If you anything like me, you would have at least ones rented, bought things on EMI or would have taken a loan from a bank sometime in your life and if you have, you might have received an SMS or an email which goes something like this
This particular SMS was on a standing instruction on my credit card for something I rented out from Rentomojo.
India’s rental economy at the time of writing this article exceeded $1.5 billion in revenue, combined with the loan disbursements of more than INR 25 trillion it makes sense especially for a company working in any of these industries to try and automate repayments.
One such way i.e. credit card based standing instruction is what you saw in our example above. In this article, we try to explain one of the latest recurring payment infrastructures available to businesses in India.
Here we go,
What is NACH?
Wiki defines NACH as
“A centralized clearing service that aims at providing interbank high volume, low-value transactions that are repetitive and periodic in nature. Offering credit and debt service to corporates, banks, and financial institutions, the service, aimed at integrating all regional ECS into one National Payment System, is claimed to be better than its predecessor, Electronic Clearing Service.“
Introduced by NPCI, NACH allows service providers to automate recurring payments from the customer’s accounts.
Here is how it worked.
Customer opts for services——-> The service provider delivers the service——-> Customer is asked to fill in a paper form ——-> This form or Mandate is sent to the Sponsor back i.e. vendors bank —-> Vendors bank then sends this to destination bank i.e. bank of the customer which approves the same
This entire NACH process took anything between 15 to 20 days to activate. Being paper-based meant everything from filling out the forms to the delivery of them to both sponsor and destination bank had to be done manually.
As an alternative to this NPCI introduced eNACH as part of it’s digital India initiatives, eNACH was the electronic form of NACH which allowed eMandate creation, submission, and processing of payments online with minimum human intervention.
Here is the official definition,
What is eNACH?
“National Automated Clearing House (NACH) is a centralized system, launched with an aim to consolidate multiple ECS systems running across the country and provides a framework for the harmonization of standards & practices and removes local barriers/inhibitors. It provides a web-based solution to facilitate interbank, high volume, electronic transactions which are repetitive and periodic in nature. “ Source – NPCI website
eNACH as a product consists of 2 formats,
- Aadhaar based eSign driven
- Debit card or Net banking based authorization driven
The main difference between both of these formats is the way the customer authorizes a merchant to debit from her account. In case of Aadhaar based eSign, the customer is required to authorize the transactions using their Aadhaar number and electronic signature, while in case of the second option the customer authorizes the merchant by either logging into their net banking account or verifying their account via their debit card.
eSign based eNACH
Paper based NACH process required merchants to send the physical NACH form filled out and signed by the customer to their banks this added to the time taken to activate payments for the products sold.
ESign based NACH was supposed to circumvent this problem by digitizing the entire process and replacing paper forms with web based digital forms signed using Aadhaar based eSign. Digitization halved the time takes to activate the NACH payment option at the customer’s bank.
eNACH via Debit card or Net banking
With the supreme Court’s verdict on Aadhaar usage, most private sector companies were unable to use Aadhaar APIs to verify their users. NPCI, after the judgment discontinued eSign based eNACH product. This led merchants to revert back to paper-based NACH or ECS systems for recurring payments especially in case of loans and EMIs.
Debit card/Net banking authorized eNACH is meant to be a replacement to the eSign based eNACH, with a simpler flow and minimum to no human intervention. APIs from NPCI allows a merchant to get the eMandate signed using a debit card or Netbanking credentials and send the same directly to NPCI.
NPCI then uses and shares this information with the sponsor bank and destination banks to set up the eNACH payment just within 2 days.
How does eNACH with Debit card/Netbanking authorization work?
The flow diagram in the previous agreement details the process followed in activating eNACH on a customer’s account. The entire process consists of 5 major actors, namely
- Sponsor bank:- This is the merchant’s bank which accepts regular payments from the customer’s bank.
- Destination bank:- Customer’s bank wherein the NACH payment is setup
- Merchant:- The one who owns the sponsor bank is usually a lender or a business who sold products on EMI
- NPCI :- National Payments Corporation of India, an umbrella organisation for operating retail payments and settlement systems in India, is an initiative of Reserve Bank of India (RBI) and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for creating a robust Payment & Settlement Infrastructure in India.
- Customer:- The end customer who interacts with the merchant and is making the payments.
NPCI’s eNACH is built to consolidate various high volume, recurring payments being used by financial institutions and businesses IN India. With debit card or net banking based eNACH and growing banking penetration, it is now becoming easier to automate payments with almost no human or paper intervention in the process.