As per the National Payments Corporation of India (NPCI), the total electronic payments reached a new high, in terms of volume, in December 2017 at 1.06 billion as compared to 957 million in December 2016. The transactions were worth Rs 125.53 trillion, 20 per cent higher than the Rs 104 trillion transaction value recorded in December 2016. These numbers have come as a shot in the arm for the government’s demonetisation move of November 2016. The move was aimed at promoting digitisation and non-cash payments, apart from weeding out black money and counterfeit notes from the system.
As a result of the ensuing cash crunch, people adopted digital modes of transactions, leading to an astronomical rise in digital transaction volumes. More than a year after the move, the uptake of digital payments instruments is still significant, signalling a gradual shift in people’s preference from cash to electronic payments. As per the Reserve Bank of India (RBI), mobile wallets recorded an increase of 192 per cent in transaction volumes during April-November 2017 over the corresponding period in 2016. An aggregate 1,832.5 million transactions were recorded on mobile wallets during the eight-month period in 2017, up from 628 million transactions during the same period in 2016.
Over the past year, the payments ecosystem has changed considerably, with the Unified Payments Interface (UPI) emerging as a key transaction platform, outperforming other electronic payment channels. UPI grew nearly 400 times between November 2016 and November 2017. It recorded 105 million and 145 million transactions, in November and December 2017 respectively. Meanwhile, four payments banks started their operations in 2017, further intensifying the competition in the digital transaction space.
UPI becomes the new battleground
UPI, backed by the NPCI, obviates the need to have a mobile wallet for making digital transactions as it directly debits money from a customer’s bank account. Further, UPI allows access to multiple bank accounts through a single mobile application (of any participating bank), merging several banking features and allowing seamless fund routing. These features made a compelling case for the platform, encouraging companies to launch their payments applications based on UPI.
In September 2017, software major Google launched Tez, an India-specific secure mobile payment application built on UPI. The application allows users to make payments straight from their bank accounts free of charge. Tez is currently working in partnership with four banks – Axis Bank, HDFC Bank, ICICI Bank and State Bank of India – and it facilitates the processing of payments across over 50 UPI-enabled banks. The transactions are enabled through Google’s proprietary Audio Quick Response (QR) ultrasound technology and are backed by dedicated security systems, at various levels, offered by the banks, the NPCI, as well as the Tez Shield, Google’s own suite of security features. The application has witnessed a significant uptake owing to its simple interface and the rewards offered by the company in the form of referrals and scratch cards. As of December 5, 2017, the application had 12 million active users and had processed over 140 million transactions. Though seen more as a peer-to-peer payments application, over 0.5 million merchants across the country are also using Tez, as per Google.
Domestic instant messaging platform, Hike also launched an in-app payments wallet in partnership with Yes Bank that enables bank-to-bank money transfer through the UPI platform. The wallet records around 10 million transactions per month. Although it is currently limited to peer-to-peer money transfers and recharges, the company is planning to establish a merchant ecosystem. To this end, it has partnered with Airtel Payments Bank to gain access to the latter’s product line including its merchant and utility payments applications and know-your-customer (KYC) infrastructure.
Meanwhile, WhatsApp is planning to go live with its UPI-based payment feature soon. The company received permission from NPCI in July 2017 to enter into a partnership with multiple banks to allow users to make in-app payments and money transfers using UPI. WhatsApp’s payment feature is highly anticipated because of the huge popularity of the application across diverse user groups in India and its potential to bring a huge segment of the country within the digital payments ecosystem. WhatsApp is betting big on its large number of installations for the success of its payment feature. The application has more than 200 million active users in India, which is around two-thirds of all smartphone users in the country.
The payments ecosystem has changed considerably with UPI emerging as a key transaction platform, outperforming other electronic payment channels.
Challenging road ahead for mobile wallets
The key feature of UPI-based applications is that they allow an individual to move funds from one bank account to another bank account at no extra cost. Wallet services, on the other hand, require the customer to first upload money in the wallet. Moreover, they only allow free transfer to another wallet. To transfer money back into the user’s own account, most wallets charge a fee of around 4 per cent. For the same reason, customers are slowly reducing their use of digital wallets and moving to UPI-based platforms. Consequently, many wallet companies, which got heavily funded between 2014 and 2016, are slowly losing steam. Still, some experts believe that wallets score over UPI on some counts such as large merchant partner networks, and the availability of attractive discounts and cashback to customers.
Meanwhile, in a major move, RBI in October 2017 directed mobile wallets compliant with KYC norms to allow transfer of funds among themselves. This is likely to usher in a key change in the mobile wallet space. In the first phase, RBI has asked wallet issuers, banks as well as non-banks, to make all KYC-compliant wallets interoperable using UPI within six months. This would allow users to seamlessly transfer money from, say, a Paytm account to a MobiKwik account. In the second phase, transactions between bank accounts and wallets will be allowed through UPI. This will enable the retransfer of money from users’ wallets to their bank accounts without extra charges. The new interoperability norms help users choose the most convenient and hassle-free product. These norms are also expected to weed out non-serious players and prompt consolidation among mobile wallets as the cost of doing business rises.
Four payments banks commence operations
In August 2015, RBI granted in-principle approval to 11 payments banks in an attempt to make financial services accessible at affordable costs to all sections of society. Later, three entities, Tech Mahindra, Cholamandalam Distribution Services and Dilip Shantilal Shanghvi, cancelled their plans, leaving only eight companies in the fray. Of these, four – Airtel Payments Banks, India Post Payments Bank, Paytm Payments Bank and Fino Payments Bank – launched their operations in 2017.
In principle, payments banks hold immense potential to drive the government’s digital inclusion initiative. The model, however, is fraught with challenges. Experts feel that a payments-only offering is an incomplete proposition and relies highly on low-ticket account balances. This makes payments banks essentially a high-volume, low-margin commoditised business, with little customer stickiness. Further, unlike regular banks, which typically do business for interest margins from the lending business, payments banks have to primarily survive on fee income since 75 per cent of their deposits have to be mandatorily invested in government bonds with maturity up to a year.
The jury is out on the future of payments banks in the digital transactions ecosystem. Going forward, industry experts feel that payments banks should strategically use technology and smart segmentation as disruption tools. They should tactically leverage their existing customer base and distribution channels to offer more financial products and greater convenience than traditional banks.
Conclusion
As payments tools are crucial to the government’s Digital India initiative, the payments space is likely to witness significant activity in the foreseeable future. Traditional financial entities are at a crossroads competing with numerous companies operating in the digital payments space. While mobile wallets emerged as a key transaction platform during the demonetisation period, the action in mobile payments has today shifted to UPI-based applications. Meanwhile, payments banks are slowly gaining ground, but are expected to work well only for players such as telecom operators that already have a large subscriber base and several contact points. s
Puneet Kumar Arora
