Mumbai: From purchasing groceries via net banking to buying a cup of tea using Paytm, Indians are increasingly turning to digital payments for their daily transactions. Aided by supportive government policies, digital payments in India have grown rapidly in recent years. Between 2015 and 2017, digital payment transactions grew at an average annual pace of more than 50%, outpacing other major developing countries.

Yet despite this growth, after adjusting for population, India continues to lag other major countries. Among the BRICS countries (Brazil, Russia, India, China and South Africa), Russia leads the way with the average adult making more than 200 non-cash transactions annually.

In contrast, India remains at less than 20. India also lags in terms of the value of transaction. In 2017, the ratio of non-cash transactions to gross domestic product (GDP) stood at around 1.7 for India, the lowest among BRICS, and significantly behind China’s ratio of 45, according to data from the Bank for International Settlements.

One commonly cited explanation for India’s digital payments explosion is demonetisation.

However, digital payments had been on the rise long before November 2016. Monthly data from the Reserve Bank of India (RBI) shows that growth rates in mobile wallet and mobile banking transactions were averaging around 200% to 400% in the two years before demonetisation. While demonetisation did result in a temporary spike in point-of-sale card transactions, the growth rate has subsided to pre-demonetisation levels since.

The other, more convincing explanation for the rise of digital payments is the emergence of a facilitative digital payments infrastructure.

According to the latest World Payments Report 2018 by Capgemini and BNP Paribas, initiatives such as India’s open application programming interface (API) stack, unified quick response (QR) code and instant payments system UPI (Unified Payments Interface) have all helped the digital payments market in India.

For instance, India’s open API stack brought together governments, businesses, startups and developers on a common platform while UPI facilitates instant fund transfer between two bank accounts via mobile platforms.

However, these initiatives and the digital payments industry have been set back by the recent Supreme Court ruling on Aadhaar. Aadhaar, which was used by fintech companies to fulfil know-your-customer (KYC) norms, can no longer be used by private companies. As fintech companies adjust to this new ruling, digital payments growth could potentially get stalled. The other significant hurdle to growth is the lack of physical infrastructure for digital payments. After adjusting for population, the number of point-of-sale (PoS) terminals and automated teller machines (ATMs) in India remains low.

While India’s density of ATMs per geographical area (69 ATMs per 1,000 sq.km) is second only to China’s (100 ATMs) among the major emerging markets, it is still not enough given India’s higher population density.

This problem remains unaddressed as India’s ATM network has hardly grown in recent years.

Lack of adequate ATMs and periodic occurrence of cash-crunch episodes, as witnessed in early-2018, can not just stall digital payments but can hurt confidence in the financial system. These forced shortages of cash is unlikely to result in any sustainable rise in non-cash transactions.

In fact, research has shown that a reliable and widespread network of ATMs can actually reduce the demand for cash. For example, a survey in Austria found that ATM usage was associated with a 24% reduction in cash holdings.

Besides ATMs and PoS terminals, India also lags other major countries in terms of internet penetration and smartphone usage, as discussed in a previous Plain Facts piece. For India to catch up with its peers on digital payments, these bottlenecks need to be addressed.

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