“I dream of a digital India where mobile and e-banking ensures financial inclusion” ~ Narendra Modi, Prime Minister of India.

Digitization of payments is an integral part of prime minister Narendra Modi’s vision of digital India. A well-developed digital payment ecosystem will not just pave the way for a cashless economy – a road that leads to economy growth, it is also a key weapon to combat black money and corruption which are rooted deep into the system.

Google and Boston Consulting Group (BCG) studied India’s payment landscape and estimated (July 2016) that “the total payments conducted via digital payment instruments will be in the range of $500 billion by 2020, which is approximately 10X of current levels.” The main contributions to this growth would be person to merchant (P2M) transactions at the point of sale, followed by business to business (B2B) and peer to peer (P2P) transactions.

The Opportunity

India is a fertile land for digitalization despite having the second largest population in the world with an unbanked population of around 233 million. While India’s population isn’t “bank-savvy”, its people are surely turning “mobile and internet savvy” in a big way.

India is now the second largest smartphone market in the world surpassing the United States as its smartphone user base increased to 220 million by the end of 2015, as per report by Counterpoint. India has over 1 billion mobile subscriptions and its smartphone base is projected to increase beyond 520 million by 2020.

In February 2016, a report by The Internet and Mobile Association of India (AIMAI) projected the number of mobile internet users in India to reach 371 million by June 2016 from 306 million in December 2015, growing at 21%. Further, it pointed out that the share of mobile internet spending has been on the rise, led by excessive use of freely available apps over the internet. In fact, the pace of mobile internet adoption has been faster in rural India, it stated, “Of the 306 million internet users, 219 million users are from Urban India, which registered year-over-year growth of 71%, while the user-base in rural India has gone up by 93% from December 2014, to reach 87 million in December 2015.”

Google and Boston Consulting Group (BCG) together project that around 90% of all devices to be internet enabled by 2017 and the number of internet users to double to nearly 650 million by 2020 from the erstwhile 300 million in 2015. These estimates are based on developments such as increased 3G and 4G penetration in remote parts of the nation, and initiatives such as the National Optical Fibre Network (NOFN) scheme by Digital India which is targeting broadband connectivity to cover 250,000 Gram Panchayats across rural India.

Traditionally, “India is a cash economy” and the transaction though possible won’t be easy. The currency in circulation in India is as high as 18% of the GDP vis-à-vis 3.5- 8.0% in nations such as the U.S. and the UK. India not just lags developed markets of the West it is even behind countries such as Brazil and China. “In 2015, cash contributed to just 20- 25% of overall consumer payments in developed nations, for example, US, UK, France and Germany as compared to 78% in India.” 

While India used cash for 78% of all consumer payments in 2015, the percentage is much below 89% in 2010 and 92% in 2005. The decline in the use of cash is the result of more Indian resorting to digital transactions which have grown at a steady rate of 50% year-on-year while transactions made at an ATM have gone up by 15%. in FY2015 vis-à-vis FY2014, as per the digital payments report. There has a decline of 7% in bank-based transactions during the same period.

Positive regulatory stance is likely to further help the adoption of digital methods of transacting money. The RBI guideline allows the use of the Know Your Customer (KYC) done by a telecom company for transactions up to INR 10,000 per month on prepaid instruments. Other initiatives include the roll-out of Unified Payments Interface (UPI), a next generation online payments solution enabling seamless instant “push and pull transactions” via smartphones. The recently announcement demonetization programme has already triggered the need to hold legitimate bank accounts and look payment mechanisms other than cash. However, the momentum needs to be maintained to achieve desired results over the long-term. (Related reading, see: Unified Payment Interface (UPI) Rolled Out In India)


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