By Kalpesh Mehta
Traditionally, banking services and innovative products have followed the “urban-first” approach wherein the intensity of investments is focused in urban areas. Introduction of these innovations among rural customers is majorly an afterthought rather than being a primary objective. The Indian economy has traditionally been dominated by cash. However, the increased smartphone adoption, and favourable regulatory policies have created the baseline infrastructure required for a leapfrogging growth in digital payments. Digital payments have grown at a CAGR of 53% over the last 5 years, and is 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.
To drive adoption among rural customers, financial institutions have introduced certain tweaks to their digital product offerings to promote awareness and adoption among rural customers, aimed at addressing the key challenges faced by rural customers. This has shifted the focus now from urban-first to rural-first taking cognisance of the fact that the rural areas could potentially become the growth engines for India.
Once unbanked uninsured customers are brought into the channel through financial inclusion, all ecosystem related customer needs could be offered through digital routes. Digital payments in India have evolved into a multi-modal experience. In 2017, there was a shift in digital payments from physical cards and wallets to newer forms of payments and more so as enabled by the government through the introduction of Unified Payment Interface (UPI), Bharat QR, Aadhaar Enabled Payment System, amongst others. Among these platforms, UPI has seen a dramatic rise as both new entrants (including technology giants) and incumbents alike have brought UPI offerings to the market. 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 growth in digital payments is likely to continue its upward trajectory, driven by key catalysts such as increase in smartphone penetration, supportive regulatory policies, new platforms enabling proliferation of such transactions, and a thriving and innovative fintech ecosystem. India is witnessing significant growth in smartphone ownership and data usage. Increasingly, more people are becoming comfortable using smartphones for various purposes. 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 people connect with and use it to remit and transfer.
UPI has demonstrated the fastest and the most 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 and mobile), banks have started opening branches in the rural areas at a faster pace (CAGR 7.2%) than the overall bank branch network growth (CAGR 6.5%).
As the industry expands further, 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 offerings. Innovation and collaboration are crucial to elevate the reach of digital payments and financial services. However, while the digital payments are expected to grow by leaps and bounds, there is still a significant proportion of the population which is yet to jump on the bandwagon. Applications that support vernacular languages are likely to play a key role in driving customer adoption, comfort and trust in using these applications. Per IMRB’s estimates, by 2021, six vernacular languages (Hindi, Marathi, Bengali, Tamil, Telugu and Gujarati) are expected to comprise almost 75% of the vernacular language internet users. While banks are yet to fully adopt this approach in providing digital services, fintechs/start-ups have already started working on providing vernacular language support and are seeing market traction.
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 and provide a formal channel for availing credit facilities, which shall promote entrepreneurship. We are already witnessing small- and medium-sized establishments that are now using their local skills to create franchises 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 socioeconomic backgrounds 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.
The author is Partner, Deloitte India