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Visualizing consumer payments in a ‘less cash’ India

TCM Sundaram
Dec 21, 2016

Fast evolving digital payments change the start-up scenario


What kind of India will emerge from the other side of demonetization drive? Will cash now cease to be the king, its throne replaced by digital payments?

Even before Prime Minister Narendra Modi’s surgical strike of demonetisation, various merchants and consumers have been showing increased trends of picking up digital transactions, along with the tech-savvy generation which has been accepting mobile wallets and online transactions for a while now. Consumers’ discomfort in sharing their credit/debit card details online has increasingly converted to their comfort in sharing even their bank account details! With better security measures and multiple online payment channels, cashless transactions have seen an ultimate leap.

According to a PwC report (1) — that was released before PM Modi’s almost life-changing announcement — 800 million people will have access to online payment options in India by 2019. While the Internet users will reach a sprawling 900 million, 800 million users will transact online! The report noted that the population between 15–34 years in India would move to the next age level over the next 10 years and continue to transact online, thus increasing the percentage of active users by at least 15%. This age group also has a strong appetite for embracing new technologies.

It is already clear that the Government does not plan to replace 100% of the estimated Rs. 14 trillion — in denominations of Rs. 500 and Rs. 1,000 notes — demonetized creating ‘less cash’ in India, that will accelerate the growth of digital payments.

But the next level of growth will come when the local mom and pop grocery stores and neighbourhood plumber/electrician start accepting digital payments. At best, there are only about 700,000 merchants in India, which accept digital transactions, at present! This number should go to 7 million and 17 million in times to come, to support daily transactions. All payment processes should be streamlined, with no other device required, other than a mobile phone with the merchant/service provider and the consumer.

Meanwhile, the proliferation of smartphones and tablets, Internet/mobile access, which is serving as a convenient, cash-free and card-free financial transaction medium, is helping to promote financial inclusion. And, really, paying digitally should be as simple as paying by cash.

The UPI wave

The fairly new payments system, Unified Payments Interface (UPI), launched by National Payments Corp. of India (NPCI), allows users to transfer money using a virtual address. Courtesy this, one no longer has to wait for hourly batches of NEFT to send or receive funds or seek MMID code for IMPS transactions anymore. With UPI, India has leapfrogged over many developed markets where a P2P transfer through banking channel is very cumbersome and costly.

Hailed as a “Whatsapp moment” in the world of digital transactions, it makes instant money transfers an every-minute possibility. With the State Bank of India and HDFC bank — which have large customer bases — coming on board, UPI is likely to see robust growth in the days to come.

There are already trials running in India for making payments using a chat platform like Facebook messenger. When Facebook opens up Whatsapp interfaces, adoption of ‘chat based payments’ will become the de facto standard amongst the millennials.

Opportunity for Start-Ups

Digital payments in India are set to increase 10 times by 2020, rising from $50bn to $500bn (2). Currently less than 3% of consumer payments are digital — this is expected to touch 30% in the next 5 years. This would become 18x on the basis of nominal GDP growth over the period.

It also means that startups and global entrepreneurs need to be ready to seize opportunities as they come. It is clear that technology will be a key disruptor and will make digital payments more convenient and easier to use.

Opportunity: The consumers are ready and the regulatory environment is conducive for the leap in number of digital transactions (proportion of non-cash transactions is expected to overtake cash transactions by 2023(3)). The vacuum lies in the digital payment acceptance infrastructure at the merchants’ end.

Problem: People are slowly moving towards using digital and electronic payment modes. However, payment start-ups face challenges such as customer awareness, regarding the product and how to use it, fears about security, and concerns about product or service delivery. Online security is critical. A survey done by Android security scanner Appvigil of popular e-wallet Apps revealed that these Apps have vulnerabilities and can be hacked.

One of key impediments hindering the rise of digital payments is the acceptance network.

Customers expect universality of payment instruments, and merchants will need suitable incentives to adopt acceptance of electronic payments. Recognizing this, the Government has already announced in the 1st week of Dec, 2016 specific incentives for merchants and consumers adopting electronic payments. Once merchants realise the inherent advantages of electronic payments, they will embrace and promote the same as handling cash comes with an additional cost. The Government can also mandate that any transaction above a threshold level, say, Rs. 50,000, shall be only through digital payments, as is done by NEFT/RTGS for businesses.

As India takes another step towards building a cashless economy, it’s becoming clear that the biggest challenge for a cashless or at least a less cash country will come from retail in smaller towns, thanks to erratic internet connectivity and poor smartphone penetration, coupled with die-hard habits of relying on cash for transactions.

For the latter, the solution needs to be so simple as sending an SMS or Whatsapp to use and have buy-in from the major issuers (of the digital payments instruments), i.e. a payment aggregator accepting all modes of digital payments, namely, credit/debit/rupay cards, net-banking, NEFT, eWallets, UPI and payments on chat/messenger platforms. A bit of hand-holding by businesses will make a world of difference.