Context: National digital payments market and its potential in India.
- The growth of financial services in India has largely been led by the banks. The regulator as well as the banks has led the initial thrust, development and support of digital payments infrastructure and systems. Non-banks have entered the market and expanded the range of payment services available to the Indian consumer backed by their strength in technology and customer centric innovation. This “best of both worlds” approach, which has resulted in a recent growth in the number of digital payments, should continue.
- The Payment and Settlement Act, 2007 has defined Digital Payments. As per this any “electronic funds transfer” means any transfer of funds which is initiated by a person by way of instruction, authorization or order to a bank to debit or credit an account maintained with that bank through electronic means and includes point of sale transfers; automated teller machine transactions, direct deposits or withdrawal of funds, transfers initiated by telephone, internet and, card payment.
Need and scope of digital payments market in India:
- Untapped potential: India, with a large share of 48% of the world’s unbanked and financially underserved, clearly is a critical frontier for digital payments.
- Growth potential: Over the last few years, the digital payment space has grown quite well in India with 400+ organizations working on creating and capturing value in online commerce. India’s digital payment industry, which is currently worth around USD 200 Billion, is expected to grow five-fold to reach USD 1 Trillion by 2023, as per a report by Swiss financial services holding company, Credit Suisse.
- Smart phones: studies had estimated that the number of Smartphone users in the country had been steadily rising through the past decade, and would continue to do so. In 2015, a little over an estimated 199 million people in the country had Smartphone’s, or about 26.3 percent of all mobile users. That number was expected to climb by 100 million by 2017, and hit 340 million last year. In 2019, we can expect almost 374 million people to own a Smartphone, about 39 percent of all mobile users. By 2022, it’s expected to hit 442 million Smartphone users in India.
- Smartphone’s today are equipped with capabilities such as enhanced processors, high capacity storage memories, NFC, resolution cameras, etc. They are no longer only communication devices; rather they are becoming commerce enablers. Emergence of smartphones has enabled development of new payment technologies.
- Block-chain: The advent of technologies like blockchain, machine learning, bots, cloud, crypto currencies, etc., is exploring development of new financial technologies. The business delivery and architectural models are changing due to these technological movements. Block chain may overhaul how financial services firms operate, migrating from centralized to decentralized models of conducting business and operations. It may reduce the cost of various financial activities to near zero especially where it involves third parties.
- Minor transactions: An interesting angle to India’s digital payment story is that it is going to be dominated by micro transactions (tractions of value lower than Rs 100). In fact, 50% of person-to-merchant transactions are to be under Rs100 says the Google-BCG report. Alternate digital payment instruments like digital wallets, UPI, payment banks, Bharat QR are expected to grow fiercely and estimated to double their contribution to 30 per cent in the digital payment industry.
- Government initiatives: Over the last few years, the Government of India has taken copious pre-emptive measures to explain, establish and encourage the use of Smart Card payments in various sectors of the Indian economy. The launch of Digital India is a major thrust to the Indian economy. Truly, “Faceless, paperless and cashless”. Demonetization of INR 500 and INR 1,000 currency notes and the subsequent policy measures taken by the Government of India (GOI) and the Reserve Bank of India (RBI) have provided further impetus to digital and card payments.
- Mobile wallets: The digital payment industry growth will be led by the digital/mobile wallets. According to the Capgemini’s World Payment Report, mobile wallets will witness a compound annual growth rate (CAGR) of 148 per cent over the next five years and will be $4.4 billion by 2022.
Issues related to digital payments system in India:
- Behavioural factor: In a developing country such as India, people would rather carry bulky bank notes than pay extra just for using digital payment methods. Demonetization pushed Indians towards switching to cashless methods which come with veiled costs galore, but as soon as the pressure reduced, Indians were back to using cash. The cash in circulation as of June 22, 2018, was only 9.8% more than it was on June 23 in 2017. This indicates that even though there is a greater appetite for digital payments systems, the Indian economy continues to be heavily reliant on cash.
- Infrastructure problems: Continued dependence on cash persists due to certain challenges deeply rooted in the digital payments ecosystem in India. These ingrained issues can be largely attributed to a lack of adequate infrastructure. In the current scenario, digital payment systems are heavily reliant on smart phones that are enabled with data connections, NFC, Bluetooth etc. Out of India’s 800Mn mobile phone users, only 200Mn use smart phones. Of these phones, only 6Mn are NFC-enabled. An even smaller percentage of users have access to QR code mechanisms. This translates to approximately85% Indians who do not have access to the infrastructure required to adopt the current digital payment systems that are heavily reliant on smart phones.
- Data localization: majority of payment system like Visa and Master card and digital payments like Googlepay, Paypal and the data stored in their parent countries where no guarantee for data security.
- Risk of Cyber Fraud: As the digital channel in financial services continues to evolve, cyber security has become a business risk, rather than simply a technical risk. Security breaches can damage reputations and destroy trust, thereby jeopardizing the investments made in digital solutions. A single hack can ensure millions of accounts being compromised, as it happened in October 2018 when 3.2 million card details were stolen in a malware related security breach. These cards from customers of State Bank of India, HDFC Bank, ICICI Bank, Axis Bank and others were used at ATMs. The stolen debit cards were used in China.
Measures to smooth transition to digital payments market in India:
- Policy framework: Government has a key role to play in ensuring that the digital payment sector delivers expected growth in a secure and sustainable manner. To help build a strong foundation, its policies and standards will need to be dynamic, flexible and balanced. The Committee on Digital Payments constituted by Department of Economic Affairs has recommended structural reforms in the payment ecosystem, including amendments to the Payment and Settlement Systems Act, 2007. So the government should implement the committee recommendations wisely and early.
- Storage: In recent times, there has been considerable growth in the payment ecosystem in the country. Such systems are also highly technology dependent, which necessitate adoption of safety and security measures, which are best in class, on a continuous basis. It was also observed that not all system providers store the payments data in India. As recommended by srikrishna committee on data protection, the government and RBI should frame the guidelines for data localization with in India.
- Fraud management: To improve customer confidence in digital payments, it is of utmost importance to keep a control on the number of frauds that occur, and to ensure that customers are not impacted. One solution is to ensure that all fraud incidents, including transaction details are reported to the regulator. This information may be used to create a fraud registry. Real time fraud detection systems could use this registry to rate the risk of fraud for users and transactions.
Way forward: Industry experts agree that the digital payments industry is entering its golden age and those paying attention are able to leverage its disruptive potential to transform entire nations. It is no coincidence that India, amongst the fastest growing economies in the world is banking on digital payments to be the catalyst for its vision for a connected and prosperous India 2.0. Digital payments can enable greater economic growth, growth in international e-commerce, and aid in social and financial inclusion. Presently, India represents one of the largest market opportunities for payments. The population is eager to participate in the rapid evolving advancement in technology. So the government should take proper measures to promote digital payments in the country.