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The government’s move to withdraw Rs500 and Rs1,000 notes may have stirred a hornet’s nest, given the shortcomings in its execution, but 8 November may prove to be a red-letter day for the country if the government and its citizens use the opportunity to steer the economy towards a truly digital future.

The acceleration towards a digital economy is already being seen if one goes by the claims that mobile wallet companies such as One97 Communications Ltd (Paytm), Freecharge Payment Technologies Pvt. Ltd (Freecharge), One Mobikwik Systems Pvt. Ltd (MobiKwik) and Oxigen Services India Pvt. Ltd (Oxigen) are making.

A day after the note ban, Ola Money, the digital payment solution from the Ola mobile app, reported an “over 1500% increase in recharges across the 102 cities of its operation".

Oxigen claimed that all previous records on money loaded onto its app and transaction count had been broken in the week after demonetization. The payments solutions provider has also announced that it will start accepting cards issued by VISA and Mastercard on its micro ATMs, and enable its merchant application to start supporting mVisa and Masterpass Quick Response (QR) code-based transactions (bit.ly/2gg9K7n).

Micro ATMs are Aadhaar-enabled portable devices that accept debit cards by RuPay, which connect to a bank’s servers to help customers withdraw and deposit cash. RuPay is a domestic card scheme launched by the National Payments Corp. of India (NPCI), the umbrella organization for all retail payments systems in India.

NPCI, meanwhile, also claimed that in just two days (8-9 November) RuPay use almost doubled to around 800,000 transactions a day compared with a daily average of 400,000 transactions earlier (bit.ly/2gdu0bW).

Paytm said on 21 November that it witnessed over 7 million transactions worth Rs120 crore. The company claimed that offline, person-to-merchant transactions have grown to contribute over 65% of the transactions. Freecharge, too, says it has ramped up its acquisition effort and is targeting to attract 1 million merchants in the coming 12 months.

In a related move that will give the country a further digital boost, NPCI said it will launch its new electronic toll collection (ETC) system on a pilot basis soon, and eventually extend the scheme to include other vehicle-related payments such as parking fees, servicing and fuel charges (bit.ly/2fIv7xf).

Moreover, a couple of months before the demonetization move, NPCI had launched a pilot project for Bharat Bill Payment System (BBPS) with 26 Bharat Bill Payment Operating Units (BBPOUs). With the launch of the unified payment interface (UPI) by NPCI in the last week of August, India has passed a significant milestone. Many banks now offer UPI-enabled apps on Google Play store.

To use a UPI-enabled app, you need an Android smartphone, a bank account and a registered mobile number linked to your bank account (bit.ly/2eiNqw1).

Digital transactions, in fact, began booming after e-commerce firms such as Flipkart, Snapdeal, Amazon, Myntra and Jabong began offering attractive discounts to woo customers. Banks contributed with their own mobile wallets, mobile banking apps, and pitches of banking on smartwatches and even social networking sites (bit.ly/1fucY4s).

Examples include Pockets by ICICI Bank, Lime by Axis Bank, PayZapp by HDFC Bank, SBI Buddy by SBI and Ziggit by IDFC Bank. Large telecom services providers such as Bharti Airtel Ltd and Vodafone India Pvt. Ltd, too, have mobile payments solutions—Airtel Money and Vodafone M-Pesa, respectively, targeted at their own customer base, largely for mobile recharges and remittances. Idea Money from Idea Cellular Ltd, and JioMoney by Reliance Jio Infocomm Ltd are other telco-led payment solutions. Airtel, meanwhile, has also announced the launch of its payments bank.

But a digital paradox exists

Credit cards were first issued in the 1950s, debit cards arrived in the 1980s and e-commerce emerged in the 1990s. But when, asks the World Economic Forum (WEF), is the cashless future you’ve heard so much about likely to become a reality? (bit.ly/2fu3hXm)

The fact is, even as Indians are well on the digital path with new technologies like mobile wallets, cryptocurrencies like Bitcoin, and mobile peer-to-peer payments, we continue to live in a cash-based world; nearly 85% of consumer transactions worldwide are done with bills and coins. While countries such as Singapore and the Netherlands use cash in a minority of payments, consumers in such diverse economies as India, Mexico, Italy, and Taiwan use cash for more than 90% of transactions, according to a September 2013 paper by MasterCard Advisors.

Retail payments in India, for instance, are still dominated by cash and cheques; just 6-7% of transactions are done electronically. Uber is primarily a cashless service elsewhere in the world, but more than 50% of Uber trips in India are paid for in cash, according to a 10 November blog by Forrester analyst Ashutosh Sharma. He points out that most Indians are still not familiar with card-based or electronic payments, “irrespective of the relentless focus of the Reserve Bank of India (RBI) toward changing their behaviour".

Sharma points out that in India, merchants insist that payments be made in cash, as electronic payments eat into their margins—just like everywhere else in the world. “Even more significantly, cash payments allow merchants and professionals like doctors, lawyers, and accountants to keep such transactions off the books and avoid tax," he states on his blog.

Hurdles to a cashless world, concurs WEF, include the fact that “some merchants still don’t want the infrastructure costs and fees associated with electronic payments; some customers still find cash convenient; access is an issue for individuals without bank accounts; and fraudsters continue to find opportunities in electronic transactions".

Consumers who have tried digital payments but have now shifted to other modes such as cash and card, etc., say that inconvenience of remembering login credentials, low acceptance, possibility of a technical or human mistake during a transaction, and frequently running out of balance are the top reasons for relapses, according to a 25 July report by technology firm Google Inc. and the Boston Consulting Group (BCG).

Hence, expanding merchant acceptance is critical to mass adoption of digital payments by consumers.

As of 30 September, the number of point of sale (PoS) devices, which accepted debit and credit cards at merchant outlets, was a mere 1.49 million, according to RBI’s monthly bulletin. These outlets include railway stations, airports, hospital counters and supermarkets. Indians had nearly 730 million debit cards and 27 million credit cards at September end, though it isn’t clear, however, how many people have more than one card (bit.ly/2gc6sFy).

These debit cards in the system include about 200 million RuPay cards linked to over 250 million bank accounts under the Prime Minister’s Jan Dhan Yojana.

When announcing the launch of Bhartiya Prodyogik Prashikshan Sansthan (BPPS) on 31 August, A.P. Hota, managing director and chief executive of NPCI, had acknowledged that, “...currently the volume of bills being paid by cash is so large that even if 25% of the bills get paid electronically, (the) impact would be visibly enormous..." Besides, 600 million Indians probably don’t have bank accounts.

A disproportionate number of these are spread across more than 600,000 villages, earning daily wages in cash (bit.ly/2fBaORD).

So, the idea of a cashless society may sound Utopian and naive to many who are habituated to using cash but the fact is that the penetration of digital banking will only rise with increased Internet penetration in the country. Technology is only accelerating this trend.

Global non-cash transaction volumes grew 8.9%, reaching 387.3 billion during 2014—the highest growth rate in the past decade, according to World Payments Report 2016 by IT consulting and services provider, the Capgemini Group, and BNP Paribas. Total non-cash circulation is the sum of check, debit card, credit card, credit transfer, and direct debit transactions.

Developing markets drove this growth, recording a 16.7% rise in 2014; mature markets grew 6% (although they still account for 70.9% of total global volumes). While growth in non-cash transactions in India is improving, the report found that it is still below full market potential.

The Google-BCG report expects around 90% of all devices to be Internet-enabled by 2017 and the number of Internet users to touch 650 million by 2020 from 300 million in 2015. The report forecasts the size of the digital payments industry in India to touch $500 billion by 2020, contributing 15% to India’s GDP.

It also predicts that the non-cash (including cheques, demand drafts, net-banking, credit/debit cards, mobile wallets and UPI) contribution in the consumer payments segment will double to 40% in the same period.

Further, while around 30 billion bills worth $103 billion are generated every year, of which 70% are paid in cash, initiatives like NPCI’s BPPS may further the digitization of bill payments. The number of wallet users is already 3X the number of credit cards issued in the country (24 million in 2015-16), according to the Google-BCG report. Further, RBI has now doubled the amount that can be kept in pre-paid payment instruments (PPIs) to Rs20,000.

Smartphones are driving digital, for now

While no one can accurately predict how the future of payments will shape up, the fact is that currently the smartphone explosion in India is expected to usher in this new era in digital payments over the next few years, according to the Google-BCG report.

India currently ranks second in the world with over 1 billion mobile subscriptions. Of this, around 240 million consumers use smartphones; this base is expected to cross 520 million by 2020. Smartphone subscriptions will rise to 810 million by 2021, according to the India edition of the Ericsson Mobility Report released on 7 June.

The Google-BCG report also highlights that micro-transactions will form a substantial portion of the industry, with over 50% of person-to-merchant transactions expected to be under Rs100. It predicts that the value of remittances and money transfer that will pass through alternate digital payment instruments will double to 30% by 2020.

A related August BCG study (bit.ly/2bc0gLk) forecasts that by 2020, about 315 million Indians living in rural areas will be connected to the Internet, compared to 120 million at present.

Globally, too, the payments landscape is seeing heightened activity across multiple categories, ranging from device manufacturers (Apple, Samsung), tech firms (Google, eBay, Alibaba), retailers (Starbucks Corp, Wal-Mart Stores, Inc.), telecom firms (Vodafone Group Plc, Orange S.A.) and start-ups (Square, TransferWise Ltd), according to the Google-BCG report. More disruption is expected as the number of fintech start-ups doubled to 1,000 in around five years with funding growing six times to $11 billion in 2015.

Innovations will help, too. The Google-BCG report says some other payment innovations that could be relevant in the India include contact-less payments like Near-Field Communication (NFC), which has not been very successful here yet due to the high costs of embedding it in smartphones and merchant terminals (bit.ly/2g6TLYA).

But the use of QR code technology is popular. The report also expects the Internet of Things (IoT) to fuel online transactions in the next few years. For example, consumers could use an Internet-connected refrigerator to order groceries and pay for it in real time using a digital payments instrument.

Further, technologies like blockchain could be used to create digital currency (like bitcoin) making peer-to-peer digital payments seamless and secure, while banks and payments service providers could offer solutions that enable customers to log in and pay through voice-based, biometric and iris authentication. Indian banks like ICICI Bank are already gearing up for a digital future with artificial intelligence-infused chatbots to act as quasi-bankers, software bots that can even do remittances and help with making loan choices, and blockchain technology to make banking more robust and secure (bit.ly/1TSKr95).

For instance, on 23 November, Paytm introduced a new feature in its mobile application that would allow a merchant’s smartphone to act as a point of sale machine by accepting payments via debit and credit cards. but it discontinued it a day later over security issues.

The changing nature of payments, towards new channels and payments tools, means the risk profile of organizations is changing, according to the 2016 Global Payments Insight Survey by Ovum Consulting and ACI Worldwide. Securing the consumer and enabling continued service provision are the top priorities now, the report adds.

‘In the future, there will be no further payments’

Such a future scenario may sound exaggerated but it needs to be taken seriously since it comes from the World Wide Web Consortium (W3C), which talks of developing Universal Transfer Protocol ledgers that are capable of staging a transfer through escrow. The payment is prepared by putting assets in escrow on each ledger and all ledgers agreeing on a release condition proposed by the receiver. The payment is executed by releasing funds to the receiver first and then passing the signed release fulfilment back down the line. Such a protocol, suggests the W3C paper (bit.ly/2fupJQc), will help digital assets to be securely relayed across multiple ledgers and networks.

Regardless of whether such a scenario comes to pass or not, nearly every innovation we have seen has eaten into the share of cash.

As the Mastercard report pointed out, countries that have an excellent cashless record such as Sweden, the Netherlands, Belgium, France, Singapore, the US and Canada, have been slowly shrinking their smaller pockets of cash... through years of investment, for example, in infrastructure, technology, financial inclusion and education.

There is no reason why India should not pick up the gauntlet.


Leslie D'Monte

Leslie D'Monte has been a journalist for almost three decades. He specialises in technology and science writing, having worked with leading media groups--both as a reporter and an editor. He is passionate about digital transformation and deep-tech topics including artificial intelligence (AI), big data analytics, the Internet of Things (IoT), blockchain, crypto, metaverses, quantum computing, genetics, fintech, electric vehicles, solar power and autonomous vehicles. Leslie is a Massachusetts Institute of Technology (MIT) Knight Science Journalism Fellow (2010-11). In his other avatar, he curates tech events and moderates panels.
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