The Ecosystem of Digital Payments in India – An Analysis

We’re all aware of the recent demonetization of larger currency. Having said that, nothing else is a better time to talk about the ecosystem of digital payments in India. Sure digitization in India is a recent phenomenon, but better late than never, India has reflected the developments occurring in the global payment landscape with an exponentially increasing growth observed in digital transactions. India is now one of the leading markets for payment services. With its massive population of over 1.25 billion, it is rapidly progressing to embrace digital and technological advancements and is gracefully conquering a lion’s share of the payments sector.

4 Super Trends Changing India

Here are four of those mega trends that are expected to change the ball game of the digital payment space in the Indian scenario.

• India turning Digital
• An encouraging regulatory atmosphere
• Rise of the NextGen payment service providers
• Improved customer services and experience

1. India Turning Digital

India is a fast evolving digital monster. The ridiculously amazing internet’s reach and smartphone penetration have taken care that Indian customers don’t lose their touch with connectivity. The same has also mirrored the rapid growth of the banking sector to turn digital.

• Mobiles here, there and everywhere:
  India boasts about its top second ranking in the world with over a billion mobile users. That being said, a mammoth 240 million connections alone are for smartphone enthusiasts, which is sure going to touch the above 520 million mark by the coming 2020! 
• We’re a part of the growing web:
  The internet network in the country is expanding at a jaw-dropping rate. With 3G and 4G connections on a rise, even the remotest parts of India have access to anything in the world at merely their fingertips! According to an initiative by Digital India, the National Optical Fibre Network (NOFN) is all set to provide broadband connections to cover 2,50,000 Gram Panchayats spread across the rural fabric of the country.As about 70% users access the internet through their mobile phones, data enabled services are also expected to see a new high in these areas as part of the initiative. Having said that, almost 90% of all the devices will be connected to the web by 2017, with the number of people using the internet to double; i.e., from yesteryear’s 300 million to close to 650 million by 2020!

   

• Banking gone Digital: For the last few years, digital transactions have seen a stable and steady growth of about 50% year over year. On the other hand, the ATM transactions have been growing at a scale of 15%. However, not to much of a surprise, the branch-based transactions have come down by approximately 7% in the last fiscal year.

2. An Encouraging Regulatory Atmosphere

The payment gateway space is rampantly changing. The government and other public sector organizations or regulatory bodies have acknowledged the same and kept up to the pace of the constantly changing environment in pertinence to both technology and customer outlook. Although this is just a beginning, a lot more is awaited to make it favorable for businesses operating in the payments space.

Here are a few key regulatory steps that are currently facilitating the digital payments in india

• No KYC (Know Your Customer) process for smaller transactions:
  According to RBI guidelines, no KYC process is needed for prepaid transactions up to INR 10, 000 per month. This way, the customer can just download any wallet of their choice and use the same for transactions without having to produce documents, photographs or other papers that are usually required while making use of the traditional banking services. 
• Freedom from Two Factor Authentication (2FA):
  A two factor authentication is necessary for secure transactions to be made using Indian debit and credit cards, irrespective of the transactional value. Although, it is for security, this sure gets cumbersome, and at times outcomes in a number of failed transactions and transactional drop-offs. However, a mobile wallet in comparison involves the 2FA process only when stocking funds from bank instruments. Moreover, mobile wallets tend to reduce the risk of online frauds, because they do not reveal any of the customer’s savings account details. 
• Aadhar made KYC easier:
  Aadhar Cards as a national identity has made the KYC process easier. By electronically linking a customer’s mobile number to their Aadhar card, the process gets completely hassle free. Also, the Jan Dhan account saw about 270 million bank accounts being opened. Financial inclusion and biometric authentication are now a reality! 
• Unified Payments Interface (UPI):
  The Unified Payments Interface introduced by NPCI is a cohesive open architectural set-up that could essentially change the way customers deal with their payments. The UPI set-up recommends combining all facilities from Immediate Payment Service (IMPS), Automated Clearing House (ACH) to RuPay into one common stand. This would permit an unbroken interoperability and the potential unlocking of compound solutions.The in-built open architecture will provide access to all payment service providers (PSPs), right from banks, FinTechs, payment banks etc. It is also likely to deliver users with the luxury of accessing bank accounts through any PSP that is linked to the UPI set-up. In addition to this, customers will be able to pick a virtual address in any format (mobile number, Aadhar card, email address, etc.) This is estimated to enhance user experience and empower PSPs to offer easy and simple payment solutions. It is also likely to facilitate several use cases on the UPI platform – comprising peer to peer payments, person to merchant payments and business to business payments.

   

• Bharat Bill Payment System (BBPS):
  NPCI also started BBPS to address the lack in the existing payment systems as they do not completely acknowledge the customer needs due to the dearth of knowledge w.r.t electronic payments. Also owned and run by the same, BBPS is proposed as an ‘Integrated Bill Payment System’ that is interoperable, handy and cost effective, which allows multiple payment modes by providing an instant confirmation of the transaction made.

3. Rise of the NextGen Payment Service Providers

Over the last three to four years, the competitive digital payment scenario in India has been a witness to a drastic change. Currently, it involves telecommunication companies, banks, mobile wallets, e-commerce and technology firms, and most likely payment banks are also to be seen in the near future.

• Bank-led:
  We’ve all seen banks offer mobile banking applications incorporated with bill payment solutions. However, as days passed customer familiarity and experience with mobile wallets has proved to be far more smooth and fast, which resulted in more and more customers choosing mobile wallets for simple mobile recharges and bill payments.Hence, banks also have come up with their in-house mobile wallets along with the mobile banking apps. For instance, there are Pockets by ICICI banks, Lime by Axis Bank, PayZapp by HDFC, Buddy by SBI and Ziggit by IDFC Bank. To make a note, most of these apps do not need a bank account to be put to good use, some of these actually permit existing bank customers to sign in using their internet or mobile banking authorizations.

  Not to forget that banks already have an existing active customer base, it’s easy for them to quickly monetize in comparison with other independent mobile wallet companies, who would have to make an extra effort to gain customer acquisition.

   

• Telco-led:
  Leading telecommunication companies like Airtel and Vodafone came up with their own mobile payment solutions Airtel Money and Vodafone mPesa respectively, catering to their own and existing customer base. Initially, their solutions were USSD-based to only ensure a user-friendly interface to people who are not very digital-savvy. Their primary motto was basically mobile recharges and transfers.Eventually, Idea Money by Idea, mRUPEE by Tata, Jip Money by Reliance are some more telco-led payment gateways launched to make it easy for customers to carry out financial transactions.

   

• Prepaid wallets:
  In 2009 -2010, the RBI had issued 26 Prepaid Payment Instrument (PPI) licenses. PPI issuers could hence issue semi-closed wallets that facilitated payments without two factor authentication or 2FA. As an outcome of the same, two types of PPIs developed: 
  • Mobile Wallets: Mobile wallets are application based stored value accounts financed by credit or debit cards or through net banking. Some of the well-known players in this segment are Paytm, Mobikwik, Freecharge and Citrus Pay. These are also primarily used for basic day to day needs like mobile recharges or bill payments.Having been backed by VC funding, these companies spent a fortune on customer acquisition through several marketing creativities. Eventually, their existing business models have included expansion of services to multiply their customer base. Such moves included tie-ups with radio cabs (Paytm – Uber, Meru – Citrus Pay), offline use cases such as POS payment (Paytm – More), also payment at fuel stations and educational institutions etc.

    In order to further reach people out of the banking space, wallet companies have allowed cash funding of wallets through out-of-the-box solutions such as Mobikwik’s cash pickup provision and Paytm’s link up with ICICI for loading cash at their bank branches.

     

  • Prepaid Cards: Firms like Oxigen, Itz Cash, Suvidhaa and GI Tech provide solutions through the support of agents lending a hand to customers who are not very tech-savvy, mainly used for remittances and railways ticket booking. Some of the PPIs have been later acquired by large tech giants. For example, Snapdeal acquired Freecharge, FxMart for Flipkart money by Flipkart, and likewise Amazon took over Emvantage.Similarly, Ola also offers Ola Money and Bookmyshow has their own wallet application to cater to their users. With rapidly growing acceptance and popularity for these wallets, many other firms have started to apply for licenses already. And the total number of PPI licenses reached a count of 46 in 2016.

     

  • Payment Banks: Keeping the aspect of financial inclusion in mind to further facilitate both high and low volume transactions by minimizing the dependence on cash, RBI came up with in-principle sanction to eleven entities to set up payment banks in 2015. These entities telecom giants (like Airtel, Vodafone, Uninor, Idea, Reliance Jio), tech-driven payment players (like Paytm), next-billion focused players (like NSDL, Fino, India Post) and Non-Banking Financial Companies (like Mahindra Finance, Cholamandalam, etc.)The scope of operation of a payment bank involves acceptance of demand deposits up to INR 1 Lakh per customer, issuance of ATM / debit cards, providing payment and remittance facilities, playing the role of a Business Correspondent (BC) to another bank and circulation of mutual funds, insurance services etc. However, no lending activities or issuance of credit cards, or accepting NRI deposits or becoming a “virtual” bank is allowed.

Although, the economic blueprint of payment banks remains challenging, given that they cannot earn by lending revenues or high interest rates on floats due to the obligation of investing customer deposits in several government securities. A few licenses such as Cholamandalam, Uninor and Mahindra Finance have already given back their in-principle approval to RBI. Hence, payment banks are well placed to capitalize on the payments opportunity.

4. Improved Customer Experience

Thanks to the popularity and acceptance of e-commerce, Indian customers are very well accustomed to the superior experience, thereby demanding a similar treatment from their financial service providers as well. All this comes with an all-in-one access to bank accounts and payments, combined with more rewards, royalty and offers. The trends seem like:

• Superior and seamless customer experience
• Attracting customers with offers and discounts

Rise in Adoption of Digital Payments in India

As we’ve seen above, India is certainly going Digital and the statement is validated by the growth of its digital footprint in the global marketplace. According to many sources, statistics show that the following are the three major trends:

• Prepaid instrument transactions have doubled the mobile banking transactions in just a span of 4 years
• Wallet users are twice that of mobile banking users and thrice that of credit card users
• The rise in the internet search queries of the word “pay” grew by 18 times since July 2010, reiterating the fact that digital payments have incorporated themselves into our daily lives.

The following are key insights from the Consumer research that indicate India’s Digital Payment readiness:

• 81% of users of digital payment instruments prefer the same to other non-cash modes
• Accessibility is as important as offers in motivating digital acceptance
• Prepaid mobile recharges and bill payments continue to be the most popular use-cases
• Point of scale to form the largest use-case for digital payments in future
• High frequency use-cases driving usage of digital payments
• Tradition to use cash, complexity and perceived lack of value proposition remain key barriers to adoption
• Security, identity, theft and fraud are not big constraints in India
• 3 out of 4 merchants believe that Digital will grow big, accelerating future sales
• No proper benefits over other means, inclination towards cash and complexity are key barriers for merchant trials
• For merchants to build a transaction ecosystem is critical

Future of Digital Payments in India – Nothing Less than a $500 Billion Trunk of Treasure

While the exact status of things will only be revealed over time, research predicts that the landscape of digital payments in India to cast the following trends in the coming years:

• Technology will make digital payments easier
• Merchant acceptance network to develop 10 times by 2020
• Payments to initiate consumption and not the other way round
• Consolidation will drive ubiquity
• Modified UPI will be a game changer
• Digital identity will speed up customer acquisition
• Cash to non-cash ratio will reverse by 2023

Conclusion

Having mentioned all the above, the market of digital payments in India is promising in spite of the strenuous activity over the last 2-3 years. Given the shifting use-cases, customer propositions and business models, the scenario is rapidly changing and evolving. If backed by an encouraging regulatory environment and coupled with some enthuse and eagerness to try the new era digital technologies, the Indian payment industry is destined to grow multi-fold in the coming decade. For many more articles and insights into the Digital space, or for courses and training sessions in Digital Marketing, keep following this space or contact Simpliskills on: 8008255010.