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India's Journey to a Cashless Society

Post demonetization, in the last 14 months India has undergone a fundamental shift in moving away from cash. The country has solved some real world problems by embracing technology in every day finance.  This journey to a ‘less cash society’ has been exhilarating for the sheer number of choices available for merchant payments.

By Molshree Pandey, Executive Director, ICDK India

For a country with such diverse culture & scale, surgical intervention was required at multiple levels for the ecosystem to pivot in weeks instead of years.

Launch of Bharat Interface for Money (BHIM) by Hon’ble Prime Minister of India   was one such “eureka” moment; it’s a mobile app that lets you make simple, easy and quick payment transactions using Unified Payments Interface (UPI) standards for instant bank transfers.  With support in 12 different languages across Android & iOS, the app now supports more than 80 million small value transactions per month across 60+ banks. 

With low/no cost associated in such a model, it solved the basic challenge of smaller retailers: cost of accepting digital payments.  Up until the launch of BHIM, the market was flooded with stored value wallets offering their own close looped acceptance variants with limited success in tier 1 cities.  We were slowly but surely moving into an important phase in the country’s development cycle to move away from planning for top 8 cities (India) to next 50 (Bharat).  UPI in itself has gone through an evolution with global giants such as Google & WhatsApp (to be launched) using the protocols for simplified consumer payment experience. The journey from 285 thousand to 105 million transactions/month in a year is a resounding vote of success from all market participants. Building loyalty, merchant offers, analytics, dispute resolution will further strengthen the platform in the coming months.

In India, cost arbitrage can very quickly drive scale. This was well understood by policy makers while blessing “Bharat QR”; first interoperable QR based push payment standards. By substituting the PoS terminal with a simple QR, the country had a solution to expand the digital points of acceptance with limited investments. Banks now had a solution for scaling the points of acceptance in locations where deploying a PoS terminal wasn’t commercially viable. 

These initiatives promoted a culture of frugal innovation within the fintech community to leverage the payments rails (UPI & Bharat QR) to optimize the consumer experience & solve inefficiencies in the payment ecosystem (Delay in merchant refunds, Dynamic QR on utility bills, QR deployed at auto-rickshaws, UPI based third party wallets etc).

With 1.19 billion Aadhaar (national identity) numbers, Aadhaar Enabled Payment System (AEPS) is solving for literacy & numeracy challenges in the under-banked /non- banked segments.  Shift from “what you know” to “ who you are” on a Micro ATM (less than $ 50) is making banking affordable & secure for a large population.

This year also marked the commercial use of tokenization with Samsung’s launch of their flagship payment application – Samsung Pay.  It opens up some exciting opportunities for everyone in the payment ecosystem to leverage the principles of tokenization & secure a payment transaction.

In 2012, the regulator had the foresight to understand that the adoption of digital payments in banking has to be led by debit cards. In mid 2012, we had 440 million  debit cards contributing to only 35 % of monthly card spends with 18 million credit cards clocking the rest of the volume. As of October’17, the debit card portfolio’s contribution is 50% even when the overall market has grown almost 6 times in this period. Recently the regulator announced a landmark decision to offer a subsidy in the merchant discount rate (MDR) for QR code based debit card transactions. The new policy effective 1st Jan, will also for the first time recognize a smaller merchant basis their last year sales and mandate lower MDR to almost third of the cost for debit cards. 

This is expected to provide a further fillip to the smaller merchants to stay away for cash & use digital payments as they adjust to the new Goods & Services tax regime. GST is expected to change the way banks will lend in India in the coming years with shift from collateral based to cash flow based lending. It wasn’t possible in MSME lending till now, as Banks’s couldn’t rely on cash flow data for credit assessment. With monthly update of cash flows on GST and lenders having access to this data, large base of MSME will suddenly have access to formal credit underwriting channels instead of expensive alternatives.

India has ~ 430 million Internet subscribers with only 21.35 million wired internet subscribers. The country is accessing Internet on their phones with average data usage shooting up to 1.6 GB/month. With the launch of Jio last year, the country moved to a new norm of 1GB/day data plans. The total data use in the country has risen from 200 million GB a month before Jio to 1.5 billion GB a month now, making India the world’s largest data user. Smartphone penetration at 30% is expected to double by 2022.The industry estimates 890 million smartphones with data traffic per smartphone to reach almost 11GB/month in the next 5 years. Rural demand is expected to fuel this growth in coming years.

The country also participated in crypto currency rush with more than 10 bitcoin exchanges, although the regulatory guidance is still awaited. 2018 is also going to the year for E-Mandates replacing the ECS and simplify the recurring payments. With UPI 2.0, it’s expected that E-Mandates will be able to support use cases such as monthly school fees payments, taxi rides, on-demand services, credit card bills, utility bills etc. India Stack’s four technology layers: presenceless, paperless, cashless & consent will continue to support APIs for the developer community to leverage the digital infrastructure and solve real world problems.

As the government plans to reach 25 billion digital transactions in this fiscal, it’s also recognizing the need to safeguard the ecosystem from security & privacy issues.
It has constituted a Committee of Experts under the Chairmanship of former Supreme Court Justice to study various issues relating to data protection in India and make specific suggestions on principles to be considered for data protection in India and suggest a draft Data Protection Bill. The objective is to “ensure growth of the digital economy while keeping personal data of citizens secure and protected.” The recently announced “Digital Payment Security Alliance” is also one such initiative that recognizes the importance of building a strong security layer across all payment channels.

While the last 14 months have laid the rails for different payment channels, there is a strong consensus that the country has leapfrogged at least half a decade in it’s digitization journey. India’s digital economy can potentially unlock productivity and value via transformative infrastructure, applications and ecosystems. A trillion dollar digital economy is no more a distant aspiration but a landmark to be achieved in the next 5 years. 

Innovation Centre Denmark India is excited to be part of this revolution too as there is significant learning opportunities for both countries. It has partnered with Yes Bank to foster fintech innovation and assist companies to expand into each other’s markets. The partnership is facilitating an exchange program for startups in India and Denmark, working on setting up a centre of excellence for Artificial Intelligence & Cyber Security and providing technology and infrastructure access to startups to enter respective markets. The country is going through one of the most important phases in it’s history perhaps after the liberalization in 1992 and we are looking forward to a even stronger 2018.




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