Digital Payment Growth in India

Digital Payment Landscape in India by Sam Ghosh 9th March 2020

Why talk about Digital Payments?
Why talk about this? Classification Policy Support ProgressInfluencing Factors

Cost of Cash Digital Commerce
Cost of Cash
As per a 2016 report from Visa, the net cost of cash is 1.6% of Indian GDP.
● Cost to the Central Bank and the Banking system
○ Printing and handling cost of cash
○ Capital and operating cost of ATMs
● Businesses
○ Time spent on handling cash.
○ Lost interest caused by the cash holdings
○ Expected loss from the damage of cash holdings.
● Households
○ Lost interest on cash holdings.
○ Time spent on acquiring and managing cash.
○ Expected loss from damage of the cash holdings.
Note: Cost of Cash is implicit and not realized - a major roadblock for growth of digital payments.
Rapid Growth Entrepreneurship Financial Inclusion

Digital Commerce
Digital Payments is the backbone of the Digital Commerce ecosystem.
● Facilitating trusted online transactions.
● Push for eCommerce growth.
● Growth in digital products and services ecosystem.

Rapid Growth of Digital Payments in India
● Digital payments is growing at CAGR 19% in value and 60% in volume as per RBI Data.
○ Retail electronic payments comprising credit transfers and direct debits are growing at a CAGR of 42% and 65%
in terms of value and volume.
○ Debit and credit card-based payments registered a CAGR of 44% and 40% in terms of volume and value.

Digital Payments is leading the digitisation of several industries
● Digital Payments is being used for customer acquisition and engagement creation for other digital
services and products.
○ From eCommerce, financial services, bill payment, hospitality, transportation, media and entertainment etc.
● Digital Payments is helping build trust among the consumers on the digital commerce ecosystem.
● Access to transaction data enables payment service providers to understand consumer behaviour and
targeted digitisation of industries.

Digital Payments is bringing financial services to the unbanked.
● The Indian banking system is disproportionately inadequate compared to the size of the Indian
economy.
○ Digital payment is bringing many non-traditional players to the financial services industry
● India brought 80% of the population in 15+ age group under the banking system through Pradhan
Mantri Jan Dhan Yojana (PMJDY) but most of the bank accounts remain unused as per Global Findex
Database 2017.
○ Rising levels of smartphone penetration along with cheaper data can help increase financial engagement through
payment applications.
● Digital Payment Systems help bring consumers under Know Your Customer (KYC) norms - a
prerequisite for the digitisation of financial services.
○ KYC norms came into effect through Prevention of Money Laundering Act, 2002, to deal with money laundering.

Classification

Use Cases Payment Methods
Digital Payments 2020 - BCG & Google

Types of Digital Payment Methods
● Real-Time Gross Settlement (RTGS)
○ RBI - “a system where there is a continuous and real-time settlement of fund-transfers, individually on a transaction by transaction basis
(without netting). 'Real Time' means the processing of instructions at the time they are received; 'Gross Settlement' means that the settlement
of funds transfer instructions occurs individually.”
○ A Secure transfer without any cap.
● National Electronic Funds Transfer (NEFT)
○ RBI - “nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme, individuals, firms and corporates can
electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the
country participating in the Scheme.”
● Immediate Payment Service (IMPS)
○ NPCI - “provides robust & real time-fund transfer which offers an instant, 24X7, interbank electronic fund transfer service that could be
accessed on multiple channels like Mobile, Internet, ATM, SMS, Branch and USSD(*99#). IMPS is an emphatic service which allows
transferring of funds instantly within banks across India which is not only safe but also economical.”
○ Created to provide customers access to a bank account and remittance using mobile instruments.
○ Created the foundation of mobile banking services.
● National Automated Clearing House (NACH)
○ NPCI - “a web-based solution to facilitate interbank, high volume, electronic transactions which are repetitive and periodic in nature. NACH
System can be used for making bulk transactions towards distribution of subsidies, dividends, interest, salary, pension etc. and also for bulk
transactions towards collection of payments pertaining to telephone, electricity, water, loans, investments in mutual funds, insurance premium
etc.”
● Banking Cards
○ Debit Card - Linked with a savings or checking account.
○ Credit Card - Linked to a line of credit extended by financial institutional.

● Unified Payments Interface (UPI)
○ NPCI - “instant payment system developed by the National Payments Corporation of India (NPCI), an RBI regulated entity. UPI is built over the
IMPS infrastructure and allows instant transfer of money between any two parties' bank accounts.”
○ Bharat Bill Payment System (BBPS) - interoperable and accessible bill payment service to consumers via digital (bank channels) as well as
through a network of agents & bank branches
● Prepaid Payment Instruments (PPIs)
○ RBI - “payment instruments that facilitate purchase of goods and services, including financial services, remittance facilities, etc., against the
value stored on such instruments.”
○ Can be of “Closed System”, “Semi-Closed System” and “Open System”.
○ Can be issued as Cards, e-Wallets etc.
● RuPay
○ Indigenously developed card scheme- supports the issuance of debit, credit and prepaid cards by banks in India.
● Aadhar Enabled Payment System (AePS) and BHIM Aadhar Pay
○ “AePS is a bank led model which allows online interoperable financial inclusion transaction at PoS (MicroATM) through the Business
correspondent of any bank using the Aadhaar authentication”
○ Services - Cash Withdrawal, Cash Deposit, Balance Enquiry, Aadhaar to Aadhaar Fund Transfer, Mini Statement and Best Finger Detection.
○ BHIM Aadhar Pay allows merchants to accept digital payments by authenticating the customer’s biometrics directly from Bank account.
● National Electronic Toll Collection (NETC)
○ Electronic Toll Collection system for India.
○ Interoperable nationwide toll payment including clearing-house services for settlement and dispute management.
○ Uses RFID based FASTag for toll collection.

Data: RBI Payment System Indicators

Policy Support

Mission Organisations Legal Structure
Payment and Settlement Systems in India: Vision 2019 – 2021
Empower every Indian with access to a bouquet of e-payment options that is safe, secure, convenient, quick and affordable.
● Competition
■ Self-Regulatory Organisation for all PSOs.
■ Encourage and facilitate innovation in an environment of collaborative competition.
■ Feature-phone based payment services
■ Offline payment solutions
■ USSD-based payment services
■ Global outreach of payment systems
■ Fostering innovation in a responsible environment through regulatory sandbox
■ Review of membership to centralised payment systems
■ Inter-regulatory and intra-regulatory coordination
■ Benchmarking India’s Payment System
● Cost
■ Accessible, affordable and inclusive services.
■ Review of corridors and charges for inbound cross border remittances.
■ Interoperability and building capability to process transactions of one system in another system.
■ Acceptance infrastructure to address supply side issues.
■ System capacity and scalability.
■ Increasing LEI usage for large value cross border payments.
■ Regulation of payment gateway service providers and payment aggregators.

Payment and Settlement Systems in India: Vision 2019 – 2021….
Empower every Indian with access to a bouquet of e-payment options that is safe, secure, convenient, quick and affordable.
● Convenience
■ Harmonizing TAT for resolution of customer complaints.
■ Setting up a 24x7 helpline
■ Enhancing awareness
■ Conducting customer awareness surveys
■ Internal ombudsman for digital payments.
■ National settlement services for card schemes
■ Enhanced availability of retail payment systems and a wide bouquet of offerings
■ Widen scope / use of domestic cards
■ Explore adoption of newer technologies including DLT for enhancement of digital payment
■ E-mandates / Standing Instructions for payment transactions
● Confidence
■ Increased coverage of the Cheque Truncation System
■ Increased scope and coverage of the Trade Receivables Discounting System (TReDS)
■ Geo-tagging of payment system touch points
■ Contactless payments and tokenization
■ Enhanced security of mobile-based payments
■ Oversight for maintaining integrity of payment systems
■ Third party risk management and system wide security
■ Framework for collection of data on frauds in payment systems
■ Framework for testing resilience of payment systems

Role of different organisations
● Reserve Bank of India (RBI)
○ Governance of the pricing policies, customer service, awareness, and cross-border remittances etc.
○ Examining the possibility of a single national settlement account for all authorised card networks.
○ Extending the availability of the payment systems - ex. 24X7 NEFT.
○ Interoperability - building capability to process transactions of one system in another system.
● National Payments Corporation of India (NPCI)
○ “an umbrella organisation for operating retail payments and settlement systems in India, is an initiative of Reserve Bank of India (RBI)
and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007”
○ Creating the infrastructure to the Banking system in India for physical as well as electronic payment and settlement systems.
● Payment System Operators (PSOs)
○ As per section 4 of The Payment and Settlement Systems Act, 2007 - no person can act as a payment system unless authorised by the
RBI.
○ POSs are the entities authorised by RBI to act as payment systems.

Legal Structure
● The Payments and Settlement Systems Act, 2007
○ Governs and regulates all modes of payment systems in India.
○ RBI is made responsible to regulate all payment systems in India.
● Payment and Settlement Systems Regulations, 2008
○ Sets the process of application for PSO Authorization Certificates.
○ Sets the reporting requirements for PSOs to RBI.
● Board for Regulation and Supervision of Payment and Settlement Systems Regulations, 2008
○ Regulation and supervision of payment systems under the Act.
○ Policies related to regulation and supervision of the payment systems.
○ Standards for current and future payment systems.
○ Authorisation of payment systems.

Influencing Factors

Supporting to adoption
● Mobile and internet penetration.
○ India leapfrogged to widespread smartphone penetration before widespread personal computer penetration.
○ techARC - India has more than 502 million smartphone users.
○ IAMAI - India has more than 385 million active internet users over the age of 12 and 66 million 5-11 age-group.
● Favourable Regulatory Environment
○ KYC exemption on transactions up to Rs. 10,000 for Prepaid Payment Instruments.
○ Exemption from two-factor authentication (required for Debit/ Credit cards) for prepaid instruments.
○ Aadhar (biometric national identity instrument) making KYC process easier.
○ National Payments Corporation of India (NPCI) - creating infrastructure and standardisation for payment systems.
● Participation of non-traditional players
○ Telcos - Airtel Money, Vodafone M-Pesa, Idea Money, Tata mRUPEE and Jio-Money etc.
○ Startups - such as Paytm, MobiKwik, Freecharge and Citrus Pay etc.
○ Payment Banks - Airtel, FINO, Paytm, Aditya Birla, and Reliance etc.

Roadblocks
● A habit of Cash use.
○ Indian Cash in Circulation seems to be very sticky irrespective of economic slowdown.
○ A large informal economy also hinders the shift to digital payment systems.
○ The Currency in Circulation (CIC) across the country increased at a CAGR of 10.2% between FY 2014-15 and FY
2018-19.
● The complexity of technology adoption
○ The learning curve for the use of the digital payment systems is one of the major problems - finds a report by BCG
and Google.
● Implicit nature of the costs of cash and lack of compelling value proposition.
○ The cost of cash is implicit and a lack of compelling motivation for digital payment systems hinder growth.
● Inertial of other non-cash methods
● Fear of online fraud.

Progress

Source : PYMNTS - Global Cash Index: Asia Pacific Edition : June 2018
Population
Population
(Million)
GDP
(Billion USD)
Cash
Propensity
Total Cash
Growth
Australia 24.4 $1282.0 11.2% -0.7%
China 1382.7 $10365.4 35.9% 9.2%
India 1299.8 $2939.5 49.3% 10.5%
Japan 127.0 $5049.4 3.4% -8.5%
Korea 51.2 $1458.9 4.1% 2.1%
Singapore 5.6 $276.3 16.7% 1.6%

Data : RBI - Payment System Indicator

Data : RBI - Liabilities and Assets (Weekend)

Source : Razorpay - The Era of Rising Fintech – How India Makes & Accepts Payments

Thank You

Digital Payment Growth in India

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