India is traditionally a cash-based economy, with the value of physical currency in circulation estimated to be over 11% of GDP, one of the highest among emerging economies. However, till date a large proportion of India’s population is unbanked and has limited access to technology-enabled financial services. The Government of India and the central bank have laid significant emphasis on financial inclusion and making banking and payment services accessible to all. Non-bank players such as telcos (through mobile money services) and business correspondents (BCs) — entities that assist banks in providing basic banking services in rural areas — have also contributed toward financial inclusion. The payments industry is growing rapidly, driven by aspirational consumers, rising personal consumption expenditure, urbanization and electronification. Banks have traditionally played a central role in providing payments services; however, the landscape is evolving with active participation from nonbanks in the electronic payments and remittance space. The key driving factors for electronification of payments in India are increasing smartphone penetration, growth in digital commerce, improvement in computer literacy, access to internet and broadband, and supporting regulations.
Digital prepaid wallet operators have gained widespread adoption in recent times and have built a substantial consumer base. It is estimated that the two leading digital wallet operators in the country together have over 117m stored value wallet accounts. Wallets started with basic services such as telecom recharge and bill payments but are now available as payment options on most popular online merchants. The next focus area for wallet companies is creating a physical acceptance infrastructure at brick and mortar retailers for wallet payments. Wallets providers have simplified the transaction experience and combined it with multiple promotional offers to gain traction. Due to a sizeable customer base, wallets can potentially drive transaction volumes at merchants and, as a result, major e-commerce merchants in India have partnered with leading wallet players.
Banks are forced to rethink their payments strategy
The rapid adoption, scale-up and increase in the utilization of digital wallets by their own customers have made banks re-think their retail payments approach. As a result, they have tweaked their digital strategy, and are actively focusing toward youth and tech savvy customers.
Large private and public sector banks have clearly taken the lead in payments product and platform innovation. Banks are rolling out their own wallets as well and providing additional services such as social media banking (accessing bank account through social media), specific consumer apps for enabling P2P and person-to-merchant (P2M) payments, and linking of bank accounts to wallets. As more and more transactions go mobile, banks will face stiff competition from mobile wallets. Innovation and focus on digital strategy will be critical for banks in the retail payments space.
But the challenges still remain:
Despite all the growth drivers of the payments industry in India, there are challenges to be addressed by the stakeholders. A large proportion of India’s population is not financially literate and does not have access to formal banking services. The challenges that the payments industry faces today can be viewed across three dimensions: business and operating models, consumer and market dynamics.
- Most non-bank payment service providers are in the early stage of business maturity, with an evolving operating model. At the same time, the long-term profitability of certain models is yet to be ascertained.
- On the consumer side, there is still a strong preference for traditional modes of transaction, especially cash. Digital payments, cards, and acceptance infrastructure at merchants are largely an urban phenomena, and there is a huge urban–rural divide to be bridged.
- The non-bank payments market is very competitively priced, with leading players competing for the same set of customers. As a result, the cost of customer acquisition is increasing. There are also significant pricing pressures in the market. In the future, these factors may lead to consolidation or exit of some players from their respective segments/ sub segments.
As the industry matures, it is imperative for the key stakeholders to address these challenges to ensure growth in customer base, transaction volumes and business profitability.
Fali Hodiwalla; Partner, Advisory Services, EY India, Dheeraj Aneja, Senior Manager, Advisory Services, EY India.