The pandemic has pushed fintech firms into a moment of reckoning. What innovations may come out of it?
The moment is almost akin to demonetization. The queues outside ATMs are back. Financial regulators and governments are pitching for digital options to avoid those
At the posh Alta Monte building in a Mumbai suburb, where apartments sell for close to ₹3 crore each, residents have been queuing up for the past few days to withdraw cash using a fingerprint scanner. Aadhaar-based payments, touted so far as the source of quick access to funds for people dependent on government benefits, has now reached gated communities across the country’s financial capital as people stay away from venturing out to use automated teller machines (ATMs).
“Aadhaar-enabled payment system (AePS) was thought to be poor man’s fintech, but covid-19 has blurred that distinction," said Anand Kumar Bajaj, chief executive of PayNearby, a firm that provides digital banking services.
The micro-ATMs outside gated colonies and the fingerprint scanners point to major upheavals that are currently underway within the world of India’s fintech firms. The immediate trigger: since early-March, as fears of a pandemic took root, Indians began to hoard cash. By mid-April, the amount of currency in circulation had hit a 12-year high. Almost in parallel, transaction volumes via unified payments interface (UPI)—the country’s most popular digital payments platform—began to plummet, from 1.3 billion in December 2019 to 1.25 billion in March.
The reasons are fairly obvious: e-commerce, online events and travel industry have come to a standstill. “The only retailers that are open (during the lockdown) are the mom-and-pop kirana stores which were mostly not adept at taking digital payments, at least not most of them," Bajaj said.
India’s digital payments ecosystem finds itself at a strange moment, which has pretty much only one point of comparison —demonetization. The queues outside the ATMs are back, with added social distancing protocols. And everyone from financial regulators to governments is back to pitching for digital options to avoid those queues.
The long-stated aim to move to a less-cash economy supposedly has a new public health imperative. “Cash can potentially be a carrier of (the) virus; digital payments provide effective ways to maintain social distancing in these difficult times," said Amitabh Kant, chief executive of NITI Aayog.
And those concerns are not restricted to the lockdown period. In the months ahead, as the economy slowly opens up, social distancing and minimal contact norms may upend the world of banking in many ways.
The Reserve Bank of India (RBI) has even roped in actor Amitabh Bachchan to endorse digital payments in its attempt to dissuade people from visiting bank branches. Meanwhile, the National Payments Corporation of India (NPCI), an umbrella organization for operating retail payments and settlement systems, is scrambling to bring more vendors on to digital payment platforms.
Bajaj said that in just the last two weeks, 5 million new users comprising individuals and merchants have come on board the UPI platform.
“These crises are times one should not waste and I am sure this crisis will lead to several innovations," said Bajaj, adding that India already has interfaces like the AePS and QR-based-pay which are ready to deploy at scale, and predicted that their usage will see significant uptick amid the disruption caused by the novel coronavirus.
One would think that owing to such aggressive marketing by multiple institutions, digital payment volumes would stop sliding. But even relatively stable, well-established channels such as the Immediate Payment Service (IMPS), a mode of quick remittance, has seen a decline in the number of transactions (217 million in March, from 256 million in December).
That is not a good sign for fintech companies in India. As the lockdown brings large sections of the economy to a halt and people have less cash in their hands to transact, payment volumes will continue to be affected.
“People who used to remit money home are out of jobs and remuneration for the moment," said Ashish Ahuja, chief business officer, Fino Payments Bank. “A lot of the migrant population has been trying to go back to their native places and because of this, the inward cash transactions have gone down drastically," he said.
According to Ahuja, for someone to do a digital transaction, the bank account needs to have requisite funds and since a large section of the country’s population gets paid in cash, digital transactions for them always begins with cash deposits.
“One thing that we have to remember is that if there is no money in bank accounts, how will a digital transaction happen? So, the first leg for a digital transaction is in the form of a cash-in," said Ahuja.
Amid this uncertainty, the industry sees the direct benefit transfers (DBTs) by the government as a source of transaction and revenues. Last month, the government released a ₹1.7 trillion relief package under the Pradhan Mantri Garib Kalyan Yojana to help migrant workers, farmers, urban and rural poor, and women.
Ahuja added that while remittances from consumers have fallen almost 70%, cash withdrawal from micro ATMs and through AePS have not fallen to that extent and will start ramping up again owing to direct benefit transfers. And that’s the niche use profile where most innovations may occur in the immediate months ahead.
Innovations in store
Digital payments have steadily become a significant mode for the inflow to the Indian consumer via government benefit payments and salaries in the organized sector, said a report by the High-Level Committee on Deepening of Digital Payments led by Nandan Nilekani in May last year.
RBI had constituted a five-member committee in January 2019 to review the status of digitization of payments, identify gaps in the ecosystem, and suggest ways of plugging them. The report stated the obvious: cash is still the dominant mode of fund outflow for the Indian consumer because of the underdeveloped nature of the acceptance ecosystem for digital payments.
Vivek Belgavi, partner and fintech leader, PwC, believes that things like DBT are top-priority right now because they are meant to protect the more vulnerable sections of society. “What we are aware of in the payments industry is that, in April, there has been a fair bit of payments traction in DBT AePS," said Belgavi.
He believes that this crisis will lead to innovations and changes in how people use payment services. “Social distancing is going to be the norm for a while along with having low-contact customer touchpoints. More broadly, the way we are tracking this is in the form of a social distancing-compliant experience, purely from a health and safety perspective," said Belgavi.
Some of the innovations, he said, would include changes in the branch banking and ATM models, which will move close to zero-touch. “If you want to minimize the risk of infection, then in every shape and form whatever can reduce touch would be a step in the right direction," he said.
Bajaj of PayNearby pointed out that last year about 115 million debit cards were done away with because they were not chip-based and were no longer permitted. This, he said, led to many customers lining up at bank branches to withdraw money sent by the government recently.
“Many of those customers did not know that their cards had expired and went to ATMs to swipe the card and then they went to branches to withdraw cash. Now, many branches did not have Aadhaar authentication devices and this is where we have been called in to work at the branches and authenticate such customer transactions," said Bajaj.
The MDR dispute
While payment companies and experts believe that the pandemic will lead to a slew of long-term innovations, the industry is already hamstrung by the government’s decision to abolish merchant fees for RuPay cards and UPI. In a letter to finance minister Nirmala Sitharaman on 15 January, Gaurav Chopra, an executive director at Payments Council of India, detailed how the zero merchant discount rate (MDR) regime for RuPay debit cards will hurt the ecosystem.
“The waiver of MDR may seem to be a simple solution to lower the transaction cost in the hands of the merchants, small business and proprietor setups, but it has ramifications significant enough to stall the penetration of technology and infrastructure—the crucial rails on which the digital payment industry operates," he wrote. Mint has reviewed a copy of the letter. Beyond the customary niceties in the letter (“we would like to thank you for meeting us and hearing our concerns"), the payments industry is exasperated with the government for suddenly discontinuing a vital source of their income. Expressed as a percentage of any digital transaction at a point-of-sale terminal, MDR is the charge paid by the merchant to the bank, card network and the point-of-sale (PoS) provider for offline transactions and to the payment gateways for online purchases.
Merchants here are shops (brick-and-mortar as well as online) where a customer swipes a card to pay for goods, and card networks are companies like Visa, Mastercard and RuPay. Before the government’s decision, the MDR was paid by merchants but they were not supposed to extract it from the customer, although several shops and establishments believe it is the customer who should pay.
The government’s logic in waiving merchant charges for some cards is that as MDR charges go, consumer charges will come down and more of them will embrace cashless payments. However, even if merchant transaction volumes on RuPay cards skyrocket, the payment companies will continue to get almost nothing.
Naveen Surya, chairman of Fintech Convergence Council and chairman emeritus of Payments Council of India, is quite vocal about his views on this move. According to him, fintechs have spent a lot of money to grow the business, which needs to be sustainable and profitable.
“We believe that the temporary benefit that the merchant will get will be completely taken away over a matter of time by the use of cash by customers," said Surya, adding that it is not sustainable in the long term and fintechs will have to find ways to make it up from other sources.
In August 2019, NPCI had capped MDR for large ticket transactions at ₹100 and made it zero at offline merchants for transactions up to ₹100. As per the notification, MDR was revised to 0.3% with a maximum cap of ₹100 per transaction.
Meanwhile, data from NPCI showed that RuPay transactions have been declining since January. While the total RuPay usage volume, both at e-commerce portals and at physical merchants, stood at 140.43 million in January, it declined to 131.56 million in February and 116.71 million in March.
Hemant Vishnoi, co-founder of EnKash and an industry expert, believes that every business runs with a certain set of costs and revenues and when it comes to the digital economy, there is always a need for heavy investments to create scalable and highly secure infrastructure.
The payments industry and bankers, however, are hoping that the government reconsiders this strategy after six months and, perhaps, rescinds its order if volumes do not match its expectations.
They are wary that the payments industry might face a telecom-like situation of wafer-thin margins and face extreme stress, especially at a time when they are making an all-out attempt to expand to newer niches in the middle of a pandemic.
“We have already seen what happened in the telecom industry where charges dropped substantially and despite not being free, telcos are struggling amidst stiff competition. That is the bigger fear," said Surya.
Tinesh Bhasin contributed to this story
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