B2B Payments Will Drive Digital Payments In India, Not Consumer Payments

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.

What could be the possible factors that propel B2B payments and, in fact, put it in the position to the lead the digital payments revolution in India? To find the answer, we must first understand that businesses operate in supply chains or value chains and are, therefore, interdependent. They receive and make payments regularly to other businesses and, unlike consumer payments, their transactions are largely governed by existing contracts, helping them operate outside the ambit of instant gratification. Here are some trends that are pushing B2B payments to the forefront in India:

• Commercial/Corporate cards: Businesses are increasingly availing credit via commercial cards for vendor payments and also using corporate cards for employee expense management. The cards get used on platforms which provide integrated reporting and reconciliation to the businesses.
• ACH payments: Merchants are increasingly leaning towards ACH solutions and that’s because of a few important reasons. ACH is an electronic payments network that can probably best be described as writing an electronic check and which is commonly used for applications like direct deposits and payroll, it also represents about 50% of all payment volume, in the world top 50 most developed economies.
• Blockchain payments: Blockchain infrastructures in the future will be leveraged to facilitate financial transactions on scalable, private Blockchain networks enabling near real-time transactions for even high-value international payments.

The Bottom Line

Till now, banks have been providing businesses various banking tools to help streamline payments. However, the adoption has been very low because of the poor customer experience and also the conservative approach of having a closed banking network that disallows a smooth network-based ecosystem to exist. Moving to the present, the slew of measures taken by the government pre and post demonetisation and more recently with the introduction of GST are seen as measures to bring all business under tax regime and promote honest, accountable and transparent payments.  In addition, the next generation technology platforms built by fintech startups are offering just cutting edge solutions the banking industry needs to usher in a new age of financial disruption one that is based on the premise of making transactions smoother, faster and cheaper than ever before.

With 51 million SMEs in the country accounting for nearly 40% of GDP, this represents a massive opportunity to drive the digital payments growth. With SME credit also playing a pivotal role in the growth of these SMEs going digital presents a unique opportunity to tie credit into payments and create a unique value proposition for businesses to adopt B2B payments.

Today, India stands at the cusp of a digital payments revolution through rapid penetration of digital payments infrastructure across the length and breadth of the country. The growth trends in digital payments are positive due to innovations in digital payment technologies and increasing consumer satisfaction, which dispels the doubts raised by some commentators regarding the growth of digital payments, subsequent to demonetisation.

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