The evolution of commerce has come a long way ranging from barter, to use of cattle and cowries and so on; until we settled for coins and notes as commonly traded forms of currency to complete a transaction. Introduction of plastic money was a lighthouse innovation in the financial services industry, enabling people to transact on debit/credit for making a wide range of purchases. And that seemed to work fine, till the likes of Paypal came along and completely changed the game to redefine how we pay and receive money.
We now have banks and other incumbents re-inventing themselves in the digital era through introduction of UPI and digital wallets. But let’s see this story in the larger picture of the whole payment ecosystem, which is a holistic environment where multiple stakeholders are involved for exchange and flow of money to complete a transaction.
The way we pay is changing dramatically. For example, people are beginning to use their smartphones for every kind of formal and informal transaction – to shop for flippers, buy songs online, or to split the pizza money.
Payments is an extremely complex industry. To understand the next big digital opportunity, it is critical to understand how the traditional credit and debit-processing chain works and what roles acquirers, processors, issuing banks, card networks, independent sales organizations, gateways, and software and hardware providers play.
When Visa and Mastercard made an appearance, they were analogous to being a part of signature club. It was a sign you had arrived in life when you zapped out your shiny plastic card for a payment, that happened on a curious advanced machine with a secret pin. Now, with advent of countless other e-wallets, Visa and Mastercard are giving their best to move on and stay in the game.
Payment apps like Paytm, PayPal, Mobikwik are on the rise consistently. The annual report by RBI said that the mobile banking service witnessed strong growth of 151 per cent and 224 per cent in volume and value terms, respectively. The number of registered customers rose to 163 million during the year 2017.
Low penetration of point of sales (PoS) terminals or card swipe machines and concerns over security make debit cards less attractive. So, if there are 700 million debit cards, there are only 2.5 million PoS machines for these cards, which are concentrated in large metros.
This is why even the government is trying to move to a cashless economy, what with it’s JAM, Demo and BHIM and UPI.
The role of government in cashless economy
There’s been too much discussed on demonitization, so lets take a look at other movies India is making to promote cashless economy. India is on the brink of embracing digital more fully than ever before. The trinity of Jan Dhan, Aadhar and Mobile penetration has ensured that government is doing its best to get the whole populace into the banking system. Bharat Interface for Money (BHIM) provides fast, secure, reliable medium to make digital payments through your mobile phone using UPI.
In an attempt to bridge the India-Bharat divide, RBI has also approved many non-banking financial companies to set up payment banks, enabling them to focus on engaging rural customers. These companies aim to provide low-cost savings accounts, remittance and payment services for the predominantly rural and traditionally unbanked population.
Even if Google’s Tez saw 5 million downloads in its first month of launch, and India’s largest wallet player, Paytm, claims around 260 million users and MobiKwik, 60 million, yet India’s largest bank, State Bank of India has only about 195 million customers. This means that while a young, urban ‘India’ is moving towards cashless payments, ‘Bharat’ still uses cash to a great extent.
The institutional move to go cashless
Despite mixed growth of digital payments the future is less cash, if not completely cashless. BCG report estimates payments in India via digital instruments are expected to touch $500 billion by 2020.
Banks in India are launching digital wallets in a bid to remain competitive. SBI launched the State Bank Buddy mobile wallet in August 2015; and had achieved transactions worth INR 2.3 billion through the mobile wallet in one year. Other digital wallets launched by banks include Pockets (ICICI Bank) and Lime (Axis Bank).
Banks understand that digital channels are the way in which customers interact with them, and consequently, digital investment priorities are starting to shift from customer experience to customer engagement. The ability to personalize communications, proactively respond to events, or prevent fraud is key to improving loyalty and retention, which leads to the additional cross-sell opportunities.
As a response to this trend, digital-only banks have launched across the world. Singapore-based DBS Bank launched India’s first mobile-only bank, Digibank. Customers are entitled to an unlimited number of cash withdrawals and are offered cashback and discounts on in-store and online purchases. Customers can open accounts at any of the bank’s partner outlets simply by giving Aadhaar Card details.
How does India stick up against other nations in going cashless?
While India is trying to leapfrog into digital, it has a long way to go. Sweden, South Korea, Denmark, Canada have high percentage of cashless transactions—as high as 75-85%.
For instance, Octopus Card in Hong Kong launched in 1997 to pay metro fares is now used by 95% of the population for transport, and at convenience stores, gas stations, car parks, supermarkets and more. Similarly, Singapore has EasyLink and South Korea has Upass with multiple use cases.
In South Korea and China, the QR code is popular. In Japan NFC is a popular way to pay. The US, Australia and Singapore have no equivalent of UPI or QR code, but tap-and-pay option are popular.
Incentives have always been the leverage of a digital payment system over traditional systems. You would rather spend the day at the mall, if it were not for the cashback and referral points and discounts on e-bay and amazon. For instance, in China a machine vends Facebook likes for Bitcoin. So, what more is in store as the digital natives, driven by instant gratification, splurge on a digital payment system, and get what they want without feeling the literal pinch in the physical pockets?
The future of payments in India does look cashless and digital, though there may some halting points like the rural penetration, incentivisation of digital payments, integration over services, data security concerns. But despite these challenges, people may eventually prefer the digital cash over currency, as it comes with the perks of transparency, immaculate records, and convenience.