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Real Time Payment System over Blockchain in India

by georgey on October 26, 2018

Immediate Payment System Over Blockchain Over the last decade, the payments and settlement systems in India have been under constant evolution. Even though the country has been adopting international banking standards, the technology is being outpaced by the exponential rise in the adoption of digital banking. The sheer market size and the expected economic growth of the country will always be the catalyst for faster, secure, and robust banking systems. Even though many innovations have been put forth to improve the payments systems in India, the cost of maintenance of the infrastructure has been on the higher side. Digital payments grew 55 per cent in volume and 24.2 per cent in value in the year 2016-17 over the financial year 2015-16. Furthermore, the continuing rise in cashless transactions calls for more cost-effective payment systems. The innovations in payments have leveraged major technological innovations in each era and we are around the corner for another breakthrough development in transaction systems, the Blockchain. Current payment Systems Real-time gross settlement (RTGS) RTGS is a funds transfer systems where the transfer of money takes place from one bank to another on a “real time” and on a “gross” basis. Settlement in “real time” means a payment transaction is not subjected to any waiting period, with transactions being settled in a first-come first-serve manner. “Gross settlement” means the transaction is settled on one-to-one basis without bundling or netting with any other transaction. RTGS system is operated by RBI as it is seen as a critical infrastructure for the country’s economy. RTGS system does not require any physical exchange of money.  In an RTGS system, transactions are settled across accounts held at the RBI on a continuous gross basis. The RBI makes adjustments in the electronic accounts of Bank A and Bank B, reducing the balance in Bank A’s account by the amount in question and increasing the balance of Bank B’s account by the same amount. Considering that money transfer takes place in the books of the RBI, the settlement is taken as final and irrevocable. National Electronic Funds Transfer (NEFT) NEFT is an electronic funds transfer system maintained by the RBI. Started in November 2005, NEFT is a facility enabling bank customers in India to transfer funds between any two NEFT-enabled bank accounts on a one-to-one basis. It is done via electronic transactions. Unlike RTGS, fund transfers through the NEFT system do not occur in real-time basis. Immediate Payment Service (IMPS) IMPS is an instant real-time inter-bank electronic funds transfer system in India. Immediate Payment Service is an initiative of National Payments Corporation of India (NPCI), a subsidiary of RBI. It is a service through which money can be transferred immediately from one account to the other account, within the same bank or accounts across other banks. The transaction can be initiated either by using the receiver’s bank account number and IFS code or the MMID (Mobile Money Identifier), in case of mobile banking. Upon successful transaction, the money gets credited in the account of the receiver instantly. This facility is available 24x7 and has an upper ceiling of ₹2,00,000 per transaction. Unified Payments Interface (UPI) UPI is an instant real-time payment system developed by the National Payments Corporation of India (NPCI) that facilitates inter-bank transactions. The interface is regulated by the RBI and works by instantly transferring funds between two bank accounts on a mobile platform. The system was introduced to promote user-friendly mobile banking services in India. UPI is built over the IMPS to provide the IMPS core features via a single payment API and a set of supporting APIs to mobile payment service providers. Immediate Payment Service Overview National Electronic Funds Transfer (NEFT) is used as the national payment system for internet banking transactions and the Real-time gross settlement (RTGS) is used as the backbone for all inter-bank settlements. For the purpose of increasing digital banking and mobile banking adoption rate by providing instant and seamless transactions, the Immediate Payment Service (IMPS) has been established. IMPS Structure During an IMPS transaction involving a payer and payee belonging to two different banks, the respective accounts get credited and debited of the transaction amount immediately but the clearing and settlement of actual funds between the banks takes place only when RTGS transaction is initiated with the NPCI. Unlike the credit-first architecture where a debit is recorded only after the credit has been confirmed, IMPS uses a debit-first architecture where the payer’s account is debited first and the credit request is forwarded to payee’s bank during a transaction. This facilitates the immediate payment service. IMPS settlement During the IMPS working hours, each member bank keeps a digital record of transactions and after the end of each IMPS cycle, a settlement cycle is initiated. The NPCI provides each bank with a Daily Settlement Report (DSR), through a Secure FTP (SFTP) in the DMS application, which contains net position amount (payable or receivable) by the bank to NPCI. DSR is the net inter-bank credits incurred, for the inter-bank IMPS transactions, during the cycle of operation and it should be within the Net Debit Cap (NDC), prescribed for each member. NDC for a member would be five times the amount of collateral (in cash) deposited with NPCI. At the end of each cutover time, NDC limit would be refreshed, and the net amount the bank owes are posted through RTGS, thrice a day on RTGS working days to NPCI. IMPS Reconciliation A bank reconciliation is the process of matching the balances in the accounting records kept by the bank with the various reports sent by NPCI during the settlement cycle of IMPS. The goal of this process is to ascertain the differences between the two, and to book changes to the accounting records as appropriate. NPCI provides member banks with various reports through Document Management and Workflow Solution (DMS) for reconciling transactions. NPCI has set up a Panel for Resolution of Disputes (PRD) through which member banks have to settle unresolved inter-bank settlement disputes. Reconciliation of transaction occurs mainly due to the various errors that occur within the transaction process.  A payment request may fail to be affected due to various reasons such as loss of network connectivity, incorrect beneficiary details. A remitting member will accordingly receive a negative response with the appropriate error from the NPCI or the beneficiary member. The Problem Reconciliation IMPS is the basic payment system used for mobile-banking transactions. Other services like UPI are built on top of IMPS systems. The IMPS system uses debit-first architecture to facilitate immediate payment system. The problem with debit-first strategy is that the transactions that encounter exceptions and errors will also be debited of the transaction amount before being in an erroneous state. Hence, there arises a problem of reconciliation of those transaction amounts. Due to the discrepancies arising from the sheer volume of transactions, even a normal payment system has huge reconciliation process behind it. With the debit-first strategy in use, the IMPS turn out to need an even larger and costlier reconciliation process. With the mobile banking adoption rate in India rising exponentially, the IMPS reconciliation process will become more and more tedious. NPCI has stated that it will be the member bank’s responsibility to verify accuracy of the Daily Settlement Reports with reference to the data available at their end. As a mandate, the banks to be an IMPS member have to deploy separate resources for performing reconciliation on daily basis and raise adjustments, if needed. Banks have to handle the reconciliation operations on all days, irrespective of Sundays and other public holidays. Banks need to have an operations desk to address other bank customer complaints and ad-hoc requirements to qualify IMPS specifications. Every IMPS bank needs to allocate huge resources and spend large amounts to keep up the reconciliation process. Congestion The IMPS architecture routes every transaction through the NPCI central server, which creates a bottleneck effect and network congestion. The centralized structure involving NPCI and the two banks participating in a transaction creates the following problems:
    1. As all transactions are in a queue to be processed, a transaction has to have an active lifetime after which a transaction is treated as a failed transaction. A time frame is set for each transaction and if crossed, it is marked as a timed-out transaction, which needs to be reconciled.
    2. Each bank may have different internal resources allocated for MSPS and each bank may have different response times. This increases the rate of timed-out transactions. These timed-out transactions in-turn increase the reconciliation problems.
Security Digital transaction security has been one of the major problems faced by NPCI and RBI. The rate of fraudulent transactions has been increasing rapidly and the redressal of these transactions in question also creates a problem for the NPCI. As the IMPS systems are used by over 300 banks all over India, the chances of vulnerability exploitation and intrusion are very high. The Solution The centralized architecture of IMPS is the inherent problem that causes the above-mentioned drawbacks of the system. The centralized architecture is adopted by the RBI because of the lack of trust between the banks and to create transparency over the operations. A decentralized architecture where banks communicate with each other to authenticate and transfer funds will replace current system and its downsides. These can be implemented using a distributed ledger technology called blockchain would enable authorities like the RBI, NPCI, CCI etc. to monitor and review each and every transaction. Objective The objective of Immediate payment service over Blockchain is to create a decentralized payment system architecture to facilitate next generation inter-bank payments. Some important features of the system are:
  1. A payment service over blockchain would facilitate inter-bank communication that could make transactions faster and error free.
  2. Cryptographic encryption over transactional details and varying level of visibility to different nodes in the network provide privacy over bank’s private data, creating high level of trust on the system.
  3. Blockchain transactions are secure and are processed only when all peers in the network are in consensus. Hence, transactional errors of IMPS can be mitigated.
  4. Since peers in network are always in the same state having access to same data, the reconciliation process can also be eliminated.
  5. Peers participating in transaction share resources to authenticate transactions, remove network congestion, and increase the transaction processing capacity of the system.
  6. Permissioned blockchain allows government bodies like the RBI, NPCI, CCI etc. to be able to validate eac and every transaction. This creates high degree of transparency over the system.
Immediate Payment system over Blockchain Architecture The Immediate Payment System over Blockchain will have distributed ledger technology as the backend technology replacing the current IMPS system, where transactions will be processed on a peer-to-peer manner. The transaction records will be updated across the nodes in real time with absolute finality. The records created through the nodes are immutable, transparent, and final. Once  a transaction is committed through federated consensus, records cannot be reversed or modified or deleted from the system. Data manipulation can take place at any of the nodes, but consensus from all other nodes or of a majority of the nodes will be necessary to commit a transaction. Since the records created are immutable, reversal of transactions through the system will not be possible but it can be initiated as a new transaction with another set of immutable records. In this payment system, all of the participating members (banks, PDs, and other financial institutions) will act as nodes for the validation of all transactions. Entities like the RBI, Clearing Corporation of India, and the National Payment Corporation of India (NPCI) can act as monitoring entities that can provide oversights and also with capabilities of taking corrective actions or dispute redressals. Immediate Payment system over Blockchain Transaction Flow
  • User can initiate a transaction through the interface provided by the bank to their end user. The form will be submitted to the banking network and processed and encoded into the DLT format. Then, it will be forwarded to the system for processing the transaction and settlement.
  • Once the transaction is initiated, it will be recorded and updated in all the ledgers of connected node.
  • Transaction state will be unconfirmed until the required numbers of validations are received from other nodes. Once validations are completed, the status will be changed into success with required log details.
  • Once the transaction is successful, the account of the issuing bank is debited and receiving bank is credited with the value of transaction. The transaction will be peer-to-peer but the permission to authorize the transaction will be made by all or a majority of the nodes taking part in the payment system.
  • The entire history of each transaction will be available to all the participants in an encrypted form that can be accessed with special permission.
  • Transactions are processed on an end-to-end basis. In case any one of the activity/process relating to a transaction is not successful, the transaction will be rejected by the system and the originating center is notified accordingly.
Advantages Third-party trust: Blockchain is built on the concept of sharing information across parties without a central authority to manage and processed using federated consensus during transactions. All the data recorded in the ledgers are available to all the nodes taking part in a transaction but the scope can be limited for all nodes or access levels. Reconciliation process: Since the transactions are peer-to-peer and ledgers are updated in real time, there is no need of an additional reconciliation process. A transaction will be completed only if all the consensus is validated and the defined rules are satisfied. Each transaction will be completed with absolute finality. Save costs over delayed settlements: In case of a distributed payment network, blockchain ensures that the transaction settlement information is also processed simultaneously along with the payment messages. Since, payments and settlements happen in real-time, the participants or RBI need not monitor Intra Day Liquidity and dispense with reconciliation in the settlement processes. Reduced processing time: All the current payment settlement systems (RTGS / NEFT / IMPS / UPI) are experiencing delay in settlement or processed in a batch manner due to the need of a reconciliation process. Under the Blockchain system, transactions are made on a peer-to-peer basis so that the settlement of funds and updation of records are immediate with absolute finality. Transparency: Maintaining an immutable record of transaction with events in a chronological order being the main pillar of its architecture, the Blockchain system guarantees much desired attributes to banking and financial transactions such as immutability and finality. The ledgers are open and can be validated by each node at any time. Transaction Costs: Transaction costs can be reduced to a bare minimum, just enough to recover operational costs. Set directly to the custodians, transaction costs can be transferred by them to each other in real time with no requirement of a transactional intermediary. Each Chain Core holds a copy of the ledger and independently validates each update. A federation of block signers ensures global consistency of the ledger. Digital assets share a common, interoperable format and can represent any unit of value -- – such as currencies, bonds, securities, IOUs, or loyalty points -- that are guaranteed by a trusted issuer.

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