Will the growing mobile payments disrupt the digital payments market landscape in India?
India has always been a cash centric economy. Till mid 2016, ~ 95% of the transactions was cash based and ~70% of online shoppers chose ‘cash on delivery’ as their preferred payment option. As a matter of fact, ‘Cash on Delivery’ in the e-tail business model drove the growth of Flipkart. As per a recent Credit Suisse report ‘digital payments’ is expected to reach $1 trillion mark by the year 2023 driven by mobile payments. This seems to be a very aggressive growth estimate from the current base of less than $200 billion. Hence, we try to assess the viability of these estimates vis-à-vis the recent emerging trends in this space. Whether to dismiss these kind of studies as a premature prediction or consent as cutting edge research work with deep insight into the future, only time will tell.
Mobile payments witness a major shift:
“Demonetization” by the Government of India in Nov’16, led to a surge in mobile banking in the following months. But transaction volumes have leveled off from their highs since then. Latest published data by RBI, indicate since Nov, 2016, although mobile banking transactions in value terms only surged by 51%, transaction volume witnessed an unprecedented growth of 458.8%. This reflects a shift from the traditional large-value, low-volume transactions with credentials managed by the bank to high-volume, low-value day-to-day transactions.
Three major forms of payments have supported this dramatic growth in last two years.
a. Immediate Payment service (IMPS)
b. United Payments Interface (UPI)
UPI: Story behind the surge
Since Nov’16(till Sept’18) Uniform Payments Interface (UPI) has driven most of the growth. National Payments Corporation of India (NPCI) launched UPI in 2015, which supports a range of mobile payments applications for free and seamless transactions. It connects users’ bank account using virtual payment addresses. The unique feature of UPI is that it acts as a settlement platform. Payment providers can build applications on top of the provided APIs.
Convenience and free usage have been key drivers for UPI’s success. The largest share of recent growth has come from new entrants like Google Tez. Entry of WhatsApp, with ~200 million users in India, can give huge boost to transaction volumes. Promotional offers or cash rewards have resulted in low value peer-to-peer transactions. This is evident in the declining token size of transaction value on UPI.
Is the surge sustainable?
Aadhar is world’s largest biometric identity system with 1.22 billion holders covering ~95% of the population in India as on July 2018. UPI payment system backed by Aadhar, connected to and interoperable with 800 million bank accounts across 122 banks has the potential to transform the mobile payments system in India. Promotional offers have provided behaviour nudge leading to increase in volumes. Convenience and free usage targeted at acquiring new customers can help in the near term. However, this is not sustainable in the long run. To overcome the overwhelming preference for Cash, mobile payments platforms would require wider adoption and innovation.
Wider adoption and acceptance:
- Creating awareness – UPI with Aadhar linkage can forego any bank account related authentication. Also, with higher daily transaction limit (Rs. 1 Lakh as compared to wallets) and no transaction cost (as compared to net banking or debit card), should have pushed towards higher value purchases/transactions. Widespread trust and awareness can bring UPI based mobile payments to mainstream. Users are more likely to adopt a new technology if they are aware of their rights to complain, assured of the data protection and have knowledge of legal rights. World’s best payment infrastructure can become abysmal without financial literacy of users about risk/reward involved. The Government and NPCI in coordination can work towards widespread awareness campaigns to build public trust in mobile payments. Consumers need to see value in mobile payments as compared to cash transactions. An innovative escrow model can reduce the trust deficit between buyers and sellers. The Government has a key role to play towards setting up the governance of these escrow models driven by NPCI and RBI guidelines.
- Customer engagement or experience can play a key role in the wider adoption of the mobile payments. We can draw the learnings from Alipay in China, a market leader with ~54% of market share in mobile banking. It has a full-fledged ecosystem offering a range of functions to the users. Alipay provides facilities such as
- Mobile payments
- Money transfer / remittances
- Small purchases such as Grocery, books, food etc;
- Books, Cabs, tickets
- Financial services such as Loans & Insurances
It provides integrated services covering people’s needs comprehensively. In similar way, UPI enabled mobile banking can provide value added services and become an one-stop shop for various financial service offerings, rather than being a just payment solutions provider.
- Adoption among merchants.Another crucial factor for growth in mobile payments market is widespread adoption among merchants. Most of the early growth has been due to peer-to-peer transactions. Only 25% of transactions over UPI have involved merchants. Small merchants and kirana shops are generally high volume and low margin businesses. They lack motivation and incentives to move from cash to mobile payments. Given that most of the transactions are of small value, it does not give them enough incentives to shift. Also transparency and audit trials associated with digital payments often acts as deterrent. Launch of alternate methods like QR code and overdraft facility can increase adoptability. Payments receipts, cash back offers and GST tax breaks can be disruptive. But, in the long run, UPI based mobile banking has to move towards value creation for merchants. One size fits all approach will fail due to variation in nature and size of businesses. Hence, the payment platforms have to cater to customized needs of merchants like:
- providing flexible credit based on seasonal nature of the business
- value added features like providing customized financial products insurance packages or investments etc.
Transaction history of the merchants can be the basis for extending these facilities and this can bring a lot of micro merchants into formal credit system. This would be of great value to the business which do not have access to traditional banking system due to lack of trading data. Finally, sustained awareness and education is the key for adoption. The Government can run community education programs involving local leaders and agents with suitable incentive structure to further encourage these merchants.
- Consumer Credit for high value purchase. Mobile payment platforms would have to come up with innovative consumer credit models enabling easy EMI based high value purchases. High value purchases such as gold & diamond jewellery are carried out through credit cards or cash. During festive season in India such high value transaction increases through credit cards. Customer prefer credit cards during these purchases because it provides easy credit availability. Easy availability of credit on mobile payment platform can be disruptive. It can increase the adoptability of this platform for high value transactions. There is a need for banking reforms to provide credit facility through mobile banking to further adoptability. Mobile platforms need to have tie-ups with high value merchants like jewellers or white good dealers to get the high value traffic.
The Government has been working on addressing the key pain points of merchants. GST council has approved a proposal to provide concession of 20% GST paid per transaction. This would be for the B2C transaction made through both BHIM and UPI and concession would be subject total ceiling of Rs 100. However, this proposal will be implemented as a pilot project, on volunteering basis by the states. Earlier the State finance ministers group had rejected this proposal as it was perceived that this would result in approx… Rs.15000 Cr loss in tax revenue to states. “Voluntary basis” based implementation has raised apprehensions about the future of this project.
Conclusion : Strong barriers exists
UPI backed by Aadhar covering 95% of the population is a major step towards financial inclusion and has the potential to revolutionise the mobile payments market. The battle against cash will need many more measures than just low cost payment innovations. There are still significant barriers in the system towards mass adoption and acceptance. There is a need for much co-ordinated and concentrated action by all stakeholders in the digital ecosystem. Products need to be as trustworthy and convenient as cash. So far the payment innovations have followed “urban-first” approach. India has still a vast untapped rural population having potential to switch to mobile banking.
UPI transactions include all transactions being carried on UPI platform including BHIM, Google Tez, Amazon Pay etc.