The Road to a More Financially Inclusive India
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The challenges faced by the financial transactions ecosystem, the pillar of economic inclusivity in India, has rapidly evolved and changed over the last couple of decades. The corresponding opportunities presented, to further evolve and innovate payment systems, is vast.
Where does the next big, disruption lie in the payment segment? The future lies in applications riding on top of the new plumbing laid such as UPI, Aadhar based KYC etc., to offer solutions which remove inefficiencies in terms of speed, security and cost per transaction for micropayments.
P2P lending has been a buzzword for a while and while its appeal to the lenders and borrowers in the various marketplaces is clear, the biggest deterrent to scale (while keeping NPAs in check) is the ability to establish a credible credit score for customers. Current KYC norms and on-boarding for customers are cumbersome and inefficient and some innovations in that area are waiting to happen.
Similarly, platforms to digitise and enable invoice management in the B2B space is another big opportunity; poor cashflow management is the bane of many an MSME businesses and the associated trade and attempts to regularise this segment will make a huge impact in the economy.
The other opportunity that stares in the face is the Cash-on-Delivery segment; it is too expensive, cumbersome and inefficient. Yet, it accounts for more than 55per cent of all e-commerce transactions currently (even higher in case of some categories!) With e-commerce expecting to grow from current estimates of $50Bn business to over $150Bn, this is one opportunity that is really there for the taking!
Let’s take a look at the inflexion points for innovations in financial transactions that got us to this point – to better understand its trajectory, projecting into the future.
Wave 1.0 of the payments revolution in India was all about bringing banking to the masses – facilitating financial inclusion. With low literacy rates, poor banking penetration and a predominantly cash economy, the first set of innovations were around using technology and distribution to reach the unbanked. RBI allowed banks to appoint entities and individuals as agents for providing basic banking services in remote areas where they can't practically start a branch. One of the biggest beneficiaries was the migrant population who could now simply deposit cash at retail stores and send money home. Another version of this financial inclusion was the 'assisted model’ pioneered by the early players, where customers could walk to a nearby affiliate store and pay their bills, recharge their mobile, buy railway and airline tickets using cash.
The next wave shifted to Digital 1.0. This meant enabling users to use their mobile phones and PCs to shop online, pay bills and remit money (P2P). Unfortunately, the “plumbing” that needed to be laid to enable digital transactions to start flowing through the ecosystem were in their infancy; payment gateways for example. In 2009 a leading payment gateway provider had all of just 200 merchants enabled as compared to the over four and a half lakh merchants that PayU claims to have online today!
Similarly, cash for the longest time has been the preferred mode of payments for peer-to-peer and peer-to-merchant payments, and not without a reason. Lack of simple, easy and secure real-time payment mechanisms made especially micro-payments very clunky and slow. The payments switch that was provided by RBI until late 2010, i.e RTGS and NEFT, were not really geared for real-time real, micro value payments.
Hence, the first wave of digital innovations in remittance was in the area of mobile and e-wallets. Companies such as Paytm, Mobikwik and ZipCash focused on setting up platforms that enabled transactions in real time using personal devices. However, as the infrastructure did not allow for seamless movement of money from one bank account to another, the e-wallet companies focussed on creating stored value accounts as well as the mechanism for moving funds from one wallet into another. Regulations further restricted interoperability of the e-wallets, making this system very inefficient. In credit cards, for example, a card issued by Bank A can be used at a merchant acquired by Bank B. So, most retail banks focus either on customer acquisition by issuing more cards or on merchant acquisition. In the comparable “closed” ecosystem of e-wallets, a player had to do both. Hence, driving the penetration of e-wallets was always a very expensive affair.
While Digital 1.0 got ushered in by technology innovations by private players, one could argue that the Digital 2.0 was driven by structural and regulatory improvements. Our reluctance to share card details online shifted significantly once RBI mandated 3D-Secure for all digital transactions. Each transaction is now secured by an additional PIN or OTP. This made it far more secure, significantly bolstering user confidence.
The introduction of IMPS, a realtime-anytime payment switch for small value transaction by NPCI (an RBI sponsored body) in 2010, changed the face of P2P and P2M transactions. In its earlier avatar, an additional identifier required for IMPS, an MMID, had slowed down adoption. Version 2 packaged and branded as UPI in 2016, made the system smoother and faster. A staggering 3 billion transactions in 2018 were made using UPI.
The success of UPI suddenly had e-wallets struggling to stay relevant. It forced them to compete with banks by pushing UPI payments over their own wallet service. This resulted in private players with deep pockets such as PayTM, Google Tez, PhonePe and Whatsapp vying with leading banks like HDFC, ICICI, Kotak and SBI for the P2P transactions crown.
Other innovations from the IndiaStack apart from UPI, has been the adoption of the Aadhar biometric-based authentication system and Aadhar e-KYC. Aadhaar based instant payments have the potential to revolutionise financial inclusion and payments as part of various welfare schemes such as MNREGA. However, the India stack hit a major regulatory and legal hurdle last year. The validity of Aadhaar has been challenged in the court, halting the use of Aadhaar e-KYC. The e-KYC process, which simplified the Know Your Customer process to enable the instant opening of bank and wallet accounts, instant loans, insurance etc. had now to be reverted back to the inefficient and expensive physical KYC!
In December 2018, the government did share its intent to give legal and regulatory backing to the voluntary use of Aadhaar. However, these regulations will continue to be in a state of confusion for a while to come.
The Road Ahead
While the first wave was that of financial inclusion, the second about laying down the plumbing for digital transactions, the third wave was all about regulations and the IndiaStack coming of age, changing the face and pace of digital transactions. The Aadhar e-KYC debacle notwithstanding, India has jumped far ahead of many other developed economies in terms of providing a robust and next-gen infrastructure for payments, with leading private players, banks and other entities vying, competing and collaborating with each other for the consumer’s attention.
The next wave, already visible in the horizon, would necessarily have to be around building further on top of what we have so far. The key pivot points are the various road bumps that need to be smoothened out before we can move further: a) quick and easy creditworthiness confirmation; b) more efficient billing and cash management systems for trade and SMEs; c) a viable replacement for Cash-on-Delivery - ironically 50-60per cent of all online e-commerce transactions happen via COD. Essentially, platforms that are able to support the further inclusion of micro businesses, improve P2M and P2P transactions and eliminate cash are expected to be centre-stage for India to progress to being a more inclusive economy.