The demonetisation drive in India in November last year opened a gateway of opportunities for digital payments, making them the preferred choice among businesses and individuals alike, for making secure financial transactions. It has put India on the verge of a digital payment revolution – one that promises to make financial transactions more secure for everyone. According to a joint report by Google & Boston Consulting Group (BCG), the total payments conducted via digital payment instruments will reach $500 billion by 2020 which is approximately ten times higher than it is now. The euphoria and attention around consumer payments going digital has reached dizzying heights with high expectations on consumer payments forming the bulk by 2020.
So, what’s driving digital payments?
- Increased broadband and data connectivity coupled with increasing smartphone penetration
- Next generation payment platforms providing world-class user experiences
- Government push and favourable regulatory environment
RBI data shows that post demonetisation, the volume of digital payments has recorded a CAGR of 55% in 2016-17, increased from 28% in 2015-16, Though February this year saw a slump, it should settle at 40%-60% higher than what it was in October last year, but lower than it was in December. At current levels, digital payments form sub one percent of GDP. Clearly, there is a significant use case for ecommerce payments, bill payments and on-demand payments which forms the bulk of consumer digital payments. The question is whether this can extend beyond this subset of payments, and can they grow without being incentivized?
Challenges for consumer digital payments
Cash is still seen as the most frictionless of payments for small ticket payments. ATM cash withdrawals are back to pre-demonetisation levels at 7200 cr per day in April up from 2700 cr in December 2016. Low penetration of POS in semi-urban and rural. The prohibitive costs of POS transactions in low margin retail which form the bulk of retail which is where the perceived growth of digital payments would need to come from is a deterrent. Even the much-hyped UPI seems to be replacing wallet transactions while the overall month-on-month growth has been lateral. Given these ground realities, there is definitely a question mark over the growth of consumer digital payments to reach the expected levels it had initially set out to achieve.
The government efforts to weed out black money and bring everyone under the tax bracket by implementing a slew of measures and policies could be promising. However, that does not necessarily mean cash transactions will disappear altogether. Several mature economies like Germany and Japan still continue to have a high percentage of cash transactions for consumer payments despite being ahead on the digital payments adoption curve.
Digital payments for businesses
The B2B market records annual transaction values of more than $1trillion, along with high anticipated rates of growth over the next five years. But it is also a market where businessmen are often plagued by cumbersome processes and ageing technology. Processing of high volume transactions, payment settlement, mitigating risk, and security are core elements of the proprietary platform, which can only be effectively addressed by technology. It is, therefore, not surprising that new technologies and regulatory changes are reinvigorating B2B payments, sparking a wave of collaboration between fintechs and traditional financial institutions.