Banks as guarantors of payment system; New entrants and new payments model

Banks as Guarantors of the Payment System

Banks act as the backbone of the payment system by ensuring:

1. Trust and Credibility

• Banks provide a secure and regulated environment for transactions, ensuring public confidence.

2. Clearing and Settlement

• They facilitate interbank transactions through RTGS (Real-Time Gross Settlement), NEFT (National Electronic Funds Transfer), and UPI.

3. Liquidity Management

• Banks ensure there is enough liquidity for smooth transaction processing.

4. Regulatory Compliance

• Banks follow RBI guidelines, KYC norms, and anti-money laundering laws, ensuring secure payments.

5. Risk Mitigation

• Banks absorb financial risks, ensuring that payments are processed even during technical failures.

6. Digital Transformation

• Banks integrate fintech solutions, improving transaction speed, accessibility, and efficiency.

New Entrants and New Payment Models

With technological advancements and fintech disruption, several new players and payment models have emerged in the financial ecosystem:

1. Fintech Companies & Digital Wallets

• Examples: Paytm, PhonePe, Google Pay
• Offer fast, user-friendly, and low-cost transactions without the need for a traditional bank account.

2. UPI-Based Payment Systems

• Unified Payments Interface (UPI) has revolutionized transactions by enabling direct bank-to-bank transfers with a single click.
• It enhances financial inclusion by making payments easy for even the unbanked population.

3. Blockchain & Cryptocurrency Payments

• Decentralized and secure payment methods like Bitcoin, Ethereum, and CBDCs (Central Bank Digital Currencies).
• Reduces dependency on banks but raises regulatory concerns.

4. Buy Now, Pay Later (BNPL) Models

• Companies like ZestMoney, Simpl, and LazyPay allow customers to purchase now and pay later in installments without traditional credit cards.
• Provides easy access to credit for young consumers and small businesses.

5. Cross-Border Payment Solutions

• SWIFT GPI, Ripple, and Stablecoins enable faster and cost-effective international transactions compared to traditional banking systems.

Impact on Traditional Banks

• Banks are facing competition from fintech and big tech players (Amazon Pay, WhatsApp Pay).
• They are adopting AI-driven fraud detection, blockchain, and cloud banking to remain competitive.
• Partnerships between banks and fintech are becoming common (e.g., ICICI Bank collaborating with Google Pay).