TomorrowMakers ™

How digital payment methods are changing the face of the Indian economy

15 November 2016
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India has joined other countries in the digital payment revolution a lot faster than the past where we often lagged behind in adopting technology, especially in the financial sector. This is set to have a transformative impact on our country, especially as digital payments spread into rural areas.

Statistics show that in 2012, 86.6% of payments in India were cash payments, and between 2012 and 2013, India had more than 7600 Crore pieces of currency floating in the economy. Yet, popularity of digital payments has been rising due to factors like a young population, rising number of smartphones and Internet users—experts predict a 100% rise in usage by 2020, a friendly regulatory environment, and a booming e-commerce sector.

Today, digital payment options include:

  • the ubiquitous debit and credit cards
  • online banking accounts
  • prepaid and electronic cards
  • smartphone apps including banking apps and other digital wallets,
  • payment banks, and
  • the Unified Payment Interface, which can best be described as an Instant Money Transfer verified with an email address and a text message.  

The value of mobile banking transactions has grown from Rs. 60 billion in 2012-13 to more than Rs. 4000 billion in 2015-16. Additionally, the number of transactions involving prepaid instruments is now twice the number of conventional banking transactions. Numbers apart, how has India adapted to the digital payment revolution?

Incentive-Centric Demand

In other countries, convenience and ease of use have been the primary reasons for people adopting digital payment solutions. However, in India, especially in non-metro cities, close to 60% of respondents in the Google-BCG market study, cited offers and discounts as the reason for using digital payments. 

Simply put, making a digital payment was helping people save money, which encouraged them to spend more, which in turn encouraged sellers to continue offering more incentives. This means those who would otherwise not buy products or services online are doing so because making a digital payment is a money-saving proposition.

By 2020, we shall be making digital payments primarily for purchases in the organized sector, which is set to account for 34% of all payments. Next most popular options are likely to be bills, recharges, and utility payments (20%), modern trade (12%, and, surprisingly, payment of rent and other professional services (11%).

Technology, Not Security, is the Biggest Challenge

Another finding of the digital payment revolution is the fact that complexity of use is a very big barrier in India, especially in rural areas. Exchanging physical cash is more reassuring than swiping a card or completing the 2FA (two-factor) authentication process. This is why reasons like difficulty in remembering passwords and using technology pose more of a problem than issues of security ,such as identity theft or phishing.

Enthusiastic Sellers

Just one out of four sellers in India feels that digital payments will not help their business grow faster. The general view is that enabling customers to pay digitally will boost sales, increased volumes, attract more customers, and increase brand recall.

This is probably why the push for digital payments has come in the form of discounts and incentives for buyers. E-commerce sites, in particular, stand to gain a lot by making people comfortable with the idea of paying for products and services through digital transfers.

Friendly Regulatory Environment

The modified UPI (Unified Payment Interface) seeks to use Aadhar, email addresses, and verification through text messages to facilitate instant money transfer. So, instead of paying cash when buying groceries, you will prove your identity through your Aadhar card, use your email address to initiate the payment, and receive a verification text message to confirm the transaction.

This is likely to be a significant game changer that will break barriers for adoption of digital payment methods, especially in rural areas.

Ground Impact

So, how exactly has India changed due to digital payments? In FY 2014-15, the RBI disposed or withdrew close to 285 crore pieces of Rs.500 notes from the economy. And the number of Rs. 500 notes produced and introduced into the economy in the same period? Zero! Not surprisingly, non-cash transactions are likely to exceed cash-based transactions in the country by the end of this decade.

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