Industry
Even beyond UPI, Indian payments space is changing
Summary
- ATMs saw fewer cash withdrawals, credit cards continued to boom and IMPS ticket size was up in the past year
India's UPI, or unified payments interface, has captured headlines, thanks to the speed with which it scaled up and the innovations around it. It's expected to garner more attention in the coming years. India plans to export it to other countries, as a key element of 'digital public infrastructure', adopted in the recently concluded G20 summit.
However, even outside of UPI, there have been significant changes in India's financial landscape in the past year. Data from the Reserve Bank of India shows that cash withdrawals from ATMs have dropped, credit cards are racing past debit cards, worrying the regulator, and companies are pushing prepaid cards, despite their low returns.
1. Going cashless
Indians visit ATMs fewer times now than they did last year, and draw smaller amounts. The number of cash withdrawals in ATMs dropped 6% in September 2023, compared to September 2022, while the total value of transactions fell 1.8%, according to the Reserve Bank of India’s (RBI’s) latest available numbers. This is also reflected in the total currency in circulation, which has dropped by nearly ₹70,000 crore so far this fiscal. Part of the reason is the government's decision to withdraw ₹2,000 notes from circulation in May this year.
Meanwhile, the total number of ATMs increased by about 3,000, or by about 1.2%, during this period. The growth was driven by banks setting more on-site ATMs (within their bank branches), even as they shuttered 3.5% of their off-site ATMs. The number of ATMs owned by non-banking entities (or, white-label ATMs), which was once considered to be a promising business, remained stagnant.
2. Inclusive ATMs
White-label ATMs were expected to address India's low ATM penetration rates in rural areas, which is about 15 ATMs per 100,000 adults. However, they have been constrained by high capital and operational costs. Micro ATMs—portable machines operated by banking correspondents at a fraction of the cost—are helping fill the gap. Their count doubled between September 2021 and September 2022, and increased another 20% over the next 12 months. They currently number about six times standard ATMs.
However, like standard ATMs, cash withdrawals from micro ATMs also dropped on a year-on-year basis in September—1.3% by transactions and 2.4% by value. Their usage is expected to pick up, driven by new payment banks. Four of the top five deployers of micro ATMs are payment banks—promoted by NSDL, Fino, India Post and Airtel. In the past year alone, NSDL, Fino and Airtel together added 479,000 micro ATMs—about 85% of standard ATMs in place.
3. Credit boom
Amid the UPI boom, Indians have also been lapping up credit cards. The number of credit cards grew nearly 20% between September 2022 and September 2023. And unlike micro ATMs, they are being put to use. Credit card payments over point-of-sale (PoS) terminals, typically used by retailers, grew 9%, and by 20% for online and other transactions. This is in contrast to debit cards. While there are 10 debit cards for each credit card, the former lag in usage, which shrank further during this period. Debit card payments fell 20% over PoS terminals and by 30% on ecommerce platforms and others.
The growth in credit cards is driven by a number of factors, including marketing push and behavioural changes. However, such growth has got the RBI worried. On 16 November, it increased the capital banks and NBFCs need to set aside for credit card loans, which is expected to moderate its growth.
4. Prepaid economics
The number of prepaid cards increased 19% to 328 million in the 12-month period to September 2023. This followed a 20% growth in the previous 12 months. However, the total transaction value dropped about 40% between September 2022 and September 2023. The average ticket size of transactions also fell, and is even smaller than the average ticket size of prepaid wallets. All these make prepaid cards uneconomical, compared to prepaid wallets.
Yet, a growth in the number of prepaid cards reflects the new customer acquisition strategy of the industry. Although the wallet-to-card ratio is 4:1, a significant number of users are more comfortable with cards. Policymakers see prepaid instruments as key drivers of moving to a cashless economy. That will likely be driven by prepaid wallets, as smartphone penetration picks up. While the number of wallets increased 4% in the past year, their total transaction value gained 18%.
5. Thicker boundaries
While UPI has become the most common way to transfer money in India, there are two other systems that are used to transfer at least ₹5 trillion a month: NEFT (National Electronic Funds Transfer), operated by RBI, and IMPS (Immediate Payment Service), which, like UPI, is operated by the National Payment Corporation of India. The largest by transaction value is NEFT, which transferred almost twice that of UPI in September 2023.
At 17%, NEFT also saw the largest drop in average ticket size during the 12-month period to September 2023. For UPI, it was 9%, following an 8% drop in the previous 12 months, reflecting its expanding user base. New adopters tend to use it for smaller transactions. Meanwhile, the ticket size of IMPS grew 9% and 16% during these two periods, reflecting its increasing popularity for larger transactions.
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