The Reserve Bank of India (RBI) has proposed a ‘lightweight payment system’ in its annual report, which the central bank believes should be a fallback option during extreme and volatile situations. How will this system be different from other payment systems like NEFT or UPI? Sarthak Ray takes a look.
The Lightweight Payment and Settlement System
The RBI has termed the Lightweight Payment and Settlement System (LPSS) the “bunker equivalent” for payment systems, drawing a parallel with the safety bunkers that are created by nations to shield the population during enemy attacks in wars, natural and anthropogenic disasters, and other such scenarios.
The lightweight system is envisioned to be a payment facilitator in scenarios where other payment systems are rendered temporarily unavailable due to disruption of the underlying information and communication infrastructure caused by catastrophic events such as natural disasters and conflict.
Why such a system is needed
RBI says it is prudent to be prepared to face extreme and volatile situations. It has conceptualised a lightweight and portable payment system “that will be independent of conventional technologies and can be operated from anywhere by a bare minimum staff”. Given that the LPSS will have minimal hardware and software requirements, it is expected that a catastrophic event won’t impede its performance. Such a system would be needed to process transactions critical to ensuring the stability of the economy, such as government and market-related transactions.
The RBI envisions the system to ensure near-zero downtime of payment and settlement, to keep the liquidity pipeline intact through uninterrupted functioning of essential services like bulk payments, interbank payments and provision of cash to institutions.
Different from UPI, RTGS, NEFT
UPI, RTGS, NEFT RTGS, UPI, etc, rely on complex networks, backed by advanced IT infrastructure. LPSS, on the other hand, will have a leaner infrastructure. Other than that, LPSS will be activated on a need basis. This seems to suggest that it will not be available on an ongoing basis. Whether or not it will be available for retail users —UPI, RTGS, NEFT, etc, are — is not clear yet, say experts.
Authentication requirements
Authentication and verification for UPI, NEFT, RTGS, rely on a information-communication technology-heavy infrastructure. Given LPSS won’t require such scale of infrastructure, it is likely to have simplified authentication and verification, while records are maintained for reconciliation.
One of the simplest authentication methods is password protection, with a master password for access and a service authentication password.
The Lightweight Payment and Settlement System
The RBI has termed the Lightweight Payment and Settlement System (LPSS) the “bunker equivalent” for payment systems, drawing a parallel with the safety bunkers that are created by nations to shield the population during enemy attacks in wars, natural and anthropogenic disasters, and other such scenarios.
The lightweight system is envisioned to be a payment facilitator in scenarios where other payment systems are rendered temporarily unavailable due to disruption of the underlying information and communication infrastructure caused by catastrophic events such as natural disasters and conflict.
Why such a system is needed
RBI says it is prudent to be prepared to face extreme and volatile situations. It has conceptualised a lightweight and portable payment system “that will be independent of conventional technologies and can be operated from anywhere by a bare minimum staff”. Given that the LPSS will have minimal hardware and software requirements, it is expected that a catastrophic event won’t impede its performance. Such a system would be needed to process transactions critical to ensuring the stability of the economy, such as government and market-related transactions.
The RBI envisions the system to ensure near-zero downtime of payment and settlement, to keep the liquidity pipeline intact through uninterrupted functioning of essential services like bulk payments, interbank payments and provision of cash to institutions.
How are other nations looking at facilitating payments in extreme scenarios
With the increase in digital transactions globally — especially after the pandemic — and the imperative to be prepared for a VUCA (volatility, uncertainty, complexity, and ambiguity) world, economies are taking steps to be prepared for extreme scenarios.
The Bahamas, a small island country in the Caribbean, has issued a central bank digital currency —the Sand Dollar, or the paper-currency Bahamian dollar’s digital equivalent — as a way of disaster-proofing payments, says a Mastercard blog. The move was catalysed by the twin disasters of Hurricane Dorian in September 2019 that killed many and caused $3 billion in damage, and then the Covid-19 pandemic. The Sand Dollar supports “offline functionality” when there are disruptions to communication. “Built-in safeguards will allow users to make a pre-set dollar value of payments when communications access to the Sand Dollar Network is disrupted. Wallets will update against the network once communications were re-established,” the Sand Dollar website says.
Several jurisdictions, including Canada, the European Union, Ghana and Uruguay, are already experimenting with payment solutions that can be triggered in extreme situations that need offline transactions to be validated.
9.41 bn: UPI transactions in the month of May, as per NPCI data
`14.9 trn: total value of UPI transactions in May 2023
Canada, EU, Ghana, Uruguay looking at disaster-proofing payments
Sand dollar: the Bahamas’ disaster-proof payment system
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