India has always been a cash-based economy, with e-payments contributing marginally to retail transactions in the country. The different forms of e-payments (cards, wire transfers and real time payment services) have been growing in the range of 20-30% y-o-y over the last five years. While banks have been primary drivers of digitisation in payments, non-bank players and mobile wallets started gaining significance over the last two to three years amongst customers and merchants.
Mobile wallet players simplified the user experience for both customers and merchants and scaled up in an asset-light way. Incentives for customers, promotional pricing for merchants and Aadhaar-based KYC have enabled a rapid scale-up.
Cash crunch as a result of demonetisation further accelerated the growth of electronic payments and instruments such as cards and wallets. With cash coming back in circulation, digital transactions that had grown as much as three to five times during demonetisation are beginning to come down but are at elevated levels compared to pre-demonetisation and are expected to grow further. Institutional initiatives such as BHIM, BharatQR, UPI, BPPS, Aadhaar-based merchant payments and a rationalisation of transaction pricing is expected to accelerate the adoption of digital payments.
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M-wallet companies that have already transitioned to becoming payments banks will be able to participate in the upcoming open-payments systems built on UPI, Aadhaar and BharatQR, thereby improving their customer propositions. In the near term, m-wallets will gain adoption among consumer and merchants. However, in the long term, with greater adoption of interoperable platforms like BHIM, BBPS, UPI and Bharat QR, wallet players will be challenged and only one or two players may remain. Globally, payments as a standalone business operates at a low margin and is a business of scale. Given the pressure on transaction pricing, market competitiveness and fragmentation, the eventual business model may not be built on the profit pools associated with payments but by enabling adjacent revenue opportunities such as lending and distribution of financial and non-financial products.
The payments space, in general, will continue to grow on the back of significant institutional innovation, regulatory innovation and overall consumer adoption. The hyper-competitive industry, coupled with thin margins and high overhead costs may lead to consolidation.
The author is director — payments practice, EY India