Digital payments in India have evolved into a multi-modal experience. In 2017, we had foreseen a shift of digital payments from physical cards and wallets to newer forms of payments such as Unified Payments Interface (UPI), BharatQR, Aadhaar Enabled Payment System, among others. Of these, UPI has seen a dramatic rise as both new entrants (including technology giants) and incumbents alike have brought UPI offerings to the market. The biggest enabler of this being the implementation of Aadhaar, and that it is the common KYC document between telcos and bank accounts. Trends notwithstanding, the current payment landscape is still evolving in the sense that there are multiple ways of payments, all seeking large-scale adoption.
The Indian economy has been dominated by cash. But the increased smartphone adoption and favourable regulatory policies have created the baseline infrastructure required for a leapfrog growth in digital payments—these have grown at a CAGR of 53% over the last five years, and expected to reach $1 trillion in value by 2023. Further, relentless innovation, easy-to-use payment products, interoperable payment platforms and customer awareness are expected to continue to drive the shift to digital payments from cash.
While 44% of urban customers have taken up digital payment channels, rural customers are a distant second, at only 16%. While traditionally all initiatives undertaken by banks have followed the urban-first philosophy, there seems to be a potential for adoption of digital payments among rural customers, in parallel with urban. This can be largely attributed to the disintermediation caused by technology, which enables banks to reach out to rural customers with minimal incremental investments on the supply-side. In addition, availability of low-cost affordable data is expected to drive demand among urban and rural customers. Financial institutions have introduced tweaks to their offerings to promote awareness and adoption among rural customers, aimed at addressing the key challenges they face.
We believe growth in digital payments is likely to continue its upward trajectory, driven by increase in smartphone penetration, supportive regulatory policies, platforms enabling proliferation of such transactions, and a thriving and innovative fintech ecosystem. India is witnessing huge growth in smartphone ownership and data usage. This marked shift in behaviour can only prove to be encouraging for digital payment use-cases through smartphones. All these factors augur well and contribute to the foray of digital payments in rural India, where smartphones have changed the way they connect and use it to remit and transfer.
UPI has demonstrated the fastest and consistent growth rate, and is poised to become a key retail payment platform. With the objective of driving financial inclusion in rural areas along with the push by the government (introduction of Jan-Dhan Aadhaar Mobile trinity), banks have started opening branches in rural areas at a faster pace (CAGR 7.2%) than the overall bank branch network growth (CAGR 6.5%).
As the industry expands, it is expected to see more collaboration and partnerships amongst various players across the value chain, aimed at providing holistic services with faster go-to-market. Innovation and collaboration are crucial to elevate the reach of digital payments and financial services. However, while digital payments are expected to grow by leaps and bounds, there is still a significant proportion of the population that is yet to jump on the bandwagon.
There is a strong interconnect between digital payments and financial inclusion. We are hopeful that this will create and build a platform to inculcate the habit of savings among people, especially the lower income category. Also, provide a formal channel for availing of credit facilities, which shall promote entrepreneurship. We are witnessing SMEs that are now using their local skills to create franchise and engage in gainful employment. Moreover, the combination of digital payments and inclusion will provide universal access to a wide range of financial services beyond banking, such as insurance products. Further, considering that there are varied socio-economic background in the country, customised or tailored financial schemes should be offered to target the different segments of the unbanked population—with regular interactions to generate awareness on the offerings and benefits that will provide them the right insights into leveraging their resources and churning them to better use.
By Kalpesh J Mehta. The author is partner, Deloitte India