49. Payout (Revisiting Basics)

I wrote about payout or disbursement in article №42… where I covered various business cases, requirements of payout and briefly wrote about various rails. Subsequently, I received a few feedback that I had jumped the gun by going a bit advanced and should have covered a little bit more about the basics. So I thought about touching upon the basics again… even if it is a repeat, it won’t harm… right?

Here are the rails that are used for payout or disbursements

Illustration 1 — Payout rails

RTGS (Real Time Gross Settlement)

Inter-bank transfer platform managed by Reserve Bank of India (RBI) for facilitating large ticket transfers. RBI acts as a clearing house to square off incoming and outgoing funds of these inter bank transfers

• Transfer amount: Rs.2,00,000 to any amount (unless your bank enforces a cap)
• Working hours: 24x7 (from Dec’2020)
• Transfer Speed: Real-time
• RTGS works in Gross settlement model — That means every transfer will be done separately.

Illustration 2 — RTGS fund flow

NEFT (National Electronic Fund Transfer)

Inter-bank transfer platform managed by Reserve Bank of India (RBI).

• Transfer Amount: Rs.1 to any amount (unless your bank enforces a cap)
• Working Hours: 24x7 (Since Dec’19)
• Transfer Type: Batch processing of 30mins
• NEFT works in net adjustment

Illustration 3 — NEFT Fund flow

Bank A has to move a total Rs.15,000 (Rs.10,000 to Bank X and Rs.5,000 to Bank Y). Bank Y has to transfer Rs.3,000 to Bank A. So during clearing of transfers, Bank A will transfer Rs.10,000 to Bank X but will transfer only Rs.2,000 to Bank Y. (i.e. Rs.3,000 is net-adjusted)

IMPS (Immediate Payment System)

This is a real time transfer solution managed by NPCI (i.e. NPCI is the clearing house).

• Transfer amount: Rs.1 to Rs.2,00,000
• Working hours: 24x7
• Transfer Type: Real-time

Illustration 4 — IMPS fund flow

IMPS works in both Real and non-real time model:

• Real Time: Remitter’s bank will debit the account and then intimate the beneficiary bank via NFS (National Financial Switch). Then the Beneficiary bank validates the beneficiary’s account and credits the beneficiary’s bank account
• Non-Real time: Both the banks will do net-settlement in batches (3 batches per day via RTGS)

UPI (Unified payment Transfer)

UPI is a real-time transfer mechanism that works 24x7 and managed by NPCI. As UPI rides on IMPS rails, it inherits all the traits of IMPS:

• Transfer Amount: Rs.1 to Rs.1,00,000 (your bank may put a cap on the upper amount)
• Working Hours: 24x7
• Transfer Type: Real-time

UPI is different in many ways:

• Transfers done to a VPA (which looks like your mail id but underneath there will be a bank account)
• Transfer can happen by pull or push mechanism
• Transfers involve 2, 3, 4 entities depending on PSPs and banks

Read more about UPI here

Payout platforms / Integration types:

That pretty much covers the main transfer rails… next one would be about type of Transfers.

These are mainly of two types:

• P2P (person to person) or B2B transfer (one business to another business)

P2P transfers are typically done at branch or online channels of the bank for NEFT, IMPS and RTGS. UPI can be done by any PSP App of bank or third party PSPs (G Pay, PhonePe etc.)

• Business to customers/businesses (One business to multiple parties)

Business to customers (or other businesses) is more interesting as various factors such as performance, stability, processing capacity and commercials play a role. I have covered these payouts in details in Article 42 (Read Here)

Illustration 5 — Payout fund flows

There are three main ways to integrate a payout platform for the transfers

1. Aggregator Model: A payment aggregator will bring multiple integration with banks to provide a bank agnostic platform. A merchant will park the funds with the aggregator and initiate the payout (either via dashboard, file upload or API)

Advantages:

• Bank agnostic platforms have no dependency on a single bank, higher uptime, transaction processing capacity and thus, higher success rate
• Adding of beneficiary in real-time along with bulk addition of beneficiaries

Disadvantages:

• Merchant has to park funds with the aggregator and keep replenishing it
• Customer’s bank account narration will have payment aggregator’s name and not the merchant’s name (it is confusing)

2. Bank-connected Model: A payment aggregator can offer this model where the merchant will park the funds with a designated bank but the transfers are initiated via the aggregator’s APIs/dashboard.

Advantages:

• No need to move funds as the account belongs to the merchant
• Narration will be in merchant’s name
• Aggregator may provide better support w.r.t. integration, post-live support

Disadvantage:

• Paying extra to payment aggregator
• If that bank is down then the payout will stop

3. Bank Model: A bank can offer its payout solution to the merchant where the merchant can initiate payout via API/Dashboard. There is no other third party aggregator involved.

Advantages:

• No need to move funds as the account belongs to the merchant
• Narration will be in merchant’s name

Disadvantages:

• If the bank is down then the payout will stop

So the merchant needs to make the decision based on its requirements.

Points to be considered:

1. Funds and new revenue channel:

To initiate payout, the merchant needs funds. What happens if there is a shortage of funds to do payout? Naturally, payouts don’t go through. But this is an opportunity for aggregators and banks to provide an OD to the merchant who needs funds and charge the merchant for the funds — another revenue channel.

2. Transfer details

To initiate the transaction to the beneficiary, the remitter would need beneficiary details. NEFT, RTGS and IMPS require beneficiary’s account number and IFSC. UPI transfer can be initiated to VPA or A/C number & IFSC.

Interesting part: IMPS doesn’t validate entire IFSC code but only first 4 letters (Try it)

3. Commercials

P2P or B2B transfers: Except for IMPS, banks don’t charge for NEFT, RTGS or UPI.

B2C or B2Bs transfers: Yes, there will be some API charges. NEFT and UPI will be on single flat rate even though most of the banks offer these modes to merchants and aggregators at nil cost.

IMPS and UPI will be on a slab wise flat rate. (up to Rs.1000, Rs.1001 to Rs.25K and above Rs.25,000). Few banks may give the payout solution for free or may charge a one time nominal fee as banks love float more than anything.

4. 24x7 NEFT/RTGS?

NEFT was made 24x7 only in Dec’19 and RTGS became a 24x7 solution in Dec’20. But the question is: are these really 24x7?

NEFT and RTGS are 24x7 if initiated by the bank’s net-banking site/app (meaning only of P2P and B2B use cases) but for one to many cases (business to consumers or other businesses or API based payouts), things become complex as all banks do not allow it or those who allow it will put restrictions in terms of number of transfers or limit on per transfer amount or limit on total amount.

Reason: Refer to illustrations 1 & 2 (NEFT and RTGS). If you notice, the banks need to keep funds with RBI to square off the transfers. Considering they do not want to lock-in their funds with the clearing house, they have to enforce limits. But if the bank has enough funds to park, then they can easily offer 24x7 to everyone and to all use cases.

Conclusion:

Although I had written an article on payout earlier, I randomly started writing again based on a few feedback. So, without much thinking about how to conclude this one, I will end it as abruptly as I started it.