Payments in India: Part 3 – The evolution of banking technology

Up to this point, we have talked about developments in payment infrastructure that went from a slow, inefficient paper-based system to a fast, computerized or electronic system that can process a large volume of transactions quickly. We have also covered the infrastructure set up by RBI and NPCI to process payments faster. While recent developments in business payments would not have been possible without these changes, there is always scope for modernisation.

Let’s consider the case of large transportation business with over 30,000 trucks operating. These trucks make an average of 5 trips a day. For each trip, the business needs to pay the truck drivers immediately. This means that the business has to make 150,000 payouts every single day. While internet banking portals have made this easier, making 150,000 payouts from these portals one-by-one would be slow and error-prone..

Let’s look at the different ways in which businesses can solve this problem.

File Uploads

A common method supported by banks is file uploads. You enter the details of all the transactions that you want to process in CSV file and upload it to the bank’s portal. Typically, banks have a specific file format for such uploads which would have all the details of the beneficiary like name, account number, bank IFSC code, phone number and the transfer amount. Once uploaded, the file is processed by the banks, and all transfers are made. While this is a huge improvement over banks manually processing the transfers, there are some problems commonly encountered with this process.

Limitations

Formatting errors

If there is any small error in the CSV file, such as an extra comma somewhere, all those bank transfers will fail. The file format has to be exactly right as per the bank’s specifications.Manual error

If there is a small error, such as in the bank account number, for example, the transaction will go into the wrong bank account.

Not real-time

A business may perhaps upload files once or twice a day. This means that the vendors would not receive their money instantly.

Reconciliation

This is a major pain point for most businesses. We have discussed earlier that due to a variety of reasons, ~2% of bank transfers fail. Identifying which ones have failed, and retrying/rerouting those transactions is already a hard process, made even harder with file uploads.

SFTP

Secure File Transfer Protocol (SFTP) is a more efficient way to move the file. Instead of uploading a file manually on the bank’s portal, a business can send it to the bank through Secure File Transfer Protocol. This reduces the effort of manually uploading files. However, even with SFTP, most of the same issues encountered with file uploads remain, in addition to a lengthy and expensive setup process. Colloquially, this is known as a “Host-to-Host” set up by banks.

API Banking

The latest and most exciting development has been the rise of API (Application Program Interface) banking. Consider every activity that you need to do on a banking portal, such as adding beneficiaries or transferring money. Since businesses have to do these operations in bulk – API banking allows them to trigger these actions programmatically from their own product or ERP. The APIs will communicate information about the type of transaction, amount, payee etc. and will be executed in real-time.

Limitations

API banking is a major leap forward in payment technologies and has opened up new horizons for businesses and banks. It can significantly reduce the time, effort and resources that go into processing payments.

Yet, this technology is still evolving and API banking has a number of limitations.

We will discuss a few here.

Limited TPS

Bank servers can only process a certain number of transactions per second (TPS). If a big business tries to process more than the set limit, all transactions over the limit will fail.

Bank server downtimes

There are times when the bank’s servers are down. During this time, all initiated transfer requests will fail.

NPCI downtime

Earlier, we discussed how IMPS transactions are processed. This includes communication between your bank and NPCI, NPCI and the remitter bank, and then from the remitter bank back to NPCI and from NPCI back to the originating bank.

If the servers of any of these entities are down, it can lead to many problems. For instance, consider when a transaction has been processed successfully, but while the remitting bank is trying to send the updated status back to NPCI, their server is down. So in this case, even though the transaction has been processed, the status is not updated and there is no way for the originating business or the originating bank to know whether the transfer has gone through or not.

This is still a simplistic case, and real-world cases can be much more complicated.

Integration hassles and timelines

Bank APIs are written with old-school technology. For example, SOAP APIs in many cases.

Integrating banking APIs can also be a time-consuming process.

Reconciliation

Reconciliation remains a major pain point even with API banking. A certain number of transactions will definitely fail. Quickly identifying and reconciling these transactions takes significant domain expertise. Different banks and different payment modes tend to have varying reporting formats and types of issues, further complicating the problem.

Security

The ability to process such a large number of transactions instantly also raises a lot of security concerns. The possibility for misuse is high and the potential for loss is even higher. The security protocols need to be rock-solid and smart to deal with malicious intent.

How Cashfree adds Value to API Banking

While API banking has huge potential to simplify business payments, companies are not able to use it efficiently because of the above-mentioned limitations. Making payouts via bank APIs tends to be a challenging technical and operational task. While API banking promises to be fully automated, it is never quite the case in practice, especially at scale. Bank offerings tend to have basic infrastructure and require significant effort to set up and operate for business use. At Cashfree, we endeavour to reduce the tech-ops challenge in Payouts as much as possible. Cashfree adds value by making API banking easy to integrate, easier to use and reconcile, more efficient with a lower failure rate, and much more secure.

Seamless integration

Cashfree offers easy to integrate REST APIs with integration kits in most Indian languages. This allows businesses to get started with live Payouts in a day or two, without having to invest significant development time.

Multiple Banks Connect

Cashfree is currently integrated with all major banks. When the servers of one bank are down, or when we see a dip in the transfer success rate of one bank, we can easily route the transactions through another banking partner.

Reduced failure rate

Through an in-depth study of banking processes, Cashfree has built many features which significantly reduce failure rates of transactions. While we won’t get into the latest and more complex fixes here, we will explain some of the more straightforward fixes that have been employed by Cashfree.

  • Queueing – As discussed earlier, banks can only handle a certain number of TPS or transactions per second. Cashfree knows these limitations, so when it receives a higher number of requests from its partners, Cashfree simply queues them and sends only as many transactions to the bank server as it can handle. This reduces the failure rate due to low TPS.
  • Auto-retry – When a transaction fails, for whatever reason, it makes sense to retry the transaction a certain number of times. Through its understanding of various banks and channels, Cashfree has configured appropriate retry rules that optimize success rates.
  • Rerouting – People familiar with banks and API banking will know that it is common for a certain channel (such as IMPS) of a particular bank to go down on a particular day. In such a case, Cashfree’s smart algorithms reroute the transaction through another mode – for instance, NEFT. Since Cashfree is integrated with multiple banks for API banking, we can just as easily route money through another bank.

Smarter Reconciliation

Despite a lot of advanced features to reduce transaction failure rates, a certain number of transactions do fail and have to be reconciled. Here are some common reconciliation problems that we handle at Cashfree: 

  1. Transaction successful but status not updated
  2. Transaction failed (and reversed) but status not updated 
  3. Transaction pending 
  4. Transaction successful but status updated as failed (rare) 

To resolve these issues, Cashfree has worked extensively with banks to understand their processes. As soon as a pattern in failures or reversals is seen – Cashfree immediately automates it by setting relevant rules. We constantly keep improving our recon algorithms to handle new patterns of failures and exceptions.

Advanced Security Features

With APIs to make and receive payments – the potential for misuse is very high. To start with Cashfree allow you to set rules for transfers which you cannot set in your bank account:

  1. Maximum amount per day per beneficiary 
  2. Maximum amount per week per beneficiary 
  3. Maximum amount per month per beneficiary 
  4. Cumulative maximum amount per day/week/month (all beneficiaries)
  5. Transfer limits for new beneficiaries. Limit on the number of transfers every day/week/month

However, these limits are just the start. Using machine learning, Cashfree studies patterns in transactions – and if a transaction falls outside the pattern, it asks for additional authorization before processing the transfer.

For instance, a business is processing an average amount of Rs. 5000 to a merchant every week, and suddenly, a transfer is triggered for Rs. 75,000. In this case, the merchant would have to check and manually approve the transaction.

The large number of transactions that Cashfree sees every day allows us to study patterns and come up with effective security algorithms. While this does not mean that you will be protected against all fraud, these checks do reduce the probability significantly.

Payouts Direct By Cashfree

Payouts Direct is a significant next step in our endeavour to make business payments safe, efficient and seamless for businesses. Payouts Direct allows businesses to connect their business account directly with Cashfree APIs and conduct their banking operations effortlessly from their own product or ERP. The businesses do not need to park funds in a Cashfree account to make payouts.

Payouts Direct already allows you to: 

  1. Make bank validations – Validate any bank account in real-time by transferring a penny amount 
  2. Add beneficiaries instantly 
  3. Make payouts 
  4. View your bank statement on our interactive dashboard and reconcile entries faster.

If you’d like to try out Payouts Direct, you can follow the link below to get in touch with us.

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