Making India a cashless economy: An innovative mindset is as important as the handset

Manish Jain, Partner, Digital and Fintech, Management Consulting, KPMG, India said in the report, “

India today is one of the leading countries when it comes to payment transformation. The seamless integration of mobile technology and financial services has paved the way for increased digital adoption. What has made this possible is proactive participation from all the key stakeholders involved here -- i.e. government, regulators, banks and financial institutions, merchants, mobile payments service providers, and investors who today have become a key enabler to leverage the mobile payments ecosystem.”

Worldwide, non-cash transactions have increased with an annual compounded annual growth rate (CAGR) of 12.7 percent and this surge is a result of digital payment adoption by emerging Asian countries, which is likely to see a 28.8 percent growth rate till 2024. The global digital payment market size is set to touch $10.07 trillion by 2026.

All of this will happen with the help of increased smartphone usage, which has a forecasted CAGR of 15.5 percent and an expected jump in the user base -- 829 million by 2022. Point of Sale (PoS) devices have been a big factor in this and so have mobile (PoS) devices which is likely to grow at a CAGR of 54.2 percent between 2019 and 2023. Other services like Near Field Communication (NFC) and Quick Response (QR) codes have sped this process up a lot.

In India, retailers accepting digital payments have increased to over 10 million in the last 2-3 years alone. It is forecast to see the fastest growth in transaction value between 2019-2023, with a CAGR of 20.2 percent, beating China and the United States. Other elements have segued into place very nicely as well for this to happen. Some of them are:

Compelling value propositions, supportive infrastructure backed by regulations and next generation technologies are now available.

Reserve Bank of India’s (RBI), key ‘2021 vision document’, which makes cash-less payments safe and fast by emphasising on infrastructure and a seamless ecosystem. This report’s 36 action points covers a gamut of issues like making India a cash-less society, cybersecurity and providing other e-payment options. Then the central and state governments, industry associations and payment platform providers playing their part too. Compared to more developed China and Japan, India has 45 wallet players, 50 UPI-based platform service providers, and 142 banks using the UPI system.

Positive policy framework changes and government initiatives like the launch of new payments systems such as UPI (which has processed $93 billion in payment till May 2019 and this is an increase of 243 percent (CAGR) between January 2017 to June 2019), Aadhaar-linked electronic payments and improvement of the digital infrastructure by the National Payments Corporation of India, have enabled mobile payments to take off.

Consumer acceptance has played a big part too.

Literacy programmes have enlightened smartphone users across villages and cities -- over 1 crore rural citizens and 3 lakh merchants have been taught about digital payments via DigiDhan Abhiyaan. RBI has designed financial literacy content aimed at specific groups like school kids, senior citizens and farmers. Lucky Grahak Yojana, Digi-Dhan Vyapar Yojana and DigiVaarta and DISHA programmes are all part of this initiative. Ministry of Electronics and Information Technology (MEITY) and the HRD ministry also have their own training programmes.

Mobile payments have become popular because of mobile wallets which will see a 52.2 percent CAGR between 2019 and 2023.

Right technical skills, capital investments and new business models that keep popping up because of enterpreneurs’ innovative ideas.

The report also studied the mobile payments system across the Asian Pacific region (APAC), Americas and Europe, to see what India can learn from them.  It looked at six parameters like technology readiness, business model and environment, regulatory support, government programmes, consumer demand and acceptance (from both users and retailers viewpoints) and the level of entrepreneurial mindset (here they looked at the Global Innovation Index rankings).

An innovative mindset is possibly the most important criteria because even with all of the support structures in place, if one can’t make a business profitable, then it has a ripple effect on the economy. Currently, Indian mobile payment players are struggling due to a lack of diverse revenue models with exceptions like Paytm which has morphed into a kind of a ‘super app’ as it provides a large number of services, ranging from bill payments to enabling making donations, buying tickets (for travel and entertainment), games and financial services.

Others using this varied expansion route are Flipkart’s PhonePe and Mobikwik with their own unique offerings to sustain a high volume and low margins business. PhonePe is giving retailers access to their customer base, so they can build their own stores within the app. Mobikwik has launched a B2B Software as a Service (SaaS) product called Magic, which is an A-Z solution for corporate rewards, reimbursements and processes. Overall, they did much better than their competitors and as a result, they raked in millions of dollars of investment from either their parent company or from overseas investors. PhonePe received around $100 million from Walmart, Paytm raised $300 million from Berkshire Hathaway and Mobkwik raised $38 million from Sequoia Capital, and it’s now looking to become a financial services platform.

Mobile payment providers may also need to look at the wholesale vendors’ space, especially in the niche B2B wholesale market. Banks have begun to partner with them to provide co-branded credit cards, or to provide short term credit for those with less disposable income (Mobkwik), or even to create a fixed deposit (FD) when a consumer’s balance moves above Rs 1 lakh, at the end of the day (Paytm). Medium and small enterprises are also a great target audience for this service but getting them on board isn’t going to be easy.

So here are KPMG’s recommendations to make India a super-charged up cashless economy:

Cash discounts to be used as incentives for merchants, e-commerce players and customers in C2G (customer-to-government) payments for utilities and railway tickets etc.

Increased penetration of USSD adoption should be initiated.

Bridging the gap between digital payments and digital lending infrastructure.

Linking up with global partners for seamless retail mobile payments of low value and high velocity.

Focus on literacy programmes that are targeted at the young and the rural population, which are made in vernacular languages, so it’s easy to understand and which emphasises on cybersecurity, so trust is built up.

Offering a unified payment platform for citizen services.

The government show focus on creating micro clusters of villages.

MPSPs should offer working capital products in collaboration with BFSIs to increase expansion and stickiness among the merchants.

Helping merchants evolve in this new economy and build customer-centric strategies.

Aggressively adding merchants from low tier towns.

Tap on cultural incentives and customer sentiments to increase mobile payments usage.

Instant gratification for last mile customers and 24/7 support.

Enhance global reach for a unified experience worldwide.

Holistic service providers for customers.

Indirectly pushing through e-commerce and enabling group buying on mobile apps.

BFSIs should create conversational, contextual and voice-enabled mobile payments experience for rural and urban users.

Monetise data with customer consent to offer personalised experience.

Promote B2B mobile payments after partnering with MPSPs and other banks to offer escrow services.

Develop peer-to-peer global payments ecosystem.

Interoperability of business correspondents.

Last mile of dormant bank accounts that need to be made into digitally active accounts.

Government should standardise KYC norms.

Continuation of minimum KYC wallets.

Allowing accounts to be opened with OTP based e-KYC (Aadhaar verification) to continue as minimum e-KYC accounts.

As for retailers -- the more the merrier should be the principle -- and more merchants should be added who use cost-effective QR mobile codes. Medium and large merchants using NFC-based applications should upgrade their PoS terminals to ensure lower turnaround time and easy transactions.

In the APAC region, China, India and Japan have the highest number of smartphone users. Mobile payments penetration is at 81 percent in China, 33 percent in India and 25 percent in Japan in 2019. This will grow at a CAGR of 10 percent in China, 12 percent in Japan and 31 percent in India between 2017 and 2022. At present, India has the highest number of mobile banking usage, as a proportion of total online consumers having current accounts at around 57 percent.

So, this is good news when it comes to mobile payment service providers (MPSP) who can begin to upsell and start linkages to provide other services -- be it financial products, music and video streaming, or just simply grocery shopping from a local supermarket. Basically, they should be looking to provide multiple services through a single window -- be a super app -- and retain customer loyalty. The stickiness factor will matter if MPSPs want to make money, and who doesn’t anyway?

Read her columns here.