received 32 applications of which six were selected for the test phase. Of the six, three focused on offline payments, and three on feature phones-based payments.

In 2021, the RBI announced that it has been conducting pilots for offline payments. The tests showed that such products could be useful, especially in remote area. Following these tests, the RBI released the ‘Framework for facilitating small value digital payments in offline mode’ in January. The central bank has defined offline digital payment as a transaction which does not require the Internet or telecom connectivity. Offline payments can be carried out face-to-face using any channel or instrument such as cards, wallets, mobile devices, etc. The RBI has kept a limit of Rs 200 per transaction, and an overall limit of Rs 2,000 for all transactions until balance is replenished.

Apart from the RBI, there are ideas from other countries. Researchers from the Bank of Canada have proposed that instead of a phone there should be a universal access device (UAD) for digital payments. The UAD could incorporate attributes of cash and manufactured at a low cost for universal access. A UAD would mean people keeping a separate device for payments, and use the mobile phone for communications.

To sum up, the focus of research in the payment ecosystem have turned from online to offline solutions. The future would be of both offline and online payments complementing each other.

Local developments also suggest that India has possibly leapfrogged the rest of the world in offline payments as it did in online payments. India’s UPI system has become a leading benchmark in online digital payments for its efficiency, and cost-effectiveness. One can hope that the India’s offline digital payments will have a similar impact as well.