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Digital Payments in India – the making of a $500 billion ecosystem

Over the past few years, the payment landscape in India has mirrored developments occurring in the global payments arena, albeit with a time lag. Although digital payments in India is a recent phenomenon, the trend has displayed an exponential growth in the sub-continent, with rapid growth being witnessed in digital payment transactions.

India now represents one of the largest market opportunities for payments. With a population of over 1.25 billion eager to partake in rapidly evolving advancements in technology, India, as well as “Bharat”, is poised to make the most of digital developments transforming the payments space.

Four Mega Trends Transforming India

The growth of the Indian digital payments space is expected to be driven by four trends that are also likely to impact how this industry looks in the future.

  • India going digital
  • “Favorable” regulatory environment
  • Emergence of NextGen payment service providers
  • Enhanced customer experience

India going digital

India is rapidly evolving into a digital behemoth. Rising smartphone penetration and internet access have ensured that Indian consumers stay constantly connected (Refer Exhibit 2.1). This is also reflected in the growth of digital banking transactions.

  • Mobile trajectory: India currently ranks #2 in the world with over 1 billion mobile subscriptions. Of this, approximately 240 million consumers use smartphones and this base is projected to increase to over 520 million by 2020.
  • The internet network: With increased 3G and 4G penetration even in the remotest parts of the country, the Internet network in India is rapidly expanding. The National Optical Fibre Network (NOFN) initiative by Digital India is set to provide broadband connectivity to cover 250,000 Gram Panchayats across rural India. While 70 percent of rural users currently access the Internet from their mobile handsets, the initiative is expected to increase the adoption of data enabled devices in these areas. With these developments in place, we expect around 90 percent of all devices to be internet enabled by 2017 and the number of internet users to double to nearly 650 million by 2020 from the erstwhile 300 million in 2015.
  • Banking on digital growth: Over the last few years, digital transactions have shown steady growth of 50 percent Y-o-Y, followed by ATM transactions growing at 15 percent. Not surprisingly, branch-based transactions have reduced by almost 7 percent in FY15 as compared to FY14 (Refer Exhibit 2.2).

India is becoming digital

“Favorable” regulatory environment

A lot is changing in the payments world. The Government and concerned regulators have recognised this and have constantly kept pace with the rapidly changing environment vis-à-vis technology and customer expectations. However, this is still the beginning and lots more needs to be done in this space to make it conducive for payments businesses to succeed in the country. Highlighted below are few of the key regulatory steps that are currently enabling digital payments in India.

KYC relaxation for small transactions: As per current RBI guidelines, there is no requirement for customers to undergo a KYC process for transactions up to INR 10,000 per month on prepaid instruments. This guideline makes it convenient for customers to just download the wallet of choice and use the same for transactions without the need for documentation, photographs etc. that are usually required to avail traditional banking services.

Exemption from Two-Factor Authentication (2FA): The RBI currently mandates the inclusion of a two-factor authentication (2FA) for transactions made with Indian debit / credit cards, irrespective of transaction value. While this requirement is necessary for consumer security, it also tends to be cumbersome, resulting in a payment process with a lot of friction, significant number of failed transactions and transactional drop-offs. A mobile wallet in comparison requires a customer to undergo the 2FA process only while loading funds from other bank instruments. Additionally, such wallets have limits on the value of transactions and tend to reduce exposure to frauds as they do not divulge any details of the customer’s savings account directly.

Aadhar making KYC easier: The advent of Aadhar as a national identity instrument has made the KYC process extremely easy. By linking a customer’s mobile number electronically to his / her Aadhar account, the process is now much simpler and hassle free. The Jan Dhan Initiative has seen over 270 million accounts being opened. This has brought millions under the ambit of financial inclusion and has made biometric authentication a reality.

Unified Payments Interface (UPI): The Unified Payments Interface launched by NPCI is an integrated open architecture set-up that could fundamentally change the way customers manage payments. The UPI set-up proposes to stitch all services from Immediate Payment Service (IMPS), Automated Clearing House (ACH) to RuPay into one common platform. This would allow for seamless interoperability and the potential unlocking of multiple solutions. The inherent open architecture will provide access to all payment service providers (PSPs), be it banks, FinTechs, payment banks etc. It is also expected to provide users with the flexibility of accessing bank accounts through any PSP that is connected to the UPI set-up. Moreover, customers will be able to choose a virtual address in any format (mobile number, Aadhar ID, email ids etc.). This is expected to improve user experience and enable PSPs to provide easy and simple payment solutions. It is also expected to enable multiple use cases on the UPI platform—including peer to peer payments, person to merchant payments and business to business payments.

Bharat Bill Payment System (BBPS): Bill payments form a major component of retail payment transactions. Cash and cheque payments continue to be predominant; particularly at the billers’ own collection points. Existing systems do not fully address the needs of the consumers due to the lack of interoperability as well as the lack of access to electronic payments. Owned and operated by NPCI, BBPS is envisioned as an ‘Integrated Bill Payment System’ that is interoperable, accessible; cost effective and allowing multiple payment modes.

Massive growth in India digital transaction

Emergence of nextgen payment service providers

India has witnessed significant payments activity in the last 3-4 years. The competitive digital payment landscape in India now spans telcos, banks, wallet companies, e-commerce / tech firms and, in the near future, payment banks (Refer Exhibit 2.3).

Bank-led: In the past, banks have largely offered mobile banking apps with integrated bill payment solutions. However, customer experiences with mobile wallets have proved to be far more seamless and quick, leading to customers preferring wallets for mobile recharge and bill payments. Thus, banks have now started offering their own mobile wallets in addition to the mobile banking apps. Few examples include Pockets by ICICI Bank, Lime by Axis Bank, PayZapp by HDFC Bank, SBI Buddy by SBI and Ziggit by IDFC Bank. While most of these apps do not require a bank account for their use, some of these do allow existing bank customers to log in using their internet / mobile banking credentials. Given that banks already have an existing captive base of consumers, they can monetise faster as compared to independent mWallet firms that will need to spend on customer acquisition.

Telco-led: Large telcos such as Airtel and Vodafone launched mobile payments solutions, Airtel Money and Vodafone M-Pesa respectively, targeted at their own customer base. The solutions were initially USSD-based to ensure even non digital-savvy customers find it easy to use. The primary use cases for these solutions were largely mobile recharges and remittances. Idea Money from Idea Cellular, mRUPEE by TATA and Jio-Money by Reliance are other telco-led payment solutions, launched to help consumers conduct a variety of financial transactions conveniently.

Prepaid wallets: In 2009-10, the RBI had issued 26 prepaid payment instrument licenses (PPI). PPI issuers could now issue semi-closed wallets that enabled payments without 2F Authentication. As a result, two types of PPIs emerged:

  • Mobile wallets: These are app-based stored value accounts, funded through credit / debit cards or via netbanking. Paytm, MobiKwik, Freecharge and Citrus Pay are some well-known mobile wallet examples. These wallets are primarily used for mobile recharges and bill payments.

Significant Indian payments activity

Backed by VC funding, these companies spent heavily on customer acquisition through marketing initiatives. Soon enough, they diversified existing business models to monetise on the customer base through expansion of services. These included tie-ups with radio cabs (Paytm-Uber, Meru-Citrus Pay), offline use-cases such as POS payment (Paytm-More tie up), payment at fuel stations and educational institutions etc.

In order to reach unbanked or under-banked customers, wallet companies have now enabled cash funding of wallets through innovative solutions such as MobiKwik’s cash pickup service and Paytm’s tie-up with ICICI for cash loading at ICICI branches.

  • Prepaid cards: Companies such as Oxigen, Itz Cash, Suvidhaa and GI Tech offer solutions with an agent-assisted offering to consumers who are not digitally savvy. Primary usage in such cases have been remittances and railway ticket booking. Some of the PPI’s were acquired by tech firms (e-commerce, radio cabs, entertainment booking) to offer in-house wallet solutions. For example, Snapdeal acquired Freecharge, Flipkart acquired FxMart to offer Flipkart money and Amazon acquired Emvantage. While Ola offers Ola Money, Bookmyshow too has its own wallet app to service customers. With growing popularity of such wallets, several other companies have now applied for such licenses with the total number of PPI licenses growing to 46 licenses in 2016.
  • Payment banks: Keeping with RBI’s stated objective of driving financial inclusion and enabling high-volume low-value transactions thereby reducing the dependence on cash, RBI provided in-principal approval to eleven entities to set-up payment banks in 2015. These entities include telecom players (Airtel, Vodafone, Uninor, Idea, Reliance Jio), tech-centric payment players (Paytm), next-billion focused players (NSDL, Fino, India Post) and NBFCs (Mahindra Finance, Cholamandalam). The scope of activities of a payments bank includes acceptance of demand deposits up to INR one lac per customer, issuance of ATM / debit cards, offering payment and remittance services, acting as a Business Correspondent (BC) to another bank and distribution of mutual funds, insurance services etc. These banks cannot undertake any lending activities or issue credit cards, accept NRI deposits or become a “virtual” bank.

However, the economic model for payment banks is challenging, given that they cannot earn lending revenues or high rates of interest on floats due to requirement of investing customer deposits in government securities. A few of the licensees such as Cholamandalam, Uninor and Mahindra Finance have already returned their in-principle approval to RBI.

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