UPI has catapulted India into the forefront on the global digital payments landscape. Working hand in hand, the AePS payments system is making life easy for rural folks, notes Tamal Bandyopadhyay.
In the last week of June, the Reserve Bank of India issued guidelines to strengthen the Aadhaar Enabled Payment System, or AePS.
All of us are familiar with UPI -- Unified Payments Interface. What's AePS?
We can call AePS UPI's elder brother. Launched in 2011, five years before UPI came into being, it's a bank-led model that allows online, interoperable financial transactions at MicroATM terminals using Aadhaar authentication.
Aadhaar is a 12-digit unique identity number for all residents of India, based on their biometrics and demographic data.
UPI, in contrast, is a system that allows for real-time, person-to-person and person-to-merchant transactions through mobile devices.
Developed by the National Payments Corporation of India (NPCI), it allows users to link multiple bank accounts to a single mobile application.
UPI and AePs together have changed India's payments landscape. AePS' playing field is rural and semi-urban India.
In May 2025, 18.68 billion UPI transactions worth Rs 25.14 trillion were done. The comparable figures for AePS were 105 million transactions worth Rs 2.87 trillion. These are financial transactions.
If we include non-financial transactions such as balance enquiry, mini statements etc, the volume of transactions crossed 208 million. All figures are rounded off.
AePS, also operated by NPCI, facilitates interoperable transactions through the Aadhaar number and biometrics for financial services such as cash withdrawal, cash deposit, fund transfer, and non-financial services like mini statement and balance enquiry, among others.
The party spoiler is fraud -- done by stealing identity and customer credentials. I don't have access to the latest data.
In July 2023, answering a question in the Rajya Sabha on 'Transactions and financial fraud through Aadhar Enabled Payment System', the finance ministry mentioned that out of Rs 10,247 crore worth of transactions between January 2019 and May 2023, Rs 585.79 crore was lost to frauds.
To make AePS transactions safe and secure, NPCI has developed a Fraud Risk Management system, a real-time fraud monitoring solution, and given it to banks free of cost as a value-added service.
The RBI wants to strengthen fraud risk management by streamlining the process of onboarding AePS touchpoint operators, or ATOs.
The acquiring banks and the ATOs, which facilitate such transactions at both mobile and fixed points, are the two parties involved.
The RBI wants the acquiring banks to carry out due diligence of all ATOs before onboarding them and periodically update their KYC details.
In cases where an ATO has remained inactive for three months, the banks will have to carry out fresh KYC for them.
They also need to continuously monitor the activities of ATOs through their transaction monitoring systems and set operational parameters based on their business risk profile.
Location and type of the ATO (mobile or static), besides volume and velocity of transactions must be on the banks' fraud risk management scanner.
Finally, given how fraudsters are innovating, the operational parameters for the ATOs must be reviewed periodically.
There is a third entity involved in the process -- an intermediary, which connects the ATOs with the banks. They are called corporate business correspondents (corporate-BCs).
The RBI directive is silent on them. The onus of verifying the credibility of the ATOs is entirely on the acquiring banks.
The regulator should formulate guidelines for the corporate-BCs, too. There are around 2.3 million ATOs and 900 corporate-BCs, but the bulk of the business is done by less than a dozen such intermediaries.
The conventional bank-branch-linked BCs -- who extend banking services to remote and underserved areas -- came into being in 2006.
There are about 200,000 of them working closely with the banking system. So far, the operations of the ATOs were modelled on the BCs.
When the new norms come into being in January 2026, this will change.
These norms will definitely make the payments system in rural India robust, but there are a few issues the RBI may look at to widen the coverage.
The acquiring banks are mostly a few private banks and payments banks. Public sector banks (PSBs) also use them, but not as liberally as they should.
When it comes to ATM transactions, customers are not charged for five a month. These transactions are not free; the banks bear the cost.
For the ATOs, the PSBs generally cap the number of transactions because of the cost. They seem to prefer the conventional BC model to the ATOs.
This means the customers cannot do all the transactions they want at the ATOs; they need to visit the BCs, too.
This defeats the very purpose of the AePS payment system -- convenience for customers.
For the use of AePS, the issuing bank pays an interchange fee of 0.5 per cent (maximum Rs 15) to the acquiring bank for servicing its savings bank customers.
For ATM transactions, the issuing bank pays a flat interchange fee of Rs 19 per transaction to the acquiring bank.
For every AePS transaction, five parties are involved -- the customer, the ATO, the issuing bank (from where the money is flowing out), the acquiring bank (where the money is going) and the corporate-BC.
Each participant incurs costs for setting up terminals and managing cash. In this ecosystem, keeping everybody happy is the key to success, but that's not easy.
The customers can use the system both for cash deposits and withdrawals. However, only a few issuing banks are live on interoperable cash deposits.
The RBI may consider allowing third-party deposits too. Once this is done, A will be able to put money in B's bank account using the AePS payments system.
The RBI is also working on new guidelines for payment aggregators -- physical point of sale (PA-P), a third-party service provider that enables businesses to accept online payments by acting as an intermediary among the customer, the business and the financial institution.
Thirty-two payment aggregators have received initial approval from the RBI to operate.
To make it more effective, the RBI could allow them to withdraw cash for the customers using QR code. There are around 225,000 ATMs operating in India.
The payment aggregator network can play the role of a micro-ATM, besides what it is already doing.
Finally, there is confusion about what the prepaid payment instrument (PPI) operators can and cannot do.
There are 50 such operators, including a few banks, a small finance bank, a large non-banking financial company and others such as Amazon Pay, MobiKwik Systems Pvt Ltd, Spice Money Ltd, Pine Labs Pvt Ltd, etc.
They issue and operate prepaid payment instruments, such as mobile wallets and prepaid cards, enabling users to store and spend digital money.
One can keep up to Rs 2 lakh in the wallet, can load cash up to Rs 50,000 a month, and withdraw Rs 10,000 a month (Rs 2,000 at a time).
A recent Bharat Bill Payment System (BBPS) directive says if the wallet is loaded by credit card, the money cannot be used for loan repayments.
Bharat Connect is a one-stop, integrated bill payment system in India, conceptualised by the RBI and run by Bharat BillPay Ltd, a subsidiary of NPCI.
Credit card is not a permissible payment mode for paying loan EMIs.
Of course, one cannot use money drawn through a credit card to pay the bill of another credit card. But since money is fungible, how will one ensure the source of it is credit card? Shouldn't the money kept in a PPI wallet be allowed to be used for loan repayment? I understand it is now allowed to repay only overdue instalments.
If all small borrowers start paying their loan instalments using the PPI wallet, the cost of collection for the microfinance industry will go down sharply.
UPI has catapulted India into the forefront on the global digital payments landscape. Working hand in hand, the AePS payments system is making life easy for rural folks.
Payment aggregators and PPIs are other pillars in the new payment architecture structure. Collectively, they are playing a critical role in financial inclusion and economic empowerment.
Tamal Bandyopadhyay is an author and senior advisor to the Jana Small Finance Bank Ltd.
Feature Presentation: Rajesh Alva/Rediff
© 2025