The amount of cash in circulation in India is estimated at around 18% of the country’s gross domestic product (GDP), making India one of the most cash-dependent countries in the world. A report by Axis Capital Ltd, NPCI: Driving digital payment revolution, said that the externalities brought about by cash dominance pose significant concerns, such as the presence of large unorganised sectors, black money, persistent exclusion of millions from formal financial services, loss of revenue on account of evasion of taxes and poor transmission of monetary policy measures taken by the Reserve Bank of India.
The National Payments Corp. of India (NPCI) aims to create an infrastructure which rests on the principle of large-scale and high volumes resulting in payment services at a fraction of the present cost structure. The industry is at an inflexion point led by fast-changing consumer behaviour, government and regulatory initiatives, ever-increasing entrepreneurial activity and strong investor appetite. This synergy is unleashing a lot of innovation and would transform the financial services and payment sector in India.
As per Ken Research, India’s payment market is expected to reach Rs.817.3 crore by 2019. The payment industry is composed of various segments—mobile wallet, mobile banking, mobile point of sale (MPOS), bill payments and online payment gateway—with each segment comprising a number of entities.
Telecom operators have a larger reach and distribution to the bottom of the pyramid. This presents a good opportunity for telecom companies and payment system operators.
The ‘JAM Trinity’, which comprises Jan Dhan, Aadhaar and mobile, holds the key to one of the biggest reforms aimed at transforming India. To accelerate financial inclusion in India, the JAM Trinity works across different sectors and will be the backbone for this government initiative. It will provide a boost both to traditional banks and telecom companies as well as new entrants such as payments banks and fin-tech start-ups.
Large-scale enrolments under the Jan Dhan Yojana and Pradhan Mantri Suraksha Bima Yojana have been an enabler.
The sparse banking network cannot be expected to accommodate the ever-growing demand and with the passage of the Payment and Settlement Systems Act, 2007, a new class of regulated entities was created to target this niche but growing opportunity. By licensing telecom companies, non-banking finance companies (NBFCs), business correspondents (BCs), prepaid payment issuers and micro-finance companies to become banks, India has joined the small list of countries putting in place a proactive framework.
Structural growth drivers
Smartphone penetration, increasing awareness about digital payments, preference for hassle-free transactions and secured payment solutions are driving growth for digital payments. The payment industry in India is expected to witness multifold growth in the next few years, helped by the new entrants int the banking and payments space. Technology is driving innovations in the payment space with mobile money, e-wallets and payment aggregators. Proliferation of e-commerce has also helped in bringing people online. Payments have grown to include loyalty cards and prepaid instruments which further widen the scope of payments and their role today.
Edited excerpts from Axis Capital Ltd report, NPCI: Driving digital payment revolution.