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Digital Payments

Digital Payments: Precursor To A Cashless Indian Economy

The last 24 months have seen unprecedented shifts in the digitization of payments in India. Demonetization provided a strong reason for consumers to move to non-cash payment methods. While the digital transaction levels seen in the months immediately post demonetization have not sustained, a new benchmark of digital payments has been created. Increase in the adoption of digital methods has been aided by the increase in merchant outlets, as well as the rapid increase of UPI that provides a simple and convenient way to transfer money across bank accounts. The number of merchants accepting card payments has more than doubled in the last two years to cross 3 million and the number of UPI transactions almost touched 250 million in June 2018. Overall, the ratio of cash transactions in the total consumer spending in India  has fallen from 78% in 2015 to 68% in 2017. The digital payments market in India is expected to grow to US$ 1 trillion by 2023 aided by growth in mobile payments, presenting great business opportunities for players in the digital space. Mobile payments alone are expected to rise from $ 10 billion in 2017-18 to $ 190 billion by 2023.

Types of Digital Payment Methods:

  • Banking cards: Cards are among the most widely used payment methods and come with various features and benefits such as security of payments, convenience, etc.
  • USSD: Another type of digital payment method, *99#, can be used to execute mobile transactions without downloading any app.  These types of payments can also be made with no mobile data facility. This facility is backed by the USSD along with the National Payments Corporation of India (NPCI).
  • AEPS: Expanded as Aadhaar Enabled Payment System (AEPS), this can be used for all the banking transactions such as balance enquiry, cash withdrawal, cash deposit, payment transactions and Aadhaar to Aadhaar fund transfers, etc.
  • UPI: UPI is a type of interoperable payment system through which any customer holding any bank account can send and receive money through a UPI-based app.
  • Mobile Wallets: Type of online/virtual wallet service that can be used by downloading an app.
  • Bank pre-paid cards: A prepaid card is a type of payment instrument on to which you load money to make purchases.
  • PoS terminals: Through the digitization, the PoS is expanding and this service is also available on mobile platforms and through internet browsers.
  • Internet Banking: Internet banking refers to the process of carrying out banking transactions online.
  • Mobile Banking: Mobile banking is referred to the process of carrying out financial transactions/banking transactions through a smartphone/tablet/mobile device.
  • QR Code: Implementation of QR code technology for digital payments at merchant outlets eliminates the use of expensive EDC (Electronic Data Capture) machines or NFC (Near Field Communication) devices and improves the economics of merchant acquisition.

Current Challenges and Growth Prospects:

  • Need For Low Cost, Interoperable Infrastructure: This continued dependency on cash persists due to certain challenges deeply rooted in the digital payments ecosystem in India. These ingrained issues can be largely attributed to a lack of adequate infrastructure. In the current scenario, digital payment systems are heavily dependent on smartphones that are enabled with data connections, NFC and Bluetooth etc. Out of India’s 800 Million mobile phone users, only 200 Million use smartphones. Of these phones, only 6 Million are NFC-enabled. There is a dire need, therefore, for a more interoperable and universal method of digital payments in the country.
  • Boosting Innovative Startups For a Digital Future: While the government and digital payment companies push for a cashless/digital economy, the pitfall probably lies in the lack of a protocol pertaining to the implementation of digital payment methods. While technologies are abundant, their penetration is less.  Innovative startups that can reduce the cost burden on users are present, adequate support for their growth is scarce. It is quite important to develop an ecosystem that nurtures innovative startups and players with unique offerings to encourage Indians to embrace a cashless/digital economy.
  • Cybersecurity: The priority over the last couple of years has been user acquisition but not much attention has been paid to risk management and fraud control. It is reported that cyber-attacks caused financial damages of more than $500,000 to Indian companies in the last 12 months. It is a priority for digital payments players to embrace new technologies like biometric authentication, AI, ML and pattern matching for real-time fraud detection & prevention for digital payment transactions.
  • Growth in Digital Payments in comparison to peers: Growth in digital payments in India has been faster & better than other emerging markets since 2015, but on a per-capita basis, India continues to lag behind BRIC peers in digital transactions ecosystem.
  • Better Reach: By encouraging digital payments in a predominantly cash economy, millions of unbanked Indians from across the country can be brought into the fold of banking with safer & better convenience.

Why Digital is the way forward?

Digital payments are not just about convenient and secure transactions, they present an amazing opportunity for the financial inclusion of one-third of the country’s population that still remains ‘unbanked’. Moreover, through their various business models, they act as the enabler for the booming startup ecosystem of India, while opening doors to investments in innovation. Delinking of financial and geographical barriers, such as the recent move of RBI providing a license to 11 companies to set up payment banks could be the start of a cataclysmic digital shift in the economy. Just as digital payments in China leapfrogged to over $5 trillion in the past four years on the back of rising mobile and data penetration. This is India’s Big Bang moment to allow open-architecture and an interoperable payment system to evolve, in order to become a global player in the digital economy.

To conclude, it would suffice to say that Digital Payments Ecosystem will be seeing an increased investment & awareness and would be the go-to method for the large population of the country.

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