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Digital Payments: the India Way
While India has about 800 million mobile phones and 430 million internet users, 80% of the transactions are still done using cash. As India looked to transition towards digital payments, several new players like payment banks, mobile wallets and telecom players entered the system. However, they were working in silos and created closed networks which further restricted the digital flow of money. Meanwhile, three powerful trends were evolving in India – increasing financial penetration driven by Jan Dhan Yojna, Aadhar enabled digital identification for all and surge in smart phone penetration. Overarching these trends was the government initiative to create an open payment architecture called UPI (Unified Payments Interface).
UPI is a real-time digital payment system for mobile-to-mobile money transfer, developed with the key objective of providing interoperability between existing platforms across multiple banks. This has attracted the attention of global giants like Google and Facebook, which have launched payment platforms for the first time in India and nowhere else in the world. The entry of Whatsapp is expected to provide a huge thrust to digital payments in the country, given its large user base of 250 million and the high frequency of usage of the application. A report put out by BCG and Google has estimated digital payments in India to expand 10X to US$500 billion by 2020 from US$50 billion in 2016.
This digital infrastructure being developed by the government is quite unique to India. In most other countries, this infrastructure has been developed by private players. One of the biggest advantage of this open system is that banks have access to transaction data, which would not have been possible in a closed ecosystem dominated by privately owned digital wallets. China, for example, has the largest payment system globally, estimated to be US$22 trillion in size in 2017. However, it is controlled by two large private groups – AliPay with 54% market share and WeChat with 40% market share. Alipay was started by Alibaba (US$490 billion market capitalization) to facilitate e-commerce transactions and Wechat, owned by Tencent (US$550 billion market capitalization), was started as a social media platform. Both of these are close-looped platforms that now have access to vast amounts of data on their customers’ online transactions, which enables them to customize selling of various products and services. Hence, while China is the leader in mobile payments globally, banks have not been able to leverage the insights on consumer behaviour generated through online transactions as much as groups like Alibaba and Tencent.
Private banks in India on the other hand will benefit immensely from this digital wave. Consumer credit in India is highly unpenetrated. Household debt to GDP is only 11% in India, compared to 50% in China and 80% in the US. As transactions move from cash to digital format, insight into consumer behaviour, such as spending patterns and interests, will increase manifold, enabling the banks to tailor make products and services for each customer. Digital strategies will not only enable faster client onboarding, but open up cross sell opportunities using intelligent data mining. Credit Suisse estimates the market for consumer and SME loans in India to increase 5x from US$600 billion to US$3 trillion over the next decade. Private banks and select consumer focused non-banking financial companies (NBFCs) in India, who have been ahead of the curve in investing in technology and data analytics, in particular are very well placed to take advantage of this platform.
Unlike in China and many other countries, thanks to the Indian government initiatives to create an open payments infrastructure, Indian banks are well positioned to drive consumer credit penetration on the back of this platform.