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Future of digital payments in India

By Business Standard
March 20, 2024 10:52 IST
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'The focus needs to shift towards the ability to collect payments, particularly in tier-3 to tier-4 areas where acceptance is still lacking.'

IMAGE: Cutlery vendor switches on Paytm at a roadside market in Ahmedabad. Photograph: Amit Dave/Reuters

A conducive atmosphere involving factors such as the Jan Dhan-Aadhar-Mobile (JAM) trinity, and the NPCI (National Payments Corporation of India) infrastructure in the name of UPI, among others, has given a fillip to India's digital payments infrastructure.

In a panel discussion at the Business Standard BFSI Insight Summit 2023, panelists said that education, awareness and an ability to collect payments digitally would further drive growth in India's digital payments story.

The panel discussion titled 'Digital Payments: Next Leg Of Growth' had top industry players including Sharath Bulusu, Director - Product Management, Google Pay; Arif Khan, chief innovation officer, Razorpay; Jatinder Handoo, chief executive officer, Digital Lending Association of India (DLAI); Kalyan Kumar, executive director, Punjab National Bank; and Vishwas Patel, joint managing director, Infibeam Avenues & Chairman of Payments Council of India.


What are the factors that have led to the growth of digital payments?

Kalyan Kumar: A policy document, which was published by the UN before the G20 Summit, mentions India has achieved around 80 per cent of financial inclusion in the last six years.

It would have taken around five decades if it would not have been through digital public infrastructure.

This speaks about enablers in India such as Jan Dhan accounts, mobiles and smartphones. This includes the availability and affordability of internet services.

This created a congenial atmosphere for the growth of this payment infrastructure.

JAM (Jan Dhan-Aadhar-Mobile) trinity, the NPCI infrastructure in the name of UPI, an open infrastructure where private sector NBFCs (non-banking financial companies) and private sector entities collaborated and gave innovative products.

Regulators played an important role by providing enabling provisions.

Arif Khan: Somewhere around 2010, India embarked on the digital journey in the form of Aadhaar.

I think it is one of the simplest blocks of identity. By 2015, the numbers were close to half a billion.

During this time, the thought process of building these blocks of digital public infrastructure (DPI) came into the mindset.

There were few other things that helped the ecosystem. From 2010 to 2016, the Jan Dhan Yojana accelerated bank penetration from 20 per cent to 80 per cent.

Typically, what would have taken us three decades got compressed to maybe half a decade.

Vishwas Patel: It is a mixture of all these things. Trends for growth were from 2010 onwards.

There are 350 million middle-class individuals with the number reaching around 460 million by 2025.

Plus, there was the Jio effect and 5G growth, the cheapest data in the world.

To add to the same, a lot of government incentives including Jan Dhan Yojana where 400 million bank accounts were opened, as a result of which 400 million debit cards were issued.

We have 230 million UPI handles based on the 400 million debit cards.

UPI was possible because of it. Other things include Aadhaar, e-KYC (know your customer), e-signing, ONDC (open network for digital commerce), account aggregator.

There are continuous innovations by the government and it supported institutions to keep this growth going.

Apart from this, there are two external factors which include demonetisation and the Covid-19 pandemic which accelerated the growth in digital payments.

Sharath Bulusu: Thinking from the lens of a product manager, what stands out for me, is interoperability which made a very big difference.

At the end of the day a payment is between two entities.

Interoperability in terms of making sure it doesn't matter who one banked with, or which app or phone one used.

These things have made a massive difference. Even before UPI came along, there was an extremely fast real-time payment system in India which was IMPS.

However, the challenge is if you want to pay someone through IMPS you go through a very time-consuming cycle of setting up the beneficiary at the other end.

Converting this into a real-time process and transacting knowing someone's phone number was necessary.

I need to know a VPA (Virtual Payment Address) or scan a QR in my mind in addition to the aforementioned factors.

Jatinder Handoo: I would like to add a public policy perspective to this discussion.

In 2003, 2004 and 2005, the government ran some initiatives in terms of alternative business models and started with a business correspondent model in India.

In those days, the entire focus was on the G2P (government to public) payments.

The drivers of payments, the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), national old age pension schemes, social security pensions, among others.

Other important steps included public policy considerations like subsidisation of merchant discount rate (MDR) on public transactions, education, financial literacy and taking the system to the doorstep of a customer.

There are three broad pieces when it comes to the government's role in the form of DPI.

One is the identity piece where Aadhaar came into the picture. Second, payments with the UPI story. Third is the interoperability of a data platform.

How do we make sure that this growth of digital payments goes to the next phase?

Kumar: There's significant potential. Our digital payment market is currently $3 trillion, expected to reach $10 trillion by 2026.

On the merchant side, the penetration is at 20 per cent, which is projected to rise to 65 per cent by 2026.

Opportunities exist in areas like supply chain, payables, receivables, inventory management, and CRM.

In the tier-3 to tier-6 cities, opportunities are available and many things are happening on that level.

Digitisation is also progressing in agri and dairy value chains in villages.

Handoo: When we talk about payments, we can't view them in isolation. Payments are closely linked with commerce and e-commerce.

Moving forward, this connection is likely to strengthen due to India's significant youth population, accounting for 65 to 70 per cent of the country.

With widespread internet access and affordable handsets, about 600 to 700 million people are online, with 485 - 500 million active on social media.

The trend of payments intertwined with e-commerce is noteworthy. Another crucial aspect applicable to payments is data and cybersecurity.

Bulusu: As we look at the next phase of growth, inclusion remains an ongoing challenge.

Despite impressive numbers, many users still aren't part of digital payments due to factors like limited access to smartphones and social-cultural barriers.

Addressing this requires building trust, increasing education, and awareness. The growth in digital payments mostly stems from bank account transactions, not yet touching credit.

Expanding the credit market responsibly is key to aligning with national aspirations and increased consumption patterns.

Connecting credit and digital payments is essential, with UPI and credit seen as a promising starting point.

Leveraging the trust and convenience established by UPI can make a significant impact, especially in a diverse country like India.

Patel: To drive the next phase of growth in digital payments, a shift in focus is crucial.

Currently, the emphasis is on the ability to pay, as highlighted by the prime minister's encouragement to go cashless with UPI.

However, the focus needs to shift towards the ability to collect payments, particularly in tier-3 to tier-4 areas where acceptance is still lacking.

Efforts should be made to make the process easy, convenient, and cost-effective for both merchants and the ecosystem.

Resistance from ecosystem players due to government-set pricing levels, including the MDR, is a challenge.

Khan: It's crucial to acknowledge the role of the regulator and the NPCI in facilitating digital acceptance in the country.

Today, macroeconomics strongly indicates that we are well-positioned with the right tools and solutions, including Credit on UPI, UPI lite, and offline options like tap-and-go.

A key aspect in India has been the scarcity of credit, partly due to high customer acquisition costs, particularly in credit underwriting.

It has been particularly costly. The evolution of KYC and technology making data machine-readable is poised to reduce acquisition and processing costs.

Previously, a credit limit of $700-$800 was feasible; now, even $200-$250 becomes feasible.

The approach, however, needs to be a balance of moving fast yet gradually.

Credit isn't a straightforward matter; understanding underwriting is crucial before scaling up.

Why is there still a dependence on cash today?

Kumar: Cash continues to dominate not only in rural areas but also in various urban settings, and there are multiple reasons for this.

Cultural preferences play a significant role, along with infrastructure limitations in our country.

Additionally, the tangible nature of cash remains visible, and concerns about the safety and security of digital payments persist.

Handoo: Cash still rules, evident in its circulation compared to electronic transactions in the entire economy.

Mr. Kumar succinctly highlighted trust and cultural issues in this context.

Shifting the focus to rural areas where a significant part of Bharat resides, particularly women who constitute 50 per cent of the population, presents unique challenges.

Drawing from my experience in microfinance, I've observed limited ownership of mobile phones among women, with only one or two in a group of 10 to 12 possessing their own mobile phones as recently as two years ago.

The majority had access to mobile phones, but these belonged to either their sons or husbands.

Notably, in rural spaces, specific fraud instances with Aadhar-enabled payment systems (AEPS) hinder adoption.

Is connectivity still a problem?

Bulusu: Connectivity comes from two angles. One is do you have coverage and the answer to that is quite good now.

There are pockets where coverage could improve, but by and large there is connectivity.

Two is the quality of the connectivity. So, if your payment ends up in a stuck state because you lost connectivity for a few seconds and then it can't recover fast enough, then it breaks trust in the system.

On the other hand, the payments ecosystem in India, including UPI, has made huge strides in becoming far more robust when connectivity drops.

I think there's new stuff coming as well such as there has been the talk about enabling completely offline payments in UPI.

These are mechanisms that will definitely help solve the problem.

Patel: With the growth in digital transactions, cash has also grown. During demonetisation days, there was Rs 18 lakh crore (Rs 18 trillion) worth of cash in the market, now there is Rs 32 lakh crore (Rs 32 trillion) worth of cash floating in the market.

Meanwhile, on the ATM withdrawal front Rs 2,64,000 crore (Rs 2.64 trillion) as of March'23 are being withdrawn every year.

We are converting digital money into cash and then going to the local kirana and paying cash.

This leads us to the acceptance part. When (Bulusu) explained that the whole supply chain needs to be digitised, there cannot be one or two breakages in between who start accepting cash suddenly from this.

Acceptance comes back to education which is required and some incentives on taxation to help merchants accept it, make it cost-effective.

There are many advantages such as instant money in a bank account, and saving money on handling cash.

How do you control illegal digital apps?

Bulusu: It's a multi-pronged approach, right?

One aspect involves establishing the right frameworks, whether from the RBI (Reserve Bank of India) or through SROs (self-regulatory organisations).

The second part focuses on distinguishing legitimate players from non-legitimate ones. The key lies in digitising more of the ecosystem to facilitate digital identification.

Establishing the identity of players behind various operations is crucial, and this relies on the robustness and effectiveness of identification and enforcement.

As a nation, there's work to be done in this regard, and strengthening frameworks will contribute to improvement.

The third aspect, and it's not to place sole responsibility on customers, involves digitising many processes.

For a country of our size, our diversity, and our challenges, the solution lies in embracing digital practices.

How long can UPI continue to be free since transaction volumes are rising? With rising volumes, you need investments to service the customers. Do you think it's time that UPI should have a fee?

Kumar: It's a difficult question. There are three perspectives to consider. Firstly, from the customer's viewpoint, if the service is free, it naturally benefits them.

Secondly, from a business standpoint, it has low operating costs for businesspeople.

Lastly, from a regulatory and government perspective, free services can lead to increased adoption, addressing the current needs.

If we delve into the pros and cons, charging a fee would help offset the significant investments made by both the private and public sectors.

While regulators and the government must weigh all perspectives, considering the current potential, charging fees may not be a favourable move, in my opinion.

It's worth noting that NPCI has already implemented a 1.1 per cent interchange fee on UPI for pre-payment instruments when charges exceed Rs 2,000.

Patel: The first thing to note is that with UPI customers generally do not bear the cost of any payment option. Typically, it's the merchant who bears the MDR.

Currently, the UPI MDR is either covered by the government or subsidised in some way.

With efforts made through discussions with the honourable Finance Minister and others, in the previous Budget, Rs 1,300 crore were allocated as incentives for promoting digital payments, and it increased to Rs 1,500 crore.

This time, in the latest Budget, the Finance Minister raised it to Rs 2,400 crore as transactions had increased.

However, over the last three to four quarters, the money has been disbursed but stops at the bank level.

Despite the hard work put in by private players like PhonePe, Google Pay, Paytm, and CRED, such as putting in QRs, and getting people on the UPI bandwagon.

But, today, none of our members, including us, have gotten a single paisa of Rs 1,300 crore, Rs 1,500 crore or Rs 2,400 crore.

While banks have costs, we are doing the hard work out there and we deserve some part.

Khan: I believe a portion of the discussion, circling back to the Fintech ecosystem, would be beneficial.

Is it good enough? Perhaps not. However, there's an intriguing trend worth noting.

Though I'm not operating at the policy level, and I invite your comments on this, the emergence of new features on UPI, like UPI on credit or auto-pay, suggests inherent interchange possibilities.

Personally, I view India as a huge market.

Over the next three to four years, if around 25-30 per cent of UPI transactions become either auto-pay (recurring transactions) or mandate transactions, or even credit card transactions, there might be a shift in interchange or MDR dynamics.

Presently, it poses a challenge, and due consideration should be given to market players.

I'm not implying that banks have a huge kitty, but there should be a fair distribution that needs attention.

Will you have an SRO for the entire fintech community since the ecosystem is not homogenous?

Handoo: The rationale behind the existence of an SRO is to support functions initially for emerging segments within a substantial industry.

Drawing from precedence, the microfinance sector has already witnessed the recognition of two SROs by the RBI, each with its historical context.

My personal perspective emphasises an activity-based and specific SRO approach.

In the realm of Fintech, two predominant streams emerge: digital lending and payments, each with distinct contours.

Moreover, beyond a segment-specific focus, we must acknowledge the enabling role that SROs play.

It is evident that there is a need for separate SROs, if not for every segment, at least for the major segments within the financial services landscape.

What are the biggest challenges or threats to maintaining the continuity of digital payments?

Kumar: The biggest challenge is a security risk as there are a number of frauds happening around. Second is infrastructure and awareness.

Khan: We need to understand that on the infrastructure side, some of it is very old chassis.

Some of them need to be updated which includes security, reliability, and so on.

The other is that we should not have the hubris stating we have done it all right after looking at high transaction volumes. There is a long way to go.

Patel: With less than 200 million Indians transacting digitally, the way ahead to grow things to 600 million is where the real focus should be.

The challenge remains multi-fold. Banks have to improve their core banking solution and they need to put enough money in their IT infrastructure.

Bulusu: The biggest barriers would be each barrier that we think of when we consider financial inclusion.

Some will stem from language since people who will come under the fold of the next wave of transactions will not necessarily speak English.

They will speak a variety of languages. Another one is social factors such as the number of women who have independent access to mobile phones and bank accounts.

When we talk about security as a barrier to inclusion, the challenge in India is not technical security.

The standards of technical security have been very high, the challenge is social engineering.

I think education and awareness would be necessary.

Handoo: The single largest barrier would be the lack of cyber security, and frauds.

There are different contours to that. As long as we have epicentres of fraud, it is going to be difficult for the common man to trust digital payments. It needs to be addressed.

Feature Presentation: Aslam Hunani/

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