Aburgeoning middle class, double-digit growth rates, and the emergence of organized retail have resulted in an explosion in retail spends by Indian consumers. But with well under 5% of retail payments being electronic, most retail payments continue to be in cash. At the same time, the parallel economy is estimated at over $500 billion. Clearly, there’s need to enhance the share of electronic payments.
The conventional approach would involve enhancing the use of existing card payment formats. But with an estimated 300,000-plus point-of-sale terminals and 20,000 ATMs processing card-based payments, the penetration is only 320 per million vis-à-vis 10,000 per million in North America. Beyond the metros, the ratio declines further. The investments to raise it would be several billion dollars and the business cases highly challenging. Hence the need for a low-cost, non-cash universal payment system.
With over 200 million mobile subscribers in India—far exceeding the number of debit and credit card holders, owners of television sets and even bank account holders, a viable case is emerging for leveraging the mobile as a payment channel. The audience for such payments would extend from jet-setting executives seeking to pay an electricity bill from Amsterdam airport to my milkman who finds managing his daily cash collections quite a nightmare.
To define the framework for creating a new mobile payment ecosystem, it helps to review a few global models that offer immense learnings for the Indian context.
A model that has impressed with its simplicity and ability to create a universal and scalable platform is Mobipay in Spain, which has aggregated that country’s leading financial institutions, mobile operators and merchants to enable mobile-based payments. The user-level simplicity ensures existing handsets can be used and offers real-time payment confirmation responses providing a sense of security to all parties.
Mobipay has brought new merchant communities into the electronic payments fold and has been effective in creating economic value and leveraging existing resources, making this one of the few interoperable payment systems globally that’s actually worked in scale. The brilliance lies in its simplicity for users and its ability to provide a common platform for competing players.
M-PESA, a mobile-payment scheme run by Vodafone and Safaricom in Kenya, enables customers to withdraw cash, make payments and transfer money using their mobile phones. With a customer base in excess of 150,000 and over 500 cash points in under four months, the model has clearly demonstrated the ability of different socio-economic classes to adopt new technologies to meet their payment needs.
There have been brilliant technological advances in Japan and South Korea with phones being used for close-proximity, low-value payments via the SIM, but the investments required to upgrade existing SIM cards, mobile-phone applications and acceptance infrastructure are posing a challenge.
India has seen mobile payment systems, such as mcheque, paymate and wallet365 (an Internet-cum-mobile based payment service). Each attempts to aggregate banks and their customers enabling P2P (people to people) transfers or merchant payments. But there are challenges of customer adoption barriers, scale and the relevance of customer needs being addressed.
The first building block in creating a sustainable mobile payments ecosystem is a scalable, secure and interoperable payment standard. For this, the creation of a common payment standard is vital, which can be done in three ways:
A) The market driven approach in which third party aggregators connect multiple banks and operators, in turn, connect customers and retail merchants. The key challenge lies in seeking a stakeholder consensus in adopting and investing in a single model.
B) The regulated approach: A government body defines the standards and rules thus ensuring a common approach by all stakeholders. This would ensure that multiple standards are not required to be supported by customers or merchants reducing the investments in training and related infrastructure.
C) The association approach: The current payment associations, e.g., Visa and MasterCard define a common standard as in the case of smart cards. Existing processes and systems can be cross-leveraged across existing and new card payment formats that have proven efficiencies. The question is if the government and the Reserve bank of India should lead in evolving a standard, or should the onus lie on the main stakeholders in the value chain?
The second building block is ease of use. Leverage existing handsets, with SMS and USSD as the prime drivers. GPRS and 3G can be added subsequently. Don’t make users memorize multiple keywords, numbers or new PINs!
The third is incentive for customers and merchants alike in the adoption of electronic payments. South Korea has demonstrated success in driving electronic payment acceptance. The fourth is the trust factor. Secure processes, payment transparency and endorsement by reputed brands are key in ensuring consumers adopt any financial service offering. Providing real-time confirmation to all parties and ensuring a clear transaction trail will benefit and encourage customers.
Clearly, some of the basic ingredients in the success for mobile payments in India would not necessarily lie in technological innovation, but in taking an extremely fresh perspective on creating a new mobile ecosystem.
Upendra Namburi is a senior banking and finance professional with a leading multinational. Comments are welcome at firstname.lastname@example.org