India is leading the world in payment system evolution. Enablers like Jan-Dhan, Aadhaar, Mobile penetration, and more recently demonetisation have created favourable conditions for large scale adoption of digital payment systems in India. The country is expected to leapfrog plastic payment systems and have mass adoption of digital and biometric systems by 2020.
Indian economy has traditionally been cash dependent. However, demonetisation and government incentives for adopting digital payments have enabled an all-time high awareness about various alternative payment systems, and exposed various cash users to the ease of use of digital systems.
Various government and private sector efforts have created a foundation for masses (from urban to the most rural areas) to access alternate payment systems. And, these conditions will improve by 2020, making virtually every individual connected, reachable, identifiable, and a part of the formal banking system.
Adoption of any payment system is driven by six key factors—system features, security, interoperability & acceptance, technology & infrastructure reach, ease of registration, and cost of use. An analysis of available payment options highlights the ‘most favourable choice’.
The analysis takes a futuristic view of the underlying conditions for each payment system. While no significant change is expected for credit card, debit card and internet banking, the evaluation of new payment systems, viz UPI, AEPS, USSD, is subject to continuous government effort to drive adoption, low cost of transaction (similar to IMPS) and development of appropriate education and grievance redressal support for customers. Mobile wallets are expected to charge merchants a basic transaction fee (1.5 to 2% of transaction value) in future, in order to be sustainable.
Thus, the government supported new payment systems have a promising future. Their core value lies in their ease, convenience and security for various types of transactions. Ability to work with various connectivity technologies and interoperability would drive mass adoption.
While the overall usage of internet banking for retail transactions will remain low, given its small base and improving internet access, the growth is expected to be stronger, especially in the B2B segment. Growth of debit cards will be driven by improvement in banking coverage and would be a preferred means to access cash for masses. Despite large expected penetration, its use for online and PoS transactions will continue to be limited.
Credit card usage, on the other hand, will persist for high value transactions to manage payment cycles and access micro-credit. However, they would primarily be available in the pockets of urban rich.
Mobile wallets will struggle to justify their utility, beyond acting as pre-paid instrument for specific high frequency low value transactions, due to their limited value proposition in comparison to the new payment systems.
An estimate of expected adoption of various instruments by 2020 suggests that after cash, new payment systems are likely to see mass adoption (over 80% penetration). Credit cards particularly will never reach beyond 5% of adult population. Thus, unlike other countries, India will leap frog credit cards as a major payment system.
The new systems also offer significant advantage to the government. Higher adoption would significantly reduce the currency cost and would enable more effective monitoring, leading to higher tax compliance. This should ensure government’s focus on driving their adoption.
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Driven by phenomenal growth in digital infrastructure (Aadhaar, Jan-Dhan Yojana, AEPS and India stack), India would shift to the new age biometric payment systems. This is a new frontier in payment technologies. Your cash is no more dependent on a piece of plastic or your smartphone. All you need is ‘your thumb’.
Raju Bhinge is CEO, Sourabh Gupta is engagement manager, technology practice and Chandranshu Mishra is project lead, technology practice, TATA Strategic Management Group. Views are personal