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Card-based virtual wallet transactions at no cost!

Thought Paper

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Card-based virtual wallet transactions at no cost! Constant advancement in digitization technologies has led to a significant increase in cashless transactions. While credit/debit card-based transactions continue to be the most preferred form of cashless transaction, mobile wallets and payments over the mobile network are also gaining in popularity.

There are some basic constraints in the card-based method, such as commission costs for each transaction and low penetration of POS terminals. However, with rapid strides in mobile technology and banks and telcos investing in mobile wallet and payment solutions, these cashless transactions are poised to become the most sought after method in the foreseeable future. This does not, however, signal an

immediate death of card-based systems. A recent impetus from the Reserve Bank of India, to enable ATMs to support cash collection apart from the traditional cash dispensing activity is proof that both ATMs and cards will stay for some time to come. For a view of the penetration and usage of credit / debit cards, please refer to the Annexure.

This paper explores the idea of a world without physical money, built around a card-based transaction system that will support a pre-charged card or card-based virtual wallet. The system will be free of commission or charges, secure and easy to use, and require minimal additional infrastructural support.

Transaction processing using card-based virtual walletThe concept

A transaction system which will replace physical wallets with card-based virtual wallets and allow wallet to wallet transactions, thereby bypassing the master card or visa network.

In order to appreciate the concept it is important to understand the typical process flow for a credit and debit card based transaction at a

merchant outlet and the commission or charges involved therein.

Typical credit/debit card transaction model: key participants

The following schematic representation of card-based transaction flow explains the traditional transaction model:

Cardholder

NetworkProviders

Presents Card as

Payment Guarantee

Provides Goods

Sales Draft

Presentation

Funds Transfer

Auth, Clearing

Settlement

Auth, Clearing

Settlement

Card Issuance,

Payment

Funds Transfer

Merchant

IssuingBank

AcquiringBank

Customer Facing Back-End Processing

Figure 1: Traditional card based transaction model

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The merchant is usually charged a commission of around 1 to 3 percent of the value of each card transaction. The merchant may also pay a variable charge, called ‘interchange fee’, on each transaction. These are often passed on to the customer.

Relevant transaction types

The proposed concept envisages replacing physical fund transfer between two parties and is therefore most relevant to transactions at merchant outlets, where there is physical proximity between payer and payee. Essentially, it replicates the cash-based payment process, with the virtual wallet taking the place of the physical one and a mechanism to transfer funds between virtual wallets replacing hand-to-hand exchange of money. This concept is not relevant

to remote transactions through the Web or mobile banking.

Proposed solutionA complete cashless transaction with zero charges would involve the following:

Virtual Wallet

The primary need would be for a virtual wallet in the form of a smart card for each payer and payee, issued by their bank. The smart card would be charged with a pre-defined amount, usable in financial transactions.

Virtual wallets could be of two types:

a) A stand-alone smart card (chip and PIN enabled) issued by the bank that is linked to the customer’s account – Type 1. A pictorial representation is given below:

Table 1: Key participants in traditional credit/debit card transactions

Participant Description Examples

Cardholder • A purchaser of goods and services

Merchant • A business establishment authorized by an acquiring

bank, ISO or financial institution to accept cards

• Wal-Mart

Acquiring

bank POS acceptance points within the payment card

and ‘acquires’ their bankcard transactions

• Contracts directly with merchants, or indirectly

agent banks or other third-party organizations,

credit card transactions

• Issues payments to merchants

• Routes information enabling authorization, billing and

payment to merchants

Issuing bank • An institution that provides payment card services to

consumers. Key functions include:

- Collecting payment from cardholders

- Extending credit to cardholders (in case of credit cards)

- Distributing cards

- Financing receivables

- Authorizing transactions

Network

Providers and acquiring sides of the business. Key functions include:

- Providing underlying infrastructure

- Promoting brands

- Establishing rules, standards and protocols governing

participation in network

- Setting interchange fee structure

• J C Penny

• Sears

• An institution that recruits ‘retail’ merchants to act as • Bank of America

Merchant Services

scheme • Chase Merchant

Services

through

to process

• CapitalOne

• Chase/BankONE

• Providian

• Compucredit

• Citibank

• Bank of America

• A card association is the nerve center connecting issuing • Visa [21000+

members]

• MasterCard [20000+

members]

• American Express

• Discover

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b) A smart card (chip and PIN enabled) built into the customer’s Visa/MasterCard ATM card (which is linked to the customer’s account) – Type 2. A pictorial representation is given below:

Both types of virtual wallets described above are linked to the customer’s operative (savings/current) account. Virtual wallets, similar to credit cards, and linked to a line of credit sanctioned by the bank in the form of an overdraft account are another possibility.

Charging of virtual wallet

Once customers have a virtual wallet issued by a relevant authority, the next step is to enable them to charge the wallet with ease. This can be done by:

a) A cash deposit or account transfer at the bank.

b) A recharge at the issuing bank’s ATM in case of type 1 wallets, and at any Visa/MasterCard ATM in case of type 2 wallets.

In order to enable the above, ATMs should be capable of writing on a smart card and must also support the relevant menus. This will require an upgrade at a one-time cost.

Card reader/writer: transaction enabler

The card reader/writer device is the most critical part of the solution as it allows payments to bypass Visa/MasterCard networks. The device must be capable of reading information from a smart card as well as writing on it.

The primary functions of the card reader/writer would be to transfer funds between wallets and support the required authentication, making it mandatory for a beneficiary to possess one to receive money.

Structurally, the card reader/writer would have two slots – one each for the payer and payee – where the virtual wallets (smart cards) could be inserted. For security reasons, the payee wallet would be linked to the card reader/writer through a registration process. This is to ensure that only the registered payee wallet can be inserted into the payee slot. The card reader/writer will support the feature to register a payee wallet.

In order to execute a transaction, both the payer and the payee would need to insert their wallets in the card reader/writer and the payer would be authenticated by a chip and PIN mechanism. The payee card would be authenticated by the card reader/writer based on the registration done earlier. Once the authentication is successful, the payer would be able to type in the amount and initiate a transfer, which would debit and credit the payer and payee wallets respectively. This would transfer funds from the payer wallet to the payee wallet without involving a network. Given below is a screenshot of a card reader/ writer prototype:

Figure 2: Type 1 wallet

Figure 3: Type 2 wallet

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Transfer Funds from Virtual Wallet to Bank Account

Funds can be transferred from the virtual wallet to the bank account when required. This can be achieved in two ways:

a) Through a card reader integrated with a terminal at the issuing bank.

b) By transferring the funds at the issuing bank’s ATM in case of type 1 wallets, or at any ATM in case of type 2 wallets.

Process Flow

The process flow for a wallet-to-wallet transfer through a card reader/writer is given below:

Transaction Processing Using Card Based Virtual Wallet

Cu

sto

me

rM

erc

ha

nt

Car

d R

ea

de

r /

Wri

ter

AT

M

Inserts virtual wallet inATM for charging and

provides requiredinputs

Visits Merchant Outletfor purchase of goods

Inserts payer wallet in thepayer wallet slot in the card

reader and enters PIN forauthentication

Enters transactionamount and clicks on

transfer button

Post Sale, inserts payee wallet inthe payee wallet slot in the cardreader / writer in order to accept

payment from the customer

Validates payee walletbased on registration

data

Validationsuccessful?

Displays errormessage

Validates payer wallet

End of Process

Validationsuccessful?

Displays errormessage

End of Process

Validates transactionamount against wallet

balance

Validationsuccessful?

Displays errormessage

End of Process

Transfers funds frompayer wallet to payee

wallet

Yes

Yes

No

NoNo

Processes requestand on success

charges virtual wallet

Business benefits

Virtual wallet issuer’s (bank) perspective

While banks stand to lose the per transaction revenue, which they might have earned on traditional debit/credit card-based transactions, they would be able to generate income in the following ways:

• Throughsaleofcardreader/writerdevices

• Throughsaleofvirtualwallets(smartcards)

While the above would generate one-time-revenue, fees on charging of virtual wallets would create continuous revenue inflows. In addition, this could potentially result in zero cash handling cost in the overall system.

Customer’s perspective

Customers (payers) would be spared a fee per transaction and benefit from the convenience of access to cashless transactions, at any time and place. They would be able to perform even mundane transactions without using cash.

Figure 5: Process flow for a wallet-to-wallet transfer

Merchant’s perspective

Since virtual wallet transactions would run independent of a network, merchants would not have to pay a commission or interchange fee per transaction. This will also reduce the cash handling cost at merchant’s end.

Challengesa) Investment in technology to produce double

slot card readers/writers.

b) Investment in upgrading ATMs to write on smart cards.

c) Ensuring penetration of card readers/writers across businesses.

d) Doing transaction level accounting for each transaction. Since the card reader/writer is a standalone device, the latest balance in the virtual wallet would not be updated in any central database. Therefore, losing the wallet (smart card) would be akin to losing cash, with remote chances of recovery.

e) No possibility of remote charging.

Conclusion

Glossary

Challenges notwithstanding, the concept has practical value and is capable of providing tangible benefits to the parties involved. While mobile wallets and payments are the growth areas for tomorrow, seamless payments across

mobile wallets on different mobile networks will take time to implement. In the interim, till cards die a natural death, this concept can prove valuable if invested in.

Terms Description

Virtual Wallet A device, capable of holding digital money, which can be used to

execute transactions, thereby replicating a physical wallet. In the

context of this paper, the virtual wallet is smart card-based.

Smart Card A pocket-sized card with embedded integrated circuits, which can

enable identification, authentication, data storage and application

processing.

Mobile Payment Payment initiated through a mobile phone.

Card Reader/writer A device capable of reading information from and writing

information on a smart card.

Merchant Owner of a business outlet, and the beneficiary of a financial

transaction.

Customer The entity that does business with the merchant.

Payer The entity that pays money.

Payee The entity that receives money.

AnnexureCredit card transactions in India rise 26% on-yr to Rs 62.13 bln in Feb

Posted: Tue, April 12, 2011 | 1:38 PM IST

Mumbai, April 12: Credit card transactions in India grew 26.2% on-year to Rs 62.13 billion in February from Rs 49.23 billion in the same month a year ago. However, the number of credit cards in circulation has declined by around 10% to 18.1 million as on February 28 from 20.1

million a year ago. The total transactions carried out via credit cards rose 22.16% to Rs 685.48 billion during April-Feb period of the fiscal, against Rs 561.12 billion in the same period of 2009-10. At the same time, the debit card transactions in February jumped by 49.44% to Rs 33.04 billion from Rs 22.11 billion in the corresponding month in 2009-10. As on February 28, the number of debit cards in use in the country was 222.3 million, 25% more than that

Display 1: Card distribution as on 28th February 2011 Display 2: Transaction value in INR (amount in billions)

a year earlier. The total transactions carried out by debit cards in April-Feb period was up 47.28%

to Rs 353.34 billion as against Rs 239.91 billion in the year-ago period.

Arup R. Guhathakurta Principal Consultant - Finacle ADT, Infosys

Finacle from Infosys partners with banks to transform process, product and customer experience, arming them with ‘accelerated innovation’ that is key to building tomorrow’s bank.

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