As India finds itself truly on the cusp of a digital revolution, the way consumers, businesses and governments operate and collaborate has changed dramatically. And it will continue to do so, occasionally being awkwardly disruptive. In particular, with increasing mobile and internet penetration, the financial architecture of the country has undergone an unprecedented transformation. A billion mobile connections, growing smartphone penetration and internet access having already crossed 300 million, the potential power of this revolution keeps swelling.
The mobile phone has become a vehicle for sophisticated financial integration, as made evident by the expanding usage of prepaid payment instruments and mobile banking. There has been renewed focus on reaping the benefits of digitisation even on part of the government, with recent initiatives such as Digital India and Jan-Dhan Yojana (JDY) attempting to bring the marginalised and unbanked to the fore, particularly through the use of technology. A total of 196 million bank accounts have been opened and 167 million RuPay cards have been issued under the latter, indicating the large unmet demand for banking services. The JDY forms the core of the government’s strategy—with a bank account, every household could potentially gain access to banking and credit facilities and participate in the formal system. The Aadhaar identity card is envisaged as the sole KYC proof, besides serving as the backbone for Direct Benefit Transfer (DBT) when linked to bank accounts. As of December 2015, nearly a billion citizens have been allocated an Aadhaar card. Linking the Aadhaar number to an active bank account is part of the inclusion drive of the government, by making income transfers predictable and targeted. There is already evidence that payments through Aadhaar-linked bank accounts have increased efficiency and reduced leakages.
As the Jan-Dhan-Aadhaar-Mobile (JAM) trinity leads the disruptions in the traditional banking and payments market in India, the financial landscape has been altered further by Reserve Bank of India’s (RBI) decision to grant licences to 11 payments banks in August 2015—the first instance of differentiated licensing in India’s banking history. These payments banks have been allowed to maintain deposits up to R1 lakh per customer, in addition to issuing debit cards, offering financial products such as insurance and mutual funds, and utility bill payments. They will be especially relevant for low-income consumers, small enterprises and workers in the unorganised sector. As they are permitted to invest only in government paper, long-term profitability will come through scaling up (by expanding the volume of transactions)—a possibility that is real given the large unmet demand for financial services, increasing smartphone penetration and the spectacular rise of e-commerce. Technology increasingly affords the opportunity to improve delivery which has been the Achilles’ heel of many well-intentioned schemes in the past. In particular, there are technologies that enable better targeting and transfer of financial resources to households. Technology causes displacement and there are clear implications for competitiveness in the sector as these entities take over some of the functions of traditional banks and help facilitate otherwise costly micro-transactions.
The list of licensees includes corporate giants such as Bharti Airtel, Reliance Industries Ltd (RIL), Vodafone m-pesa, etc, in addition to the Department of Posts. Both these categories of entrants have the advantage of leveraging an expansive and far-reaching customer base as well as existing infrastructure to address the problem of last-mile access to financial services—a deficiency that traditional banks have so far been unable to overcome. The new entrants have the flexibility to engage in price competition and price discrimination, and are likely to pose real challenges to traditional banking. Recognising the need to keep up with these innovations, some traditional banks have already decided to collaborate with these niche banks. The State Bank of India (SBI) has partnered with RIL with an equity share of 30% and Kotak Mahindra Bank has agreed to acquire a stake of 19.9% in Bharti Airtel’s payments bank venture.
Payments banks are not the only likely source of disruption in this space—the increasing prevalence of prepaid payment instruments has revolutionised the way consumers transact. According to the statistics published by RBI, the value of prepaid instruments (PPIs) has increased fourfold, from R62.01 billion in 2011-12 to R243.62 billion in 2015-16 (until October 2015). In particular, the value of transactions made through mobile wallets (or e-wallets), which account for 40% of the value of all PPIs, has increased tenfold, from R10.01 billion in 2012-13 to R97.46 billion in 2015-16 (until October 2015). In fact, in terms of volume, transactions through e-wallets have long surpassed those made through mobile banking.
Most of these wallets function as semi-closed PPIs, allowing consumers the convenience of not having to load their bank account or debit/credit card details and go through the cumbersome two-step verification procedure each time they transact. Additionally, they make possible peer-to-peer transfers and micro-transactions, which were not previously feasible through traditional banking methods. Some of these wallets (Mobikwik, Paytm) also allow direct loading of cash into accounts, rendering the process even simpler for consumers who are new to digital payment methods and making digital transactions available to those who do not have bank accounts. Cash-back offers, loyalty rewards and discounts are offered by all wallet providers, making their products more attractive in comparison to credit/debit cards and mobile banking. To fill the gaps in achieving last-mile financial integration in rural areas, the key players are collaborating with kirana stores and are setting up kiosks to facilitate easy top-up of digital wallets. With a focus on increasing convenience, capturing unmet rural demand and incentivising consumers through innovative schemes, mobile wallets have become a force to reckon with.
Both payments banks and PPI players have shown alacrity in understanding the diverse and evolving needs of consumers, and have used technological innovations to adapt to them. Having completely altered the way consumers transact and save, these disruptors have become key competitors for traditional banking institutions. Incumbent response to these threats has been predictable—some large banks have imposed restrictions on the usage of their digital infrastructure. For example, SBI and its subsidiaries recently disallowed customers from loading their Paytm wallets through their accounts. Users of Oxigen, another digital wallet provider, face similar constraints as they are barred from topping up their wallets by the payment gateways of SBI and CitiBank. Even as the entrants enjoy the first-mover advantage, banks have been trying to catch up by introducing their own instruments, hoping to put to use their existing infrastructure and customer base. SBI, HDFC Bank, Axis Bank as well as ICICI Bank have introduced digital wallets, prepaid cards and options for peer-to-peer transactions, in addition to providing discounts and cash-back offers to compete with third-party players.
With these disruptions already starting to transform the banking sector, it remains to be seen whether payments banks and PPI players essay the role of competitors or complements to traditional banks, or act as both. However, it is clear that intense competition and innovation, resting on the backbone of the ongoing digital revolution, is set to benefit consumers and help achieve broader policy goals of financial inclusion.
Rajat Kathuria & Vatsala Shreeti
Kathuria is director & chief executive, Shreeti is research assistant at the Indian Council for Research on International Economic Relations (ICRIER). Views are personal