In today’s Finshots, we explain HDFC Bank’s pilot project to promote offline digital payments and the role of the RBI sandbox

The Story

Kolkata just wrapped up its annual International Book Fair. There were lots of books. And thousands of book lovers. It was supposed to be a bonanza for booksellers.

But…everything went wrong. Because patchy internet connections ruined the show. See, people were so used to making UPI payments that many of them didn’t carry any cash. And when they tried UPI, apparently, only 2 out of 10 UPI payments were successful. Naturally, sales plummeted.

Well, such sticky situations where poor networks turn into your worst nightmare might soon be a thing of the past. Because on Monday, HDFC Bank kickstarted a pilot programme for offline payments. Yup, you can use your phone and make payments upto ₹200 without the internet!

Now before you scoff at the low limit, here’s an interesting fact. According to the NPCI, the folks who manage UPI, 50% of the total UPI transactions are below ₹200. So yeah, these offline modes of payment can be a real lifesaver on most occasions when you’re caught in areas with a patchy network.

So how will OfflinePay work?

Well, you load money into a special wallet that can hold up to ₹2,000. And when you want to make a payment, just fire up the app which will work offline. Scan a QR code and watch the money get debited from the wallet. Even if the merchant doesn’t have a network, that’s fine. Because after the payment is done, it generates a QR code. The merchant can use their OfflinePay app and scan this code for proof of payment. Even if they’re offline. And once either you or the merchant comes into internet range, the transaction is settled.

But wait…that sounds pretty much like UPI Lite, no?

Well, UPI Lite works by topping up a separate wallet too. And it can work offline. But we scoured through all the FAQs available — on the NPCI website and even Paytm which has just integrated UPI Lite into its app — and couldn’t find anything to show how the receiver can be sure that they’ve received the payment. So maybe that’s a difference? We don’t know.

Because HDFC’s statement says, “Digital payment typically requires one either the customer or the merchant to be online to get executed. The pilot is attempting to ensure that a transaction goes even when both customer and merchant are fully offline.”

Anyway, while OfflinePay sounds perfect, it definitely has its fair share of hiccups. For instance, everyone involved with the transaction needs the OfflinePay app. Also, you can’t top up the wallet when you’re offline. So if you’re in a region without prolonged internet access and make payments, you might quickly run out of money in your wallet.

But hey, it’s innovation nonetheless.

And here’s the thing. This isn’t a full-fledged rollout. It’s a trial run for select users in 16 Indian cities (and towns) over the next 4 months. In fact, HDFC Bank came up with this idea under the RBI’s Regulatory Sandbox (RS).

What’s that, you ask?

Think of it as a special, fenced-off area that companies can use to trial their ideas. They can experiment with new tech. And launch innovative products. All under the watchful eyes of a regulator too — like the RBI for banks, the IRDAI for insurance, or SEBI for capital markets.

But if you’re wondering why on earth we need these sandboxes, think about it this way. From a regulatory standpoint, you want to work in tandem with innovative companies. You don’t want them to find some loophole and launch a product. Then, people will blame you saying that you were napping and that regulations are always slow to catch up. By telling companies, “Hey, let’s work together and see how we can innovate,” regulators can be front and centre of developments. And it’s all real-time. You don’t need to push consultation papers and seek feedback from everyone. You can conduct a live experiment, see how the pilot pans out and decide if regulations need a tweak — to make things simpler or to reduce some big risk.

For companies, it’s a big deal too. Because typically, regulators have a whole host of criteria that a company needs to meet before it can launch a financial product. It could be net worth, track record, or management experience. But all this could be relaxed in a sandbox. Startups with a solid idea can get an exemption and create fantastic products.

And since the product isn’t rolled out to everyone but only to a select group who’s aware of the risks, it won’t hurt the company’s reputation if things go wrong too. It’s a lot like how we patch-test new skincare products to understand if they’re safe.

It also saves costs. If a fintech chooses to trial its product to a select group under the RBI sandbox they don’t have to spend boatloads of money on heavy rollouts too.

The end result? Well, in quick time, everyone will know if there’s ‘product market fit’ or not. Maybe no one will care about sending ₹200 offline? Who knows.

So yeah, it’s thanks to the RBI regulatory sandbox that we could soon have ‘offline digital payments’. It has allowed a legacy bank like HDFC to innovate along with fintechs. And with RBI launching multiple cohorts under the sandbox for retail payments, cross-border payments, and financial fraud prevention, you can be sure that we’ll see more such innovation coming our way. With over 6,000 fintechs in the country, it could brew remarkable benefits for India’s financial services sector. And for us as users.

Until then…

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