Digital payments: The inflexion point and the curve ahead

The payment industry in India has evolved dramatically through the past couple of years. Driving this change has been the interface between technologies, policy and user driven product development. Disruption has been at the core of this change. India’s growth story in payments technology has been further catalyzed by disruptive offerings pioneered to engage an ever evolving consumer demographic.

Set to be the youngest country in the world by 2020, India is home to a majority of consumers who are willing to take the leap into digital payments. This churn has led to a massive transformation from traditional currency to non-cash instruments paving way to digital payments. A key accelerator of this transformation is the penetration of smartphones.

The opportunity for India really lies in the fact that it is the second largest active smartphone users market in the world, despite low penetration rates. The adoption of smartphones is estimated to grow to 520 million by 20201. An added impetus is the rapidly expanding 3G and 4G internet network in to the hinterland.

The government has initiated the process of making digitization an intrinsic part of the India growth story. Under the ‘Digital India’ initiative, 90 percent of mobile devices in the country are expected to be internet-enabled by 2017. The change has started to reflect in urban India. Digital transactions are said to have shown a growth of 50 percent Y-o-Y, followed by ATM transactions growing at 15 percent and branch transactions at 7 percent growth. While urban India naturally adapts itself to newer technologies, development of the internet infrastructure will drive rural India to follow a similar pattern.

Traditionally, an empty pocket with no cash has been associated with a lack of financial security. However, technology continues to challenge tradition. Economies across the world have gradually realized that cash comes at a cost of printing, managing and moving it, besides being a key driver of a financial system that is unaccounted for. Alarmingly, India’s cash-to-gross domestic product proportion at 12 percent is higher than many other economies. There is an urgent need to acknowledge that the primary competition for any payment technology in India comes from cash and not from other peers and contemporaries.

There has not been a better time before in the nation for payments, especially with the regulatory bodies cognizant of the need to improve the payment system network in India. RBI’s breakthrough Vision-2018 document focuses on responsive regulation, robust infrastructure, effective supervision and customer-centricity, thus acting as an enabler for the payment transformation. The Unified Payment Interface (UPI) has gone live and so have the incentives for digital transactions, tax deductions for cash transactions exceeding 2 lakh rupees and real time payment transfer using Aadhar enabled payment systems.

A key characteristic of the payment industry has been its ability to constantly innovate. The increasing adoption of technologies like Near Field Communication (NFC) enabled smartphones that allow real-time, one-touch payments, cloud-based PoS, peer-to-peer transfers, virtual currencies like bitcoins enabling higher transaction speed and efficiency are creating a shift in the mindscape of consumers, proving a lucrative model for all players in the system.

What next?

In a bid to enhance customer acquisition, wallet companies offer high-volume discounts and offers, thereby escalating customer expectations. Although the ecosystem is currently perceived to be in favour of customers, the discounting and cash–back led model might not be as sustainable as it is envisioned to be. A sustainable value proposition that any payments technology provider can offer the consumer should essentially be in the form of covering risk.

There is an urgent need for financial technologies to back their core competencies and enable a secure and risk-free environment to create a loyal customer base. Most payment interfaces currently are responsible for processing payments. The next level of evolution will be driven by ensuring the safety of buyers and sellers through various systems that protect their interests beyond just the transaction.

Enhancing user experience

Risk mitigation mechanisms in India currently also rely on the consumer to ensure the safety of transactions. With a considerable number of purchases being made on the mobile phone, customer authentication techniques require them to switch between screens. Most instances of cart abandonment take place at this cumbersome stage of switching between two screens. This gap is currently the greatest opportunity for payment companies. To leverage it, companies would do well to redefine their operational models that stand for strong risk management capabilities in the backend. And in the process, ensure security of the customer’s money while facilitating a flawless checkout experience.

In a nutshell

India is slowly transcending from using technology to living it. The demographic dividend that India offers is immense – what makes this phase a winning spree is the happy coincidence of the inflexion points of the payment industry and the country’s young populace. While it may be a matter of time before digital payments landscape is more democratized than it is, the rate at which consumers are adopting the concept is encouraging. It is now over to us to make the game better than it was yesterday.

(This article is authored by Anupam Pahuja, Managing Director and Country Manager, PayPal India)