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Digital payment industry in India

IBEF, Knowledge Centre

Jan 04, 2019 14:59

From being primarily a cash-obsessed economy, India’s digital payment story is new but exciting. Driven by progressive regulatory policies and increased use of mobile internet, Indian payment industry is going through a transformational phase. The next few years will witness a whole new way of how money is moved in the Indian economy.

The story so far

Digital payments started to pick up pace with the growth of e-commerce companies followed by emergence of digital wallet companies. To lure the consumers, the digital wallets doled out lucrative offers and cashbacks to get consumers on board using the payment channel. Thanks to the ease of use, attractive offers and increased smartphone penetration, the digital wallet companies did find their way to the consumer’s phone as well as the pocket.

To expand their reach, the digital wallets started encouraging customers to use them for offline point of sale (POS) transactions too like at shopping malls, supermarkets, grocery stores, restaurants and gas/petrol stations. These POS transactions are expected to become a majority contributor to the digital payments platform in the coming years. Clearly, digital wallets are playing a unique role in driving the growth of digital payments sector.

The other important pillar of the digital payment story are the online ticketing, travel and events companies like IRCTC (Railways), Makemytrip, Yatra, Ibibo, Cleartrip (Airlines and hotels), Trivago (hotels), redBus (buses), and Bookmyshow (movie and event ticketing). They have got consumers to transact online.

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The potential

The digital payment industry is gaining momentum and is projected to grow at an exponential rate. 81 per cent of existing digital payment users prefer the medium over other non-cash payment methods like cheques or demand drafts. Online shopping, payment of utility bills (like electricity, mobile bills, water bills, etc.) and movie tickets are the three things that an Indian user primarily pays for through digital platform.

According to a report by Google and Boston Consulting Group (BCG), the Indian digital payments industry is estimated to touch $500 billion by 2020, contributing 15 per cent to the country’s GDP.

An interesting angle to India’s digital payment story is that it is going to be dominated by micro transactions (tractions of value lower than Rs 100). In fact, 50% of person-to-merchant transactions are to be under Rs.100, says the Google-BCG report. Alternate digital payment instruments like digital wallets, UPI, payment banks, Bharat QR are expected to grow fiercely and estimated to double their contribution to 30 per cent in the digital payment industry.

Mobile/Digital wallets: The digital payment industry growth will be led by the digital/mobile wallets. According to the Capgemini’s World Payment Report, mobile wallets will witness a compound annual growth rate (CAGR) of 148 per cent over the next five years and will be $4.4 billion by 2022. The digital wallets are also supposed to outshine UPI.

Key Drivers

This exponential growth of the digital payment sector is driven by multiple factors including convenience to pay, the ever-growing smartphone penetration, rise of non-banking payment institutions (payments bank, digital wallets, etc.), progressive regulatory policies and increasing consumer readiness to the digital payment platform.

The convenience to pay along with the availability of lucrative offers, are two key factors that have been driving the growth of digital payments in India. This coupled with the increasing smartphone penetration is proving to be a boon for digital payments sector. India, currently, has third largest internet user base in the world with 300 million users. 50 per cent of these users are connected to internet through mobile only. This 150 million mobile only internet users’ are playing a key role in the growth story of digital payments.

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.

Another key driver of digital payments is positive policy framework changes and government initiatives like launch of new payments systems like - UPI, Aadhar linked electronic payments and improvement of the digital infrastructure.

Comparison with global market

When it comes to the ecosystem of digital payments, India is pegged to have the most evolved system compared to 25 other countries which were surveyed by FIS, a US-based banking technology company. This included UK, China and Japan. The parameters that FIS used to measure the digital payments in these 25 countries include round-the-clock availability of the services, adoption, and immediacy of payments.

FIS’ Flavors of Fast used the Faster Payments Innovation Index (FPII) rates different payment system across these 25 countries on a scale of 1-5, with 5 being the highest rating. According to FPII, India’s IMPS service was the only system to get a level 5 5 rating, leaving behind countries like UK, Singapore, Denmark, Switzerland, China, Japan, and others. This certainly puts India’s digital payments story to be an exciting one.

Road ahead

Clearly, the digital payment space is being transformed and the sector has witnessed tremendous growth, innovations and regulatory support over the last two years. Such has been the changes that India has become the most evolved country when it comes to the digital payment ecosystem. The focus should be to keep the momentum going with more support from the government and innovations, safety and convenience from the players.