Analyzing India's Journey To Become a Cashless Economy With the growing threats of misuse of payment networks and data theft, a large number of retail customers are apprehensive of migrating to a digital payment infrastructure

By Rajesh Narain Gupta

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The government is steadfastly committed to facilitate a cashless economy and build a robust digital payments infrastructure in the country. The drive has been spurred by a rise in consumer spending by a young tech-savvy population and COVID-19 fast-pacing the transition from cash to digital. It needs to be pointed out that the comprehensive acceptance and penetration of a digital payment system across India remains a distant dream. It continues to remain largely restricted to the metro cities and it will take some time before populations in small cities, towns and villages substitute contactless payments in place of cash on delivery.

With the growing threats of misuse of payment networks and data theft, a large number of retail customers are apprehensive of migrating to a digital payment infrastructure. The fear can be overcome by implementing state of the art technology tools along with provision of insurance cover to mitigate the risks of cyber fraud. The digital payment industry in the country has the potential to grow at an exponential pace with digital platforms leveraging emerging technologies and innovation to offer ease of transactions, convenience and transparency to customers.

Founded in 2008, the National Payments Corporation of India (NPCI) has been the sole umbrella organization in enabling a vibrant digital payment ecosystem in the country. It is played a vital role in enabling India's shift towards becoming a cashless nation by offering a diverse range of products and technology solutions. Fearing the concentration of monopoly in the digital retail payments market with a single entity, the government is pushing to bring in new players with specializations in areas of technologies and service offerings. The foray of new entities like fintechs and startups in the digital payments space will boost competition and offer a wide variety of streamlined services and pricing advantages to customers.

In order to grab a greater share of the country's exponentially growing digital payments market, 6 consortiums led by big ticket players which include Reliance Industries, Tata Group and AXIS-ICICI Bank submitted applications to the Reserve Bank to set up a national payments infrastructure. Leading entities like Paytm, India Post and Fintech startup iserveU also formed consortiums to submit their applications to the Central Bank.

Though the digital payment ecosystem in the country has expanded substantially, it still has a lot of ground to cover. With the entry of more private players in the ecosystem, its penetration across small towns and cities in India will increase significantly. A key example of a robust digital infrastructure that is scalable and technologically advanced is the IRCTC platform for the online booking of train tickets.

Digital payment solutions can be introduced across multiple areas and sectors to drive financial inclusion among the masses of the country. With core legacy banking platforms are fast becoming obsolete and upgrades not possible in existing platforms, banks are finding it difficult to integrate next-gen technology transformation in banking services. Digital payment platforms have the potential to function as effective alternatives to existing banking platforms and also complement the functionalities of banks in multiple ways.

Big players will continue to dominate the digital payments industry in the country. For small and marginal players entering the digital ecosystem, the profit margins can be low and diminishing. Though there could be big advantages in the form of cross-selling opportunities and additional float income and smooth interplay among various other businesses of the promoters, large-scale capital requirements and other conditions will make it difficult for small players to survive or make profits. The digital payments ecosystem will be highly biased in favor of big players will small players not having a competitive advantage.

If small players wish to enter this market for high valuations over a period of time, the return on equity may not be an ideal situation. With a growth in cyber crime putting retail users at a greater risk of fraud, the entire ecosystem will need to upgrade its fraud risk management standards to enable a secure transaction experience. Advanced security technologies will need to be implemented by digital platforms to ensure that customer data is not breached. In order to avoid any potential fraud situation for customers, the government will need to install mechanisms wherein insurance firms can examine cases efficiently and settle claims in a time-bound manner. To cite an instance, if there is a fraud below INR 10,000, the customer should get his insurance amount within seven days through quick claim settlement.

The government will need to keep a close watch on how digital payment platforms operate with cyber crime units and agencies of the government kept in a constant state of readiness to tackle any potential case of fraud and cheating. The government will also have to ensure that there are a limited number of players functional in the retail digital payments ecosystem to ensure that there is healthy competition and the platforms are tightly monitored.

India is fast set on the path to become a cashless society with the rapid acceptance and adoption of digital payments. With the government actively promoting and incentivizing contactless payments, a large number of people are likely to use digital payment modes. Digital transactions have become a way of life for the common man with laborers working in cities and maids and servants working in homes making use of online payment interfaces to make and send payments as per their convenience. The COVID-19 pandemic outbreak has put digital payment platforms at the center stage as a large number of people make online payments for the purchase of goods and services on ecommerce sites.

Rajesh Narain Gupta

Managing Partner, SNG & Partners

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