Expanding the Digital Payments Ecosystem in India

By Melissa Cyrill

India’s digital payments ecosystem will be worth around US$ 500 billion by 2020, according to the latest research put out by Google and the Boston Consultancy Group (BCG) in a joint study. Their forecast sees the digital payments sector contributing to 15 percent of India’s gross domestic product (GDP) in four years time.

Multiple factors and institutional and behavioral trends are powering this transition towards a cashless economy. The rapidly increasing penetration of smartphones and internet on mobiles, digital payment services provided by non-banking institutions, consumer expectations of one-touch payments, and progress in regulatory governance, have altogether shaped India’s payments landscape in favor of digital solutions.

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Highlights of the Google – BCG Report

The joint study is based on research executed by the global information and measurement company, Nielsen, which included group discussions, online surveys, and interviews with users and merchants across India’s major cities – Delhi, Mumbai, Bangalore, Ludhiana, Lucknow, Indore, Surat, Visakhapatnam, and Coimbatore.

Key predictions of the study are:

• Person to merchant (P2M) transactions driven by digital payments at physical point of sale, followed by business to business (B2B) and peer to peer (P2P) transactions will be major contributors of growth.
• More than 50 percent of India’s internet users will adopt digital payments by 2020, with the top 100 million users driving 70 percent of the digital payments gross merchandise value (GMV).
• Online shopping, utility bill payments, and movie ticket purchases will be the top three services for which Indian users will make digital payments.
• Contribution of non-cash modes of payments, i.e. checks, demand drafts, net-banking, credit/debit cards, mobile wallets, and unified payment interface (UPI), will double to 40 percent of the consumer payments segment by 2020.
• Non-cash transactions, which today constitute 22 percent of all consumer payments, will exceed cash transactions in the Indian economy by 2023.
• Micro-transactions (under US$ 1.50) will cover over 50 percent of person-to-merchant transactions. The value of remittances and money transfers passing through alternate digital payment instruments will double to 30 percent by 2020.
• Indian consumers may be 90 percent as likely to use digital payments for both online and offline transactions. Offline points of sale will eventually contribute to 60 percent of digital payments.

Changing Consumer Behavior in India

Convenience and greater confidence in the security of digital transactions dominate the reasons why the payments landscape is so drastically changing, both globally and in India. Online payments through debit and credit cards, followed by the emergence of digital wallets, have become the most preferred transaction channels in the last few years, due to their ease of use, the availability of smartphones and affordable internet, and enhanced security and encryption methods.

In India, the following the sectors and payment service providers have enabled the push towards greater cashless transactions:

• Online Ticketing Firms – This sector was the first to introduce a significant population to digital payment strategies by pushing Indian consumers to get familiar with transacting online for routine services. This includes transportation such as booking tickets for railways (IRCTC), airlines (Makemytrip, Yatra, Cleartrip), and buses (redBus and Abhibus), movie and event ticketing (Bookmyshow), and more recently utility bills payment portals (Bill Desk, Paytm, Citizen Portal, Suvidha, Oxigen Wallet etc.).
• E-commerce Firms – The advent of online shopping transformed the character and volume of digital payment transactions in India. Shopping websites like Flipkart, Snapdeal, Amazon, Myntra, Jabong, ShopClues, and others, offered highly discounted merchandise, alongside incentives attached with digital payment such as cash back bargains. 
• Digital Wallets – With the increasing penetration of smartphones and their affordable access, mobile wallet companies began entering the e-commerce segment. Their selling point was the convenient storage of money in digital wallets that made online transactions easier and faster. Leading mobile wallet companies include Paytm (One97 Communications Ltd), Mobikwik (One Mobikwik Systems Pvt Ltd), Oxigen Services (India) Pvt. Ltd, Citrus Payment Solutions Pvt. Ltd, Freecharge, and PayUMoney (Naspers Group).
  Today these companies have turned their focus into expanding in the offline world, encouraging and incentivizing their customers to transact using their service at select retail outlets, local grocery stores, restaurants, petrol filling stations, and app-based transport aggregators like Ola and Uber. There are also plans to expand the cash limit in wallets from the current limit of US$ 150 (Rs 10,000) to US$ 15,000 (Rs 100,000) through the adoption of KYC (‘Know your customer’ verification).
• Unified Payments Interface (UPI) – End of August saw the launch of the Unified Payment Interface by the National Payments Corporation of India (NPCI). UPI is a payments system that allows money transfer between any two bank accounts by using a smartphone app, without the hassle of typing credit/debit card details, IFSC code, or net banking/wallet passwords. Instead, customers will need to register their mobile number with the bank.
  UPI’s functionality allows a multitude of transactions such as merchant payments, remittances, bill payments, peer to peer lending etc. that can be up to a limit of US$ 1500 (Rs 100,000). So far the UPI app of 21 banks are available for download on the Google Play Store for Android phones. Few other major banks such as the State Bank of India, HDFC Bank, and IndusInd Bank are expected to join by November.

  Data published by the Reserve Bank of India (RBI) in March 2016, established that on aggregate, Indians made more than 730 million withdrawals from 200,000 ATMs. Thus, the introduction of UPI is, itself, a major development in the evolution of the digital payments ecosystem in India, enabling faster and simpler electronic payments across a diverse scale.

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How Will ‘Going Cashless’ Impact the Indian Economy?

According to the RBI, the currency with the Indian public stood at US$ 252.15 billion (Rs 16.8 trillion) as of July 8, 2016, more than 95 percent of the total currency in circulation. To meet this demand, banks added around 18,000 ATMs in the financial year (FY) 2015-2016; the cost of maintaining these along with the capital expenditure for new ATMs is about US$ 2.36 billion (Rs 15,800 crore). Such high-cash usage has also facilitated the continued existence of black money. All in all, broad estimates put the direct cost of running India’s cash-dependent economy as being close to 0.25 percent of the total GDP.

Consequently, there will be massive benefits in moving India towards a cashless economy for everybody – bankers, regulators, government, and consumers. There are other indirect benefits as well, namely the boost for startups in the digital payments space (fintech sector), expanding e-commerce market share, and greater financial inclusion for the segment of the digitally unbanked demographic (who range from workers to dependents like students and housewives).

What must now emerge is the ubiquitous acceptance of digital payment methods by bankers and merchants, the maintenance of the security of networks, and ‘reliable speed of transactions during peak hours’. In this regard, the ‘Digital India’ program and the central bank’s regulatory push towards adopting cashless strategies of making payments will definitively promote their growth and usage.

Conclusion

The forecast by the Google-BCG study indicates that India’s digital payments ecosystem will grow by ten times to reach US$ 500 billion. This is vital for the Indian economy as it enables greater financial inclusion and propels innovation in the financial sector, while reducing the massive costs of running a cash-based economy. The growth of digital payment service providers will also promote transparency, becoming an indirect check on the presence of black money in the market, and thereby increasing the contribution to the country’s GDP. Principal challenges now lie in the architecture that will facilitate this behavioral change – secure and stable mobile internet services, high speed connectivity, usage by merchants and banks, and a progressive regulatory framework to match the rapid evolution of the digital payments market.

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