Electronic Payments in India: Looking Back and Surging Forward
The first decade has been an eventful and possibly watershed period in the Indian economy, with consistently high GDP growth, a mobile revolution resulting in over 700 million connections, rapid point-of-sale (POS), ATM and branch expansion, the establishment of eCommerce and the penetration of plastic in millions of wallets across the country.
India's economic expansion remains the catalyst for the evolution of a large robust electronic payments ecosystem. GDP growth has averaged over 7 percent since 1997 and clocked a commendable growth rate of 5.4 percent in 2009, despite the recent global recession. Services constitute an increasing proportion of the GDP each year. Urbanization and industrialization - coupled with the all-round growth - is catalyzing the expansion of a middle class estimated to be over 300 million. With the current growth trajectory, studies have indicated that household incomes could triple over the next two decades. This increase would make India the world's 5th-largest consumer economy by 2025, up from 12th now. Private consumption plays a significant role in India's growth, with private spending having crossed 17 trillion Indian rupees ($372 billion) and accounting for more than 60 percent of India's GDP in 2005.
In the midst of this frenetic activity is a silent payments revolution that has unfolded in recent years. India stands at a very interesting cusp. The seeds appear to have been sown for the creation of a dual electronic payment architecture and ecosystem - the first in the classic card-based mold and the second in the cardless format.
Outlined below is a snapshot of the key events and business models that have recently occurred in Indian retail payments. These could potentially influence and catalyze the course and development of the electronic payments landscape this decade.
1. The Reserve Bank of India (RBI) drafted an electronic payments vision document, outlining its intent and focus areas for moving from a predominantly cash-based society to a more efficient electronic one. The primary objective is to establish a framework and body of regulations to grow efficient payment systems. The document has the added benefit of providing a clear roadmap for all stakeholders, including banks and service providers, on the focus areas and the drivers in the coming years.
2. The National Payments Corporation of India was established in 2008 and commenced business in April 2009 - a result of the establishment of the Board of Payments and Settlements in 2005 - with an objective of broad-basing electronic payments and making them more efficient.
3. Unique Identification Authority of India (UIDAI): The government has commenced implementation of UID (Unique Identifier), a 12-digit unique code to be issued to every Indian citizen. This remarkable breakthrough sets the foundation for establishing a unique national identifier and enabling identity authentication for every citizen - a logical and imperative building block for financial inclusion. With MasterCard having developed a payment solution for UIDAI, the road has been paved for integrated identification and payment solutions.
4. An inter-ministerial group (IMG) was constituted by the Cabinet Secretariat in 2009 to finalize a framework for delivery of basic financial services using mobile phones. The framework envisages creation of "Mobile Linked No Frills Accounts" to enable a basic set of transactions via a mobile, PIN-based system using "Mobile Banking POS," as well as through biometric-based "micro ATMs" of the Business Correspondents (BCs) or the sub-agents of BCs.
5. The 200 million cards milestone was reached in 2010. More than 44 million debit cards were issued from 2009-2010, and a larger number were projected to be issued in 2010-2011. The scorching pace of growth is set to continue in the coming years.
6. Credit card issuance and spends are back on the upswing after a period of consolidation and delinquencies, which had resulted in a reduction of the credit card base by more than 9 million cards in 2008 and 2009. Secured card issuance is gaining traction, inviting a large customer base across India into the credit card fold. Annual fees are back, shoring up credit card P&Ls. Spends per active account are rising, rapidly fueled by the growth in organized retail, domestic holidays and international travel.
7. Prepaid has come of age. Banks have seen the opportunity served by prepaid with regards to addressing the gap left between the debit and credit customer base. Over 14 non-banking corporate entities have been granted permission to issue prepaid cards in card-based, paper-based and other electronic formats, including virtual/mobile wallets. Even one of India's leading mobile operators has been granted permission with several others in the fray.
8. With the establishment and rollout of large-scale transit projects, including metros, toll roads, organized parking and other emerging urban transportation systems, electronic transit payment networks have become the norm. Large transit payment products - mainly contactless cards - are already flourishing across major metro towns (e.g., Delhi Metro, Gurgaon-Delhi Toll Road and Mumbai Suburban Railway).
9. The quality and depth of credit history and analysis is expected to grow multifold in the coming years, resulting in enhanced quality of credit scoring and recoveries. This is due to the remarkable transformation has been in the increased consumer awareness of the importance and impact of their credit histories.
10. Debit cards have been opened up for Internet transactions, potentially providing a tipping point for eCommerce transactions. With cash withdrawal at POS machines now a reality, the seeds for wide adoption and use have been sown.
11. With an estimated 450,000 POS terminals and 45,000 ATMs, the acceptance infrastructure is set at yet another inflection point for growth. Several Indian banks have blueprints in place to install and potentially double the base in the next three years.
Entry of global players, including First Data and ATOS in merchant acquiring, marks a significant shift in banks' strategy in moving to the processor model vis-a-vis a completely owned and operated model. This shift should revive the profitability of the merchant acquiring business lines and lead to the next phase of profitable, long-term expansion.
12. The India Card initiative as an alternative domestic payment network and system could potentially take the Indian card payments to the next level.
13. ATM access fees have been normalized by the RBI, enabling easier and cheaper access for banked customers across all bank ATMs. Though stressing the cost lines of banks, the lower charges should result in an explosion in ATM usage across India.
14. Payback acquired Imint, India's largest coalition loyalty program, which in turn was subsequently acquired by American Express. This potentially changes the contours of the landscape, creating a fine meshing of payments and loyalty systems. Interesting times are ahead.
15. The qualifying criteria for business correspondents, potentially allowing the entry of corporates with their distribution partners and retailers into the realm, could be a game changer for financial inclusion and banking access.
16. The innovation melee continues, with a wide array of breakthrough business models, consumer propositions and technology solutions being implemented and driving adoption of electronic payments. Eko, FINO, ATOM and a host of other players have been setting and redefining the grassroots level electronic payment principles.
17. The RBI has introduced Interbank Mobile Payment Service (IMPS), enabling seamless, mobile-based transfers between bank account holders. The cornerstone of interoperability has been established with this measure.
18. With over $133 billion payments from bank accounts via Electronic Clearing Service (ECS) and National Electronic Fund Transfer (NEFT), electronic fund transfers have proven to be the silent monster that has established the increasing orientation towards cashless (and even checkless) payments in India.
19.With the formal launch of 3G in India, a deluge of service offerings across customer segments is expected to fuel purchases and transactions on mobile devices.
20. The BC model has received a quantum push, with both retailers and non-banking entities now being permitted to work with banks as extensions of their branch counters. This virtually opens up the opportunity of converting over 10 million retail outlets in India into bank branches.
Outlined below are some trends and events that are likely to emerge and influence this space:
1. Financial Inclusion
Can we move from the 200+ million active account mark to the 500+ in the next five years? Should the metric of financial inclusion be only a bank account, or can other products and services issued by non-bank entities be considered for the same? Will the BC network be financially viable?
It would seem quite apparent on all counts. Both the regulator and the inter-ministerial group have clearly validated the same via their initiatives, regulations and recommendation that universal financial inclusion would clearly not be achieved by banks alone.
The active and profitable participation of non-banking entities, MFIs, NGOs and the retail channel would be critical. Allowing the underbanked customers the opportunity to walk into their neighborhood store to both deposit and withdraw cash instead of stashing it below the pillow is the logical bedrock and inflection point for penetration and adoption of banking services.
Allowing BCs to operate as access points across banking institutions rather than serving a single sponsor bank would be a crucial turning point. Revenue and profitability analysis of BC systems or entities performing roles similar to BCs have clearly shown the limited direct revenue opportunities. Hence, the solution perhaps lies in widening the network of banks serviced and in enhancing the number of products sold.
Could a plan be conceived, allowing the creation of a default bank account with a designated institution for every unbanked UID holder, hence assuring both identity and financial inclusion in one shot? The account could then be activated subsequently by the customer or switched to another banking relationship.
The question that remains to be answered: Would card plastic remain the sole means of customer authentication and transaction authorization, or would the mobile platform truly deliver on its promise of achieving both? Can the financial inclusion wave offer the sufficient scale of customers into the funnel to drive the growth of electronic payments? The inter-ministerial group report appears to resonate in that direction.
2. Domestic Payments Standards and Network
Though the structure and format is evolving, the country is poised to witness the formation of a domestic transaction switching network for POS, ATM and remittance transactions, possibly inspired by China and Singapore. This network is likely to coexist with the existing global card networks of American Express, MasterCard and Visa.
With ATM and POS device costs already at possibly the lowest levels available globally, the case rests on reducing switching and settlement costs and fueling card issuance by banks on the other end.
ATM white-labeling by non-banking entities may be a game changer and is expected to be around the corner. The entry of global processing majors is likely to influence the market as much as the large-scale POS and ATM expansion of India's largest banks.
The questions that linger:
a. Could a card-based payments network be overtaken or coexist with a new approach/standard to payments emerging from India? Can REMIT deliver that promise?
b. How quickly would the pure, mobile-based transaction and remittance system emerge that would transform the classical payments DNA?
India is poised to occupy a unique global position, as it could be the only country establishing two payment architectures supporting card and mobile payments, respectively. This is perhaps a significant departure from models that have developed in Kenya and Philippines. In India, the government and regulator are steering the direction and shaping the course of a new framework.
3. Device Penetration Levels
When will India achieve the 200 ATMs per million penetration or 2,000 POS per million milestone? The more pertinent question to be asked, however, is whether traditional POS and ATM penetration is the milestone metric to be chased?
Card acceptance has already commenced in electronic cash registers in the large, organized retail formats, where separate POS devices are not required to be installed. This could possibly be the direction adopted in these segments.
Can low-end card readers linked to mobile phones be the next step of evolution for card acceptance? With cash withdrawal via POS machines already being permitted for debit cards, the confluence of low-cost card reading access devices linked with mobile phones and the activation of the retail channel as BCs could spurn or limit the requirements for large and expensive ATM devices. Technologies and systems to support the same have already arisen in North America and other markets. So, would low-cost POS devices override the need for ATMS?
As the mobile no-frill account ecosystem crystalizes, we are set to witness the creation of a non-card-based ATM and POS network that would surely catapult the payment device penetration levels into another orbit.
4. Role of Non-Banking Entities in the Payments and Transfers Ecosystem
Apart from the BC network, the scope of opportunity for non-banking entities can clearly extend beyond payment processing, network management and device installation and support. The entry of several other global majors in the services and infrastructure layer is imminent.
White-label ATM services have been in the wings for awhile and could potentially be a game changer if and when introduced.
There have been several inroads made with co-branded opportunities and the guidelines on prepaid card issuance, allowing customer acquisition, issuance, reload and even transaction processing to be undertaken by non-banking institutions. This measure in itself, as it evolves and expands in scope, could be extremely significant this decade.
The potential partnership and alignment between banks and mobile operators would evolve
interesting permutations, impacting the framework of BCs operating today.
Other large categories, including the Fast Moving Consumer Goods (FMCG) sector may be enthused to leverage their retail distribution networks as well. There have been considerable efforts to convert cash into electronic formats for transactions between corporates and their distributors/retail chains. The last transaction leg between retailers and consumers may be of interest to these manufacturers seeking to gain transactional level insights into their consumers and enhancing the revenue opportunity for their retail base.
With UIDAI, no-frills bank account and mobile operator customer relationships, there would be an enhanced understanding of the customer profiles. This would offer fertile ground to provide targeted, value-added services and loyalty offerings for third-party companies.
As banks and operators move towards establishing low-cost payment networks and BC chains, a slew of technologies would emerge and connect the current mainframe-based legacy systems in the card-based ecosystem with the new-age solutions. Will the two worlds meet?
Constituting over 98 percent of all retail payments in India and c rrently dominated by cash (the preferred consumer payment method), micropayments is clearly the most significant arena today. A melee of technologies, standards, end uses and devices ranging from mobile, Internet, NFC, smart cards, contactless targeting transit, grocery or even utility payments is going to emerge in a heady concoction of ground-up innovation. Look forward to path-breaking approaches to payment-based solutions delivering trust and reliability and questioning the basis and framework of payments as we know it today.
The challenge remains - can a PayPal emerge in the face-to-face payments space? Can a single standard emerge that would make processing sub INR50 transactions economically viable for the players? Would a no-frills mobile payment system be that answer?
It is quite possible that a payment system emerging from a transit payment format would be the ideal approach for large-scale, card-based micropayment proliferation in the urban areas. Octopus, NETS and Oyster have addressed both scalability and economic viability. Would the National Payments Council charter the course for such a system in India? This is possibly the most influential piece in the jigsaw puzzle that would steer the penetration of electronic micropayments.
6. Incentivize Electronic Payments
The one large opportunity that remains lies in incentivizing usage of electronic payments. The timing, however, is the crucial question. Should tax breaks for merchants and customers be put in place, as they were in South Korea, for card payments? Can these incentives be extended across all electronic purchase transactions or even on C2G payments? Considering the huge costs incurred by the government in processing payments received from consumers, this could be the vital stimulus required and a sufficient business case. This could also be the necessary impetus to trigger wide-scale adoption.
The impact of electronic payments on GDP growth has been researched and documented globally. This could possibly be the single largest impact point that the electronic payments industry could look forward to in this decade.
7. Redefine and Start from Scratch
Quite clearly, the need to re-engineer is going to be offset by the larger opportunity to redefine and create a new slew of user interfaces, processes and systems to tread forward in the new payments world that is emerging.
Approaching the mobile and retailer channels as alternate channels is in itself a recipe for failure. Banks, which have traditionally evolved as primarily branch-based institutions, would need to make an effort in evolving and designing strategies that view these as equal channels, if not the future dominant channels.
As other industry categories play a greater role in the erstwhile, bank-dominated payment systems, look forward to new approaches for addressing customer needs and redefining the method in which the boring payment leg has traditionally been approached. Location-based services are gaining ground, offering immense opportunities to bundle payments with value-added delights, including real-time rewards and offers, which may be provided by marketers.
The economic and social benefits of electronic payments, though obvious, are destined to witness a decade of remarkable participation and partnerships between the government, regulators, banks, mobile operators and a slew of players who would have been considered untenable a few years back.
Here's looking forward to the next decade of payments.
Upendra Namburi is a banking and financial services professional. He also blogs at futureredefined.blogpsot.com and loyaltyredefined.blogspot.com. The views expressed in this column are that of the author only and do not necessarily reflect that of any outside affiliations. Upendra can be reached at firstname.lastname@example.org or http://twitter.com/upendranamburi.