Where India leads in digital payments, and where it lags

Last week saw two milestones in the financial technology sector in two parts of the world. Razorpay, a payments processing company, became the fifth Indian fintech player to hit a valuation of $1 billion. In Nigeria, Paystack, a similar start-up often called the ‘Stripe for Africa’, was acquired by Stripe itself. The $200-million acquisition was the largest for a Nigerian start-up.

This growth in the fintech sector comes with a spate of innovations over the last decade. Digital payments were the first disruption, and digital lending followed. Today, China is a leader in digital payments, and India has been an able follower. India registers about one-eighth the transactions that China does, but it matches China on growth.

One of the biggest stories of fintech innovation to come out of India is the Reserve Bank of India-regulated Unified Payments Interface (UPI). Piloted in April 2016, the platform enables users to transfer money instantly between two bank accounts over a mobile phone. It gained relevance that November, when India demonetised high-value currency notes.

In its first full financial year, 2017-18, UPI accounted for 9% of all retail digital transactions in volume terms and 1% in value terms. These include transactions through debit and credit cards, IMPS bank transfers, UPI and National Automated Clearing House (NACH). By February 2020, UPI’s share had crossed 50% in volume terms and 16% in value terms.

The pandemic and physical distancing have provided further tailwinds to UPI. In September, the payment method made up nearly a quarter of the value of all retail digital transactions.

The UPI infrastructure is characterised by peer-to-peer transactions and real-time inter-bank settlements. Its progress has had a knock-on effect on Indian companies. Further, greater smartphone ownership, lower transaction costs, and improved user experience are also spurring new business models in fintech.

Start-ups in the sector are now turning their attention to innovations in retail, real estate, insurance, and wealth management. Even legacy banks are investing in various segments: wallets, digital lending, payment services, savings and wealth management, remittances, point of sale products and services, and insurance and real estate.

This March, CB Insights, a market intelligence firm focused on the internet economy, published a list of the top 250 promising companies in fintech. Companies from the US dominated the list (136), but India came in a worthy third, with 20 companies. These include PolicyBazaar in insurance; Pine Labs, Razorpay and BharatPe in payments processing; Cred and INDWealth in personal finance; and Khatabook, ClearTax and Fyle in accounting and taxation.

More than where India is right now, start-ups are looking at where it can potentially go. In 2018, the Bank for International Settlements (BIS) ranked India seventh among the 24 countries where it tracks digital payments. Around 67 million payments were processed per day in India that year—about one-eighth of China and one-seventh of the US. This marked an eight-fold growth in just six years: only China had a better growth rate.

But India still has much distance to cover in financial inclusion. In 2018, the latest year for which BIS data was available, it was ranked last in per capita penetration and frequency of use, with just 18 digital transactions per person per year. This was less than half of Saudi Arabia (38) and Mexico (40). Though digital payments have shot up since 2018, India is far from the likes of China (142), the US (495), and Singapore (831).

New innovations mean India is leapfrogging the debit and credit card generation of digital payments systems. Only about 33% of India’s population above 15 years owns a debit card, against 92% in Singapore, 87% in Japan, and 67% in China, according to the World Bank.

On this path, China has shown the way, relying on new payments infrastructure to increase penetration. One measure of China’s progress in this space is the upcoming initial public offering (IPO) of Ant Financial, the fintech arm of retail giant Alibaba. It is expected to be the world’s largest IPO, at $35 billion, and comes from a behemoth offering digital wallets, lending, wealth management, and banking services.

Of the 24 countries the BIS tracks, only nine have infrastructure to settle transactions in real time. In 2018, around 95% of China’s digital transactions were classified as real-time settlements. For India, that figure was 29% in volume terms and 7% in value terms.

With payments now possible even without a smartphone using USSD 2.0, the UPI and digital payments story in India can only go further upwards. That will open up newer possibilities in fintech and beyond.

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