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Digital Payment Industry In India

Indian digital Payment industry is expected to grow at CAGR of 37.73% to reach almost $1 trillion in 2023 from $ 200 billion in 2018 in terms of value of transactions. The digital payment system types include mobile wallets, internet banking, mobile banking, PoS, and others

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Definition / Scope

Digital Payment is the process of payment through digital modes. In digital payments both the payee as well as the payer using digital modes in order to receive as well as to send money. The complete transaction is carried out online. There are several advantages to the adoption of digital payment across multiple sectors. For example factors such as the time efficiency, ability of banking at any time, capability to keep track of the payments being made (payment history) as well as ease of expense control.

The most common form of digital payment method is found on all e-commerce websites. You can pay on these platforms using any of the methods such as Debit card, credit card, net banking, or payment wallet. A payment gateway is used to interface your bank account with the merchant's bank account. After the transaction, you receive an SMS confirming the status. Swiping your credit/debit card on the swipe machine is also a form of digital payment. UPI or Unified payments interface is a real-time payment system initiated by the govt. of India, which is used to make fund transfers through a mobile app. You can transfer funds between two accounts using any UPI compatible apps such as GooglePay, BHIM, SBI UPI, HDFC UPI, iMobile, PhonePe. You will have to register for mobile banking to use UPI apps. Using UPI, you can transfer using the phone number or QR code. AEPS stands for Aadhaar Enabled Payment Service. Customer needs only his or her Aadhaar number to pay to any merchant. AEPS allows the bank to bank transactions. USSD is also a lesser-known form of digital payment where you do not need to have a smartphone or internet connection. You can dial *99# and pay using mobile services.

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Market Overview

The Indian payments industry is widely dominated by the cash-based transactions. The government and private segment both are running on the digital payment wave. The banking industry in the country was prominent branch based till 2014. Afterwards, there was a substantial growth in the branch-less channels of banking, which has further discovered into digital payments in both urban and rural regions. Additionally, the key players of this market are dominating the highest market share across the globe by adopting the effective strategies and policies for making significant developments in the platforms of digital payments which further lead the market growth more effectively around the globe.

The present era is entering into a new pace in payment system by using digital wallets filled with coupons and offers. The Digital India programme is a flagship programme of the Government of India with a vision to transform India into a digitally empowered society and knowledge economy. Faceless, Paperless, Cashless‖ is one of professed role of Digital India. Considering the benefits like transparency in transactions, scope for curtailing parallel economy and improving the ease of business, it is very essential that the transformation towards digital payments. Many changes took place in the recent past like launch of many digital wallets like - Paytm, Mobiwik, Free Charge etc. and government launching many United Payment Interface (UPI) solutions and BHIM app for smooth transition to digital payments. The surge of smart phones and internet connectivity of 3G and 4G is reflected in the robust growth of payment gateways in India.

The sector is experiencing an unprecedented jump in growth since November 2016, when the government demonetized high currency bills (Rs 500 and 1000) – which represented 86 percent of India’s cash in circulation. By February 2017, digital wallet companies had shown a growth of 271 percent for a total value of US$2.8 billion (Rs 191 crore).

Key Metrics

Metrics Value Explanation
Base Year 2018 Researched through internet


Market Risks

  • The rapid shift to digital transactions has increased the collective exposure to cyber security threats. The major threats posed in the country are fraud and theft through digital transactions. The Indian Central Bureau of Investigation (CBI) has already registered complaints against a group of 15 people who claimed fraudulent refunds through the Pay TM payment gateway for over 600,000 Indian Rupees.
  • The indian digital payment market is full of competition as digital payment companies like Paytm, MobiKwik, PayUmoney, Airtel Money etc have already gained the high market shares and Users. Providers can be impacted through direct losses, regulatory fines, costs to remediate issues, and forgone current or future revenue when users cannot or choose not to use a product or service.
  • In order to steal the money in e-wallets, hackers create multiple fake accounts, and collect money in small amounts. They use psychological manipulation on digital newbies, as well as breaching server security to steal data. Many organisations are becoming more aware of the need for better and more advanced protection measure. However, they still any effective defenses against ransomware and cyber attacks. It requires a complicated combination of intelligence, expertise and technology to detect and counter cyber attacks.
  • Lack of consumer awareness regarding digital payment system as many people do not know how to use those services and prefer traditional payment system.

Top Market Opportunities

  • With Paytm — which has 7 million merchants (two times the banking system)— now becoming a bank and post the launch of Google Tez and PhonePe, which are also focusing on merchant payments, a steep rise in digital payments could be expected.
  • The Digital Payments ecosystem in India are undergoing a transformation with the entry of global tech giants that are acting as aggregators for retail transactions. Within just four months of launch, Google’s payments app is now already processing a large number of digital transactions.
  • While the number of PoS terminals has doubled since demonetization, the merchant acquisition infrastructure in India remains weak, as banks have not been able to drive adoption. This sector presents immense opportunities for digital players.

Market Drivers

  • Increasing convergence and integration between e-commerce and mobile technology have radically changed the shape of the payments marketplace. While most transactions are still being made with cash, the shift to electronic and digital methods is happening rapidly moving away from cash. According to PWC, in 2014 people who had access to online payment was 400 million while in 2018 it reached to 800 million users. India currently has the third largest internet user base in the world.
  • The advent of next-generation payment systems like payment banks, digital wallets and BharatQR, is fueling digital payments furthermore. It is projected that digital payments in India will supersede cash by 2022, according to the IDC Financial Insights report titled The Future of Payments in India: More Spectacular Growth Ahead.
  • The Indian Government is bringing positive policy framework such as Goods and Services Tax (GST), financial inclusion, improving digital infrastructure, launching payment systems such as aadhar enabled payments, UPI, and others which are supporting the digital payments industry.
  • In 2016, Indian Government made a significant move, i.e. demonetization, to curb black money circulation within the country and to increase digital payment penetration. It is a phenomenal step made by India towards improving cashless economy, resulting in sharp increase of several digital payment channels in the country.
  • India comprises of approximately 15% of global populations, out of with 58% are the youth. Having such a massive ratio of the young population the payment methods in the country are transforming tremendously. The cash usage in India is declining continuously, in the year 2017, the cash usage marginally declined by 33% and is anticipated to further come down to 29% in the coming years.

Market Restraints

  • The significant hurdle to growth is the lack of physical infrastructure for digital payments. After adjusting for population, the number of point-of-sale (PoS) terminals and automated teller machines (ATMs) in India remains low. While India’s density of ATMs per geographical area (69 ATMs per 1,000 sq.km) is second only to China’s (100 ATMs) among the major emerging markets, it is still not enough for India’s higher population density.
  • The digital payments industry have been set back by the recent Supreme Court ruling on Aadhaar. Aadhaar, which was used by fintech companies to fulfil know-your-customer (KYC) norms, can no longer be used by private companies.
  • Indians in rural parts of India does not have bank accounts, credit score, and home ownership details. This has played a vital role in the lack of financial services penetration. Due to the lack of relevant financial data, the risk of lending to millions of undocumented and unverifiable Indians is very high even though they satisfy the income sufficiency test.

Industry Challenges

  • The main ingrain issue is lack of adequate infrastructure. Digital payment systems are heavily reliant on smartphones that are enabled with data connections, NFC, Bluetooth etc. Out of India’s 800 Mn mobile phone users, only 200 Mn use smartphones. Of these phones, only 6 Mn are NFC-enabled. This translates to approximately 85% Indians who do not have access to the infrastructure required to adopt the current digital payment systems that are heavily reliant on smartphones.
  • The hardware and software required to adopt the current digital payment infrastructure are bulky and expensive. A lot of retailers are resisting adoption due to these high costs and continue using cash. In a developing country such as India, people would rather carry bulky bank notes than pay extra just for using digital payment methods.
  • There is challenge of risk management to digital payment industry. These firms though tend to equip better tools and skills, but lack the armies of professional risk managers that big financial institutions employ. Digital Payment industry customers expect real-time response which means that risk management must be able to assess risk automatically. There is no doubt that intelligence is revolutionizing the process, risk management will be the key to their success.

Technology Trends

Instant Payment

UPI (Unified Payment Interface) has changed the way people make payment in India. It is an initiative launched by the Government of India where anyone registered on UPI and having a valid UPI ID can now make payments on any e-commerce applications. National Payment Corporation of India (NPCI) has considered UPI as a game- changer in India.

NPCI is an umbrella organization for all payments in India operating UPI platform as well. BHIM (Bharat Interface for Money) is another new product development by NPCI that is built on UPI platform. UPI 2.0 is an upgraded version of older UPI that is currently being used by most of the banks in India. Some of the UPI apps are SBI Pay, Tez App, BHIM App, Axis Pay and Phonepe App.

Mobile Wallets

The use of mobile wallets is rising, which can be attributed to the adoption of highly secure technology by banks and fintech companies. With many banks and fintech firms also offering incentives to consumers for choosing digital wallets for payments, retail payments are likely to grow at a faster pace. With demonetization in India saw a rise in the use of mobile wallets for cashless transactions and proved to be the best innovation in the field of technology. When it comes to mobile wallet ranking Paytm tops the list. Paytm recorded unprecedented growth of 435 % at a time spurred by demonetization.

PoS machines

Use of PoS (point of sale) machines is growing as the government and retail companies are pushing for less-cash payments. As PoS machines are cheap, banks are pushing them in comparison to ATMs, which require large investments.

Artificial Intelligence:

AI (artificial intelligence) is making transactions more convenient and secure. AI can take digital payments to the next level. Experts believe that with the integration of all payment applications and use of technologies such as AI and machine learning, the digital payments landscape will undergo a drastic change in the next few years.

Pricing Trends

  • On a debit card, there are usually two types of charges. One is the annual fees that a bank charges for issuing the card to the customer. Two, is the convenience fees that is charged at the merchant outlets for swiping the card at a point-of-sale terminal. A customer is entitled to eight free monthly transactions at an ATM (five at his home bank ATMs and three at non- home bank ATMs) in a metro city. Thereafter for every transaction, a bank charges Rs 20 per financial transaction and Rs Rs 8.5 for non-financial transactions.
  • There are no charges while making payments or adding cash into wallets. But there are certain charges when money is transferred to your bank account from your mobile wallet. For instance, Paytm charges a flat 4 per cent for transferring money from your wallet to any bank account. Similarly, Mobikwik charges 2.95 per cent of the transfer amount as per the charges mentioned on the website.
  • As per Cashless India website, banks are allowed to define the maximum limit by themselves for transactions. ICICI Bank has set the limit of Rs 2,000 per transaction by using Aadhaar Pay, as per its website. According to Cashless India website, there are no transaction costs for the customers.

Regulatory Trends

  • The National Payments Corporation of India (NPCI), which is an initiative led by RBI and Indian Banks Association, launched the Unified Payments Interface (UPI) on April 11, 2016. UPI seamlessly manages multiple bank accounts within one mobile application of any participating bank. This ecosystem that was built under NPCI has certainly caught on with accountholders. In August 2016, the interface handled 93,000 transactions worth Rs 3.1 crore for 21 banks. This has grown to 31.2 crore transactions valued at Rs 54,212 crore and 114 banks in August 2018.
  • The NPCI also developed the Bharat Interface for Money (BHIM) app, which was launched by the Honrable Prime Minister Shri Narendra Modi on December 30, 2016. BHIM provides users with the facility of fast and convenient digital payments using UPI. From the total UPI transactions in August, around 16.5 million transactions amounting to Rs 6,872.57 crore were done through the BHIM app.
  • A common Know Your Customer (KYC) form has been introduced for availing all types of products and services offered by all financial services providers under the jurisdiction of RBI, SEBI, and IRDAI. The customer needs to fill up this form only once, after which he/she is assigned a 14-digit identifier to be used while availing more products and services of the same or other providers. The financial service providers are expected to upload the data from this common form with a central agency called the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI).

Market Size and Forecast

  • Indian digital Payment industry is expected to grow at CAGR of 37.73% to reach almost $1 trillion in 2023 from $ 200 billion in 2018 in terms of value of transactions. The digital payment system types include mobile wallets, internet banking, mobile banking, PoS, and others
  • It is expected that more than 80% of the urban population in India will adopt digital payments as a part of their routine by 2022 and 70% of the retail chains will adopt the same.
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Market Outlook

In the past few years, the payments acquired in India were changed from standard payment methods to digital payment methods witnessing some aggressive growth. If the growth is increased gradually sooner India’s Digital Payments will hit $500Billion by 2020, contributing to 15% of India’s GDP (Gross Domestic Product), as per the recent report by Google and Boston Consulting Group.

The report which is submitted by Google and Boston Consulting Group is based on Nielsen’s qualitative and quantitative research with over 3,500 representatives (digital consumers – 1,516, exporters – 917 and remittance users – 917) the research was done across 9 locations in India which are Delhi, Mumbai, Bangalore, Visakhapatnam, Surat, Indore, Lucknow, Ludhiana and Coimbatore.

As per the report, by 2020, non-cash (includes demand drafts, cheques, net-banking, credit/debit cards, mobile wallets and UPI) contribution in the consumer payments will become double which is up to 40%. Already 81% of the users who are currently using the digital payment methods, all of them love to transact by non-cash payment methods. 90% of the Indian consumers like digital payment methods for both online payments and offline payment methods. Over 60% of the payments were the digital payments, and contributed by offline points for sale.

Technology Roadmap

Over the years, the RBI has been focusing on technology-based solutions for the improvement of the payment and settlement system infrastructure, coupled with the introduction of new payment products by taking advantage of the technological advancements.

Smart Cards offer users more security, convenience and control than any other payment methods. The wide variety of cards available - credit, debit and prepaid offer enormous flexibility to the people. Visa, MasterCard and RuPay cards are some of the examples of smart card payment systems. These cards offer the people the power to purchase items from stores, Internet, through mail-order catalogues and over the telephone. They save both customers' and merchants’ time and money, and thus enable them with ease of transaction.

Smart Cards can be used widely through ATMs and also various Mobile Point of Sales (MPOS). The Mobile Point of Sales (MPOS) mechanism changed the dynamics of the e-commerce business in India. Using mobile-based GPRS connectivity to facilitate debit/credit card payments, it overcame the inherent risk of fraud, counterfeit, mutilation and theft that usually tend to increase the operational cost of a company in the Cash on Delivery (CoD) model.

Further, to reduce the risks arising out of the use of credit/debit cards over internet / Interactive Voice Response (IVR), wherein transactions are carried out over the telephone, the RBI mandated that all Card Not Present (CNP) transactions should be additionally authenticated based on information not available on the card and an Online alert such as OTP should be sent to the cardholders for such transactions. Such authentication processes ensure smooth flow of money digitally, further encouraging Indian users to use Smart Card, who were once hesitant to use any payment method apart from cash.

Digital wallets and mobile payments are also steering us towards a cashless world where payments can be made quickly, conveniently, and securely with just the tap of a button. Digital wallets and mobile payments are rapidly evolving in order to enhance the experience for both customers and business owners. That means that they’re going beyond simply transferring funds electronically or swiping your smart phone over a checkout terminal.

Paytm recently introduced Payments Bank, India’s only mobile-first bank with zero balance - zero digital transaction charge accounts. Payments Banks are a new set of differentiated banks introduced by the RBI with the aim of extending deposit and payments services to millions of unbanked and underbanked Indians.

The new WhatsApp Payments feature allows users to send and receive money has already been rolled out widely. India is among the first markets to get the new service. The payment feature has been built using India's Unified Payment Interface (UPI).

Distribution Chain Analysis

Indian digital payment imdustry is growing mainly driven by mutual growth among various players. Mainly investors and start-ups are triggering the vibrant digital ecosystem in India. Start-ups are aggregating products from the bank in a disruptive way while investors are funding money to expand their horizon. In addition, government and regulatory bodies have been launching various initiatives to support the companies in this sector.

Furthermore, the government is offering strong infrastructure for Digital payment start-ups towards financial inclusion and enablement. Moreover, digital payment industry incubators and accelerators like Alibaba and PayPal are providing inducing environment for innovation and mentorship as well.

Competitive Landscape

One of the most recent developments underscoring that point came from Google. The company is rebranding Tez, its digital payment app designed for the Indian market, to Google Play, which already operates in 20 countries. Google also said it was working with India-based financial institutions (FIs) — Federal Bank, HDFC Bank, ICICI Bank and Kotak Mahindra Bank — for an “instant loan” offering via the digital payment app.

Anyone doing digital payments in India must contend with homegrown Paytm, India’s largest online transaction facilitator, which could reportedly win a $286 million to $357 million investment from Berkshire Hathaway.

Meanwhile, Facebook-owned WhatsApp wants approval from the Indian government to officially launch its digital payment service across the country. In February, WhatsApp launched a payment feature in India that now has around 1 million users. Amazon, too, has gotten into bill payments, enabling consumers to pay for electricity, landline, broadband and other utilities with their Amazon Pay accounts. Walmart also has a role, via its ownership stake in online marketplace Flipkart, which is reportedly introducing two new payment products designed for when consumers want to convert a cash-on-delivery payment to another option.

Competitive Factors

  • Financial service providers are feeding on data to examine behavioral attributes that lead to customer decisions. Hyper-connectivity also referred as Inter of Things (IoT) is giving companies key competency to be a market leader. As a result, successful disruptors typically offer a better customer experience and greater convenience at a much lower price. This will intensify price competition and pressure on cost.
  • The payment space is the most competitive segment and provides a strong growth potential. The competitive payment space in India ranges from telecom companies, banks, wallet companies, e-commerce, and technology firms and is highly likely to include payment banks in the future.
  • As a result of advances in technology and new regulations today many players from different industries are entering payment industry. Most of the fintechs and startups are providing solutions for payment services. New players are not only limited to fintechs and startups but also giant technology companies and retailers are also launching their payment solutions.

Key Market Players

ToneTag

A global technology solutions provider, this company uses proprietary Software Development Kit (SDK) that encodes data into sounds. ToneTag is making mobile payments as accessible and frictionless as possible by removing any sort of hardware dependency and by enabling all devices to make payments. ToneTag has reached over 50 million consumers across the globe with its cutting-edge Sound Wave technology-based systems and empowered 3, 10,000 merchants. Backed by Amazon, Mastercard, 3one4 capital and Amensa, ToneTag is built to bridge the last mile in financial inclusion and deliver simple cashless payments.

Paytm

Paytm is India's largest payments company that offers multi-source and multi-destination payment solutions. It offers comprehensive payment solutions to over 8 million merchants and allows consumers to make payments from any bank account to any bank account at 0% fee.

Google Tez

Tez is a mobile payments service by Google, targeted at users in India. It operates atop the Unified Payments Interface, developed by the National Payments Corporation of India. It can be used where UPI payments are accepted. Tez works on the vast majority of India's smartphones (with apps for both Android and iOS) with the Android app supporting English, Hindi, Bengali, Gujarati, Kannada, Marathi, Tamil, and Telugu with more languages coming soon.

PhonePe

PhonePe is a Fin-Tech company headquartered in Bangalore, India. Founded in December 2015, it provides an online payment system based on Unified Payments Interface (UPI), which is a new process in electronic funds transfer launched by National Payments Corporation of India (NPCI). It is licensed by the Reserve Bank of India for issuance and operation of a Semi-Closed Prepaid Payment system.

WhatsApp Pay

WhatsApp's payment gateway is based on the unified payments interface (UPI) of the National Payments Corporation of India (NPCI), cutting out the cumbersome intermediary step of loading money onto a wallet. Instead, users can transact directly from their bank accounts using a virtual ID. The Facebook-owned messaging app has its eye on India's flourishing e-payments pie, slated to grow five-fold by 2023 to $1 trillion, according to investment bank Credit Suisse.


Payment Gateways in India

  • ABC Payments
  • CC Avenue & EventAvenue
  • DirecPay (TimesOfMoney)
  • PaisaPay (Ebay)
  • Transecute

Strategic Conclusion

Measurement of Digital Payments is extremely important to monitor progress. The different components of Digital Payments have to be comprehensively studied with respect to global best practices and the list of indicators which are universally acceptable and relevant in the current context may be considered by RBI. A handbook of statistics may be prepared giving time series data on Digital Payments based on these standardized indicators which could be followed for all data collection and reporting agencies. This would bring uniformity and will reflect the growth in Digital Payments more accurately.

Further Reading


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