Did you know that the digital payments industry is worth a staggering $9 trillion? Payment revenues in India account for $14 billion of this, a whooping 7.8 times the GDP figure. Let’s dig deeper.
But before we dive into digital payments and the inroads they have made in India, it is vital to understand the structure of the payments industry. The term is often befuddled in mire and devoid of reasonable frame. Talking about the payments industry would be like talking about how little Jim found his gifts under the Christmas tree. How’d it get there Jim? Well, Santa gift wrapped it and put it there through the chimney yeah? Not entirely, you left out the elf factory, sledge, reindeers and all that. It’s the same with the payments industry.
Understanding the Payments Industry
The payments industry is much bigger than the card swiping machine at your local store. According to a report by the IAMAI and PCI – “Disrupting cash, Accelerating electronic payments in India” the payments ecosystem can be divided into 5 sections.
● Cash Withdrawals
● Merchant Payments
● Utility Bill Payments
● P2P Transfers
● Travel and Ticketing
The fact is that we are increasingly becoming a cashless society or in countries such as India a ‘less’ cash society if you may. What this shift translates into is the presence of more innovative methods of payments. A new payments solution is introduced once every 6 months on an average to keep up with this need to go cashless.Technology and mobility are changing the way we view payments. Click To Tweet
There are many ways to break down the payments landscape, the above diagram is the most basic and convenient way to do it. On another level one could also classify the payments industry into mobile payments and non mobile payments. Here’s a video demonstrating the same.
Mobile wallets are increasingly used by companies to blur the line between online and physical channels of payments; giving the paying customer a sense of near effortless payment; in every literal sense.
It’s The Mobile Way Forward
The mobile payments – an independent section of the payments industry and one that is growing at an incredible place is the future. Almost all reports on the payments landscape show that the mobile payments have grown 51% in terms of revenue from 2008. There isn’t another segment that can match this % growth.
There are three key elements when it comes to mobile payments, as mentioned in the video, we’ll analyse them in detail later on but for now it’s good to know the mobile payments triangle.
So, what is the whole deal about these mobile payments? For a long time now, banks have held the monopoly over the payments landscape namely via Visa/ MasterCard, internet banking and mobile banking.
But there is a radical change that is taking place now. According to a McKinsey report of ‘India’s emerging payments market’, there are 27 million credit cards being held by Indians but only half of them are active. But there are 300 million mobile phones in India- ALL of which are active.
In order to understand the extent of the impact mobile transactions have on our lives, let’s look at the three key sectors that have come under its influence. Now remember we are not talking about a mere ripple in the back yard pond; mobile commerce has come to dominate the below segments.
1. Mobile Payments
This is a dimension of the mobile commerce industry that enables the use of your mobile phones as a payment device. This system enables the use of a mobile phone as an NFC (near field communication) device, or as a payment terminal. [ Square, Intuit ] The use of SMS payments is also part of this segment; a good example of which is ‘mPesa’.
2. Mobile Banking
This channel creates leverage for the mobile phone as the enhanced banking platform for almost all banking services. Allowing for enhanced access and immediate transacting. In India, it is mobile banking that has bestowed banking to the hands of millions of rural Indians. The concept of mobile banking has also opened the doors for mobile wallets/ virtual wallets.
3. Mobile Marketing
This branch needs no introduction. Companies use this in an effort to expand retail commerce and provide consumer solutions using mobile. The plus side to mobile marketing is the location based feature that enables convenience like nothing else. Think of this as a gateway linking the offline world to the online world.
According to a McKinsey report of ‘India’s emerging payments market’, there are 27 million credit cards being held by Indians but only half of them are active. But there are 300 million mobile phones in India- ALL of which are active.
What Makes it Enticing?
Everyone’s talking big about the evolving payments space, but what is it about this evolution that gets everyone interested? To understand this, we need to look at the benefits that technology has gifted to the payments space. A report by PWC on electronic payments in India lists them as-
● Speed of Delivery
● Ease of use
Interestingly the next high growth rate in payment methods happens to be the Debit/ Prepaid cards. Almost every bank account has a debit card associated with it. With greater incentives by card companies such as reward points and cash back offers to promote the use of cards, with a growth of 43% since 2008, the Indian economy is witness to an increasingly less cash payments landscape.
But cards alone aren’t what contribute to this growth. It’s the point of sale machines that are driving this momentum. The ability to swipe your card at the nearby supermarket and not worry about change is the reason for the less cash economy.
A less cash economy is good news in that there is less physical cash in circulation. This is a boost for increased and easy spending.
In the last 5 years the value of transactions done through POS terminals has doubled compared to the 5 years before that. The only deterrent to growth of POS terminals in India is the fact that the value of transactions in general is usually low.
The average transaction done using a Debit card is ₹2,604 and that done using a Credit card is ₹3,785. But the bulk of transactions have lower value than this and most of India still prefers to use cash for transaction of smaller value. Or in other words, much of rural and towns in India don’t engage in high value transactions – as such the cost of keeping a pos machine is not justified.
**Data taken from a report by IndigoEdge - Indian Payments Industry: Mobile POS Solutions
But despite this the volume of transactions done through POS terminals has seen huge leaps. In just a year, the number of POS machines have increased by 1 lakh.
**Data taken from RBI reports - statistics on Payments and Settlement Systems
This is The Future
Mobile payments are leading the way for the payments landscape in India but more importantly they are changing the way we look at payment in itself. The very idea of being able to consolidate all your payment modes into one place is revolutionary.
While mobile wallets are yet to become a widely accepted mode of payment, debit/ credit cards have on the other hand been making the digital dream come true. In time this will make way for other forms of mobile payments to take over but for now let’s take a look at the how debit and credit cards have been performing.
|Transaction Type||December 2014||December 2015|
|No. of POS||10,58,294||12,45,110|
|No. Of Transactions at POS (Credit cards)||5,60,91,791||6,93,67,262|
|Value of POS transactions with Credit cards (₹ millions)||1,71,865||2,11,941|
|No. Of transactions at POS (debit Card)||7,36,18,740||10,81,18,356|
|Value of POS transactions with Debit Card (₹ millions)||1,11,007||1,45,832|
**Data taken from RBI reports - statistics on Payments and Settlement Systems
As you can see the year on year growth of debit card transactions have grown tremendously. Another reason for this could also be the rise in the number of bank accounts across India as a result of the government’s Jan Dhan initiative.
The top 5 banks with the most number of POS machines out there are-
● HDFC Bank
● State Bank of India
● ICICI Bank
● Axis Bank
● Corporation Bank
Based on the chart above we can see that more transactions are done using debit cards than credit cards, however it’s worthwhile to note that the value of transactions done using a credit card is much higher than the ones done using a debit card.
Now the growth of the POS payment solutions in India brings more good news than merely being able to swipe your credit card. With the growth of NFC technology and mobile payment devices, you could see yourself shaking your phone at the check-out counter to pay for the goods and walking out like a pro.
Real time payments combined with a centralized wallet could just be the end of your payment woes. Alongside the advancements in the security features for these mobile payment solutions means that such technology can be readily accepted once available.
The Benefit to Businesses
The benefits are not just for the consumers, businesses can also leverage this to their benefit. Small businesses that employ a POS machine in the store are now eligible for loans to expand their business or stock up on reserves.
FinTech companies like NeoGrowth are catering to these small business segments for their credit requirements. Formal channels for credit accessibility are often sceptical of lending to small businesses because of which they turn to unorganized lenders for the credit requirements.
Now if a business has a POS machine , the business can avail a trusted loan that can then be repaid every time a payment swipe is made on their machine. This is innovative and highly efficient in that the loan is being repaid not monthly, not weekly, or on any periodic basis but every time a transaction is made on the machine. It’s hassle-free and worry-free for the business that needs to run behind having to pay the loan.
The Less Pleasant Reality
The progress that we’ve made with the payments landscape in India is good but it’s nowhere close to where we need to be. The greater chunk of transactions is still made in cash and digital cash has penetrated only the cities and semi-urban towns.
As per the IndigoEdge report there are around 14 mn retail outlets in the country without a POS terminal. 5 million of these merchants have sales volumes that justify a card swipe terminal.
A report by the IAMAI ‘Road to Less Cash’ shows that Bangalore has the highest card usage rate in India, but here again only a mere 33% of the organized retail outlets have a POS machine.
The only competition to POS solution comes from mobile wallet such as PayTM, Paymate and Google wallet. The other being prepaid cards such as gift cards, sodexho and others such as zipcash. However these haven’t made significant growth compared to mobile wallets.
The major issue here is the lack of a solid value proposition when it comes to POS. Merchants tend to distrust the device, fear of delayed payments and lack of connection to the internet are all deterrents. Add to that some charges levied by the banks for transactions done on these machines and it isn’t as shiny anymore.
Here are a few companies in the mobile-POS terminal space
● MRL Posnet
● Paymate India
● Mobi Swipe
SUMMARY – Advancements in the field of NFC (Near Field Communication) technology has enabled the payments industry to employ these and revolutionize the way payments are made. In India this technology is still in it’s infancy however POS machines have enabled digital payments to invade India. As a result of we are seeing a shift to an increasingly less cash economy. While security and scalability are concerns being worked upon, we are on the right track. The next few years will see the introduction of multiple payment solutions that simplify the payment process.