Mumbai: When the Indian government invalidated high-value banknotes on the night of 8 November, taking out 86% of the currency in circulation by value, it was supposed to be a war on unaccounted-for and untaxed wealth, counterfeit notes and terror financing.
Somewhere along the way, as serpentine queues formed outside bank branches and automated teller machines (ATMs) for days and weeks together, the slogan changed.
It became all about promoting a cashless or at least a less-cash culture in an economy where almost 90% of transactions are paid for in cash.
The talk turned to technologies such as mobile wallets, crypto-currencies such as Bitcoin, mobile peer-to-peer payments, block chain technology, payment banks and architectures such as the unified payment interface (UPI) and the recently-launched Bharat Interface for Money (BHIM) app.
The total value of all transactions done using electronic payment systems in India in December rose to Rs105 trillion from Rs95 trillion in November, according to representative data released by the Reserve Bank of India (RBI) on 17 January.
They included transactions done through the real time gross settlement (RTGS) system, the national electronic funds transfer (NEFT) system, immediate payment service (IMPS), credit cards, debit cards, UPI, point of sale (PoS) terminals and mobile banking.
Indeed, the growing popularity and rapid adoption of digital payment systems, in the face of a shortage of cash and stringent limits on bank withdrawals, may be a silver lining to the demonetisation of Rs500 and Rs1,000 notes—an exercise that some critics have slammed as ill-conceived and hastily implemented.
To be sure, India has a long way go before it joins the ranks of countries such as Sweden, Finland, Canada, the Netherlands, Belgium, Singapore, France and the UK where more than 85% of the consumer payment transactions are done digitally.
But it’s a start. Consider this. A day after demonetisation, Ola Money, the digital payment solution offered by ride-hailing company Ola, reported an “over 1,500% increase in recharges across the 102 cities of its operation". Oxigen Services India Pvt. Ltd, too, claimed to have broken all its previous records in money uploads and transaction count in the week after the demonetisation.
Similarly, the National Payments Corporation of India—the umbrella organization for all retail payments systems in India—claimed that in just two days (8-9 November), the use of its domestic card scheme—RuPay—almost doubled to around 800,000 transactions a day, compared with a daily average of 400,000 transactions earlier (http://bit.ly/2gdu0bW).
One97 Communications Ltd-owned digital payments firm Paytm said on 21 November it had seen more than seven million transactions worth Rs120 crore on that day alone.
The company claimed that offline, person-to-merchant transactions had grown to contribute over 65% of transactions. Mobile wallet FreeCharge, too, said it had ramped up its acquisition effort and was targeting signing up one million merchants in the coming 12 months.
On 16 January, Paytm said it has received a “phenomenal response" for new service categories such as hospitals, tolls and petrol pumps, and expects to add more categories in the coming months.
According to the company, the new categories are generating six million transactions a month and are expected to overtake mobile recharges (in terms of order volumes) by mid-2017. Over the next few months, Paytm will expand to newer categories such as automobile service stations, school and college hostel cafeterias, dairy outlets, apartment maintenance and traffic challans.
The company will convert into a payments banks over the next two months, according to a 4 January Press Trust of India report.
In a bid to give the country a digital boost, NPCI said its new electronic toll collection (ETC) system would eventually include other vehicle-related payments such as parking fees, servicing and fuel charges (http://bit.ly/2fIv7xf).
It was only in September that NPCI launched a pilot project for Bharat Bill Payment System (BBPS) with 26 Bharat Bill Payment Operating Units (BBPOUs). Most 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 (http://bit.ly/2eiNqw1).
Digital transactions began booming after e-commerce firms such as Flipkart, Snapdeal, Amazon, Myntra and Jabong began offering attractive discounts to woo customers.
Banks accelerated the efforts with their own mobile wallets, mobile banking apps, and pitches of banking on smartwatches and even social networking sites (http://bit.ly/1fucY4s).
The launch of Pockets by ICICI Bank Ltd, Lime by Axis Bank Ltd, PayZapp by HDFC Bank Ltd, SBI Buddy by State Bank of India and Ziggit by IDFC Bank Ltd are cases in point.
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 Jio-Money by Reliance Jio Infocomm Ltd are other telco-led payment solutions.
Airtel, meanwhile, has also announced the launch of its payments bank.
Banking in India is witnessing what Nandan Nilekani calls the “WhatsApp moment", threatening to disrupt the banking ecosystem in India as payments move to mobile and lending to algorithms.
With the launch of UPI, the country has crossed a significant milestone.
“Apart from making payments easier, UPI enables micro-credit. This will help the currently underserved small traders and businesses. The visibility into transactions provided by UPI apps enables financial institutions to evaluate the credit worthiness of its users. Instead of assets, credit will be based on transaction flow, and can be issued instantaneously. This will provide more choice for borrowers, especially those who depend on moneylenders and the informal sector for loans," says Venkatesh Hariharan, director of Indian Software Products Industry Round Table (iSPIRT)—a think tank.
Smartphones and increasing Internet penetration will only help India’s digital cause. Around 90% of all devices will be Internet-enabled by 2017, and the number of Internet users will touch 650 million by 2020 from 300 million in 2015, predicts a 25 July report by Google and Boston Consulting Group (BCG).
The report forecasts the size of the digital payments industry in India to touch $500 billion by 2020, contributing 15% to India’s gross domestic product (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 such as NPCI’s BBPS may give a further impetus to the digitization of bill payments.
The number of mobile wallet users is already three times the number of credit cards issued in the country (24 million in 2015-16), according to the Google-BCG report.
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 more than one billion mobile subscriptions. Of this, around 240 million consumers use smartphones, and this base is projected to increase to over 520 million by 2020.
Smartphone subscriptions in the country will increase fourfold 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 more than 50% of the person-to-merchant transactions expected to be under Rs100.
It predicts that the value of remittances and money transfer that will pass through alternative digital payment instruments will double to 30% by 2020. A related BCG study (http://bit.ly/2bc0gLk) in August forecasts that by 2020, about 315 million Indians living in rural areas will be connected to the Internet, compared with 120 million now.
Globally, too, the payments landscape is seeing heightened activity across multiple categories, ranging from device manufacturers (Apple Inc., Samsung Electronics Co.), tech firms (Google, eBay Inc., Alibaba Group Holding Ltd), retailers (Starbucks Corp., Wal-Mart Stores Inc.), telecom companies (Vodafone Group Plc., Orange SA) and start-ups (Square Inc., TransferWise Ltd), according to the Google-BCG report.
More disruption is expected as the number of fintech start-ups doubled to 1,000 in approximately five years, with funding growing six times to reach $11 billion in 2015.
“This hockey-stick growth is due to the axis shifting to the customer, who is today served by a variety of competing business models and methods driving its adoption. The explosion in mobile banking is proof enough of how private banks and, later, PSU (public sector undertaking) banks, too, got their act together and worked with start-up fintech firms to rejig their apps, sites and in-house wallets to keep up with customer expectations, rather than trying and do everything by themselves, or waiting for the regulator to issue diktats," says Probir Roy, co-founder and director of digital payments firm Paymate.
Hiccups clearly exist.
Indians love their cash. “Paper currency facilitates making transactions anonymous, helping conceal activities from the government in a way that might help agents avoid laws, regulations and taxes. This is a big difference from most forms of electronic money that, in principle, can be traced by the government," wrote Kenneth Rogoff, Thomas D. Cabot professor of public policy and professor of economics at Harvard University, in an 11 April 2014 paper.
This trend is borne out by the fact that retail payments in India, for instance, are still dominated by cash, with a mere 6-7% of transactions conducted electronically. The rest are in cash or cheque.
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 Inc. analyst Ashutosh Sharma.
Sharma points out that in India, merchants are forcing the choice of cash payments on customers because electronic payments eat into their margins—just like everywhere else in the world.
Barriers to a cashless world, concurs the World Economic Forum (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 more convenient; access is an issue for individuals without bank accounts; and fraudsters continue to find opportunities in electronic transactions".
Consumers who have tried using digital payments but have now shifted to other modes such as cash, card and online banking say the inconvenience of remembering log-in credentials, insufficient acceptance, possibility of a technical or human mistake during a transaction and frequently running out of balance are the top reasons for lapsing, according to the report by Google and BCG. Hence, expanding merchant acceptance is critical to driving mass adoption by consumers.
As of 30 September, the number of PoS devices which accept debit and credit cards as modes of payments at merchant outlets was a mere 1.49 million, according to the Reserve Bank of India’s (RBI’s) monthly bulletin. 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 (http://bit.ly/2gc6sFy). Moreover, most Indians use debit cards to withdraw cash from ATMs.
According to Roy, a cashless economy has to have appeal and practicality at the most elementary level for consumers and merchants alike, especially given the plethora of overlapping and competing payment options.
“There are great apps for mobile banking, money transfer, shop and pay, tap and go, etc., and then there are the old faithful viz. net banking, prepaid cards, IMPS and e-wallets, USSD (unstructured supplementary service data) and UPI. The latter (USSD and UPI), yet to quite reach their ‘WhatsApp moment’, saddled as it is by the way banks have implemented, and promoting them vis-a-vis other offerings, lack of a people-friendly branding and a common user interface," explains Roy.
Roy cites the example of a food court in a mall where you load your food court plastic card, redeem at food stalls on par and cash out the balance when done.
Security is another big concern. According to cybersecurity firm Kaspersky Lab, while those who have been transacting online are fairly well-versed with the threats one can face while paying online, it’s the first-time users or new adaptors that need to be educated on the risks they are exposed to.
According to Altaf Halde, managing director (South Asia), Kaspersky Lab, while payments through smartphones are very convenient and frees one of the pressures to hold cash, it calls for precautions.
“One small slip-up can cause one a huge loss. While companies are bound by law to follow guidelines, fraudsters find their way through many security barricades. The only way to safeguard oneself, in such a scenario, is to be vigilant while paying and to keep the mobile protected with a security plan. With these two simple steps, people can ward off almost all financial theft risks. As the current adjustment period makes way for settlement, we are sure that more people, across economic strata, will find digital payments way more convenient and may make it their preferred mode of payment," says Halde.
Being an online security firm, Kasperky Lab recommends that users should get themselves “a mobile security plan".
Moreover, interoperability issues are causing friction between banks and mobile wallet service providers.
On 16 January, for instance, Mint reported that ICICI Bank Ltd had blocked transactions on payments app PhonePe in at least the second such instance of a commercial bank trying to protect its turf against non-bank mobile wallet and payment companies.
PhonePe is a UPI app.
A day later, PhonePe’s co-founder and chief executive officer Sameer Nigam took to microblogging site Twitter to allege that ICICI was blocking transactions since Friday (http://bit.ly/2jlYhGX).
ICICI Bank cited security concerns as its reason for blocking PhonePe. NPCI initially ordered ICICI Bank to rectify the situation. Later, in a U-turn, it said PhonePe is in violation of UPI norms (http://bit.ly/2iT5Q3F)
On 4 January, CNBC-TV18 reported that SBI had blocked net-banking transactions with e-wallet firms, although it allowed customers to top up their mobile wallets with debit and credit cards.
At the time, SBI chairman Arundhati Bhattacharya said the service was blocked because of security concerns.
Roy insists that an open-access platform allows for interoperability for wallets operators, and diverse choice for customers. This will allow banks to have a wider acceptability of popular third-party prepaid cards and wallets, with minimal loading failure rates.
Second, it will enable them to, inter alia, inter-operate seamlessly and with minimal friction across a multi-sided base comprising e.wallets, banks and common merchants (same QR code for instance).
Third, banks will have to rework service level agreements with their PoS merchants and card networks to ensure a much higher reliability.
In conclusion, says Roy, India is too large a country, diverse in its perceptions, behaviours and idiosyncrasies to have a one-size-fits-all strategy for a post-cash world.