The democratization of digital payment

Demonetization did not push up, let alone initiate digital payments. But it managed to spread it significantly. It is now for the consumer businesses to make innovative use of the new regime 

 

Every three years since 2001, the Reserve Bank of India (RBI) has been releasing what it calls a payment systems vision – a document that articulates the policy and regulatory stance it would take with regards to payment systems for next three years. In its fourth such document, called Payment System Vision 2012-15, released as a draft in June 2012 and finalized in October the same year, the central bank moved from just talking about attributes such as safety, security, interoperability and efficiency to explicitly give itself a mandate to push electronic payments.

 

The vision statement of that document read something like this: To proactively encourage electronic payment systems for ushering in a less-cash society in India and to ensure payment and settlement systems in the country are safe, efficient, interoperable, authorized, accessible, inclusive and compliant with international standards. For the first time, two phrases entered the vision lexicon: Electronic payment and less-cash society.

 

To put it in context, the vision document came only five months after the then finance minister Pranab Mukherjee, releasing a white paper on black money that explicitly stressed on the need to move to electronic payments to curb the circulation of black money. The white paper is not available in the Department of Revenue site anymore. RBI’s insertion of the phrase ‘less-cash society’ was seen by many as a dream than a vision at that time, though many hailed the idea behind it. But in the next few months, RBI demonstrated that it was serious. For one, it slashed debit card transaction fees; it mandated the banks to go for electronic payments even while allowing some concessions to mobile wallets. The switch to a digital payment regime had started in all earnest. The next few years saw digital payment forms registering triple digit growths. (see charts) 

 

Three and half years later, when the central bank released its next three-year vision document, Payment Systems Vision 2018, the focus had shifted to well-defined outcomes: Continued decrease in the share of paper-based clearing instruments, consistent growth in individual segments of retail electronic payment systems (NEFT, IMPS, Card transactions, mobile banking, etc.) and increase in registered customer base for mobile banking and explicit statements about infrastructure—significant growth in acceptance infrastructure and accelerated use of Aadhaar in payment systems. 

 

Demonetization, even as it came so shockingly, was thus not ‘complete madness’, as critics claim; nor was it as ‘pioneering’ a step, as the supporters hail it. It just followed a very well-defined, focused method initiated at least four years back. It was consistent with the policies initiated by the previous government. While the jury is still out on the real impact of demonetization in terms of achieving its originally stated objective—to curb black money—there is no denying that it did impact the way India transacts. 

 

 

Anecdotal evidences abound on how the likes of Paytm invaded each market, each galli, and each shop. All we do here is to look at cold data, published by RBI, to see what it achieved and what it did not. The real impact of demonetization What we ask here is a very specific question that can be answered—and more importantly, is extremely relevant to our readers. That is: Has demonetization helped in pushing up digital payments?

 

We try to explore the question by taking the data route.

 

We examine here five data points.

 

a.Value growth in credit card usage (PoS only)

 

b. Value growth in debit card usage (PoS only)

 

c.Value growth in retail electronic clearing such as NEFT, IMPS etc

 

d.Value growth in m-wallet usage

 

e.Value growth in other prepaid cards usage (excluding paper vouchers)

 

The card usage data shows that between August 2016 and August 2017, the monthly usage of credit card value has  increased by 41%, which is significantly, though not disruptively, higher than the growth in annual usage (in terms of value) witnessed in the previous three financial years of 2015-16 (25%), 2014-15 (23%) and 2013-14 (25%). In short, demonetization has had some impact on driving credit card usage. However, if one examines monthly data, it is clear that while the usage did go up significantly during demonetization period—between November and January—the growth today is at a higher level than its January level. So, it has been a more gradual growth. So, a definite conclusion is not possible. However, it is safe to say that demonetization did help in some manner, pushing up credit card usage.

 

 

The debit card usage data is not so ambiguous. Between August 2016 and August 2017 (the last month for which detailed data is available), the monthly debit card usage (in terms of value) went up by 93%, as compared to 31%, 27% and 28% growths in the previous three year (annual value). That’s a huge jump. Further, the monthly data shows that, unlike credit cards, the big push to debit cards came during the demonetization months of November 2016 to January 2017. 

 

In fact, the usage sharply dropped in February after availability of cash. It has been in the February levels in even now; that is close to 30% below the January peak.

 

 

So, it is much easier to conclude that demonetization had had a big impact on driving debit card usage in PoS or using them as a real payment instrument, rather than just withdrawing cash. Of course, in case of both credit card and debit card usage, we have used the PoS usage only and not the ATM usage, as ATM usage is for cash.

 

The impact on mobile wallets has been significant too. Between August 2016 and August 2017, the monthly usage of mobile wallets in terms of value grew by 236% as compared to 152%, 198% and 174% annual growths in the previous three years. It is a no-brainer than demonetization did push up mobile wallet usage. But what is more important is that unlike debit cards, the mobile wallet usage saw a more permanent growth and even today is at a level that is significantly higher than pre-demonetization months.

 

 

So, data suggests that mobile wallets gained immensely from the demonetization move. Prepaid cards actually saw a lower growth in monthly value usage between August 2016 and August 2017. They grew 120% in this period, as compared to growth of 143% and 278% in annual usage value in the previous two years. In short, demonetization has had no impact on prepaid card usage, not even during November to January, as the monthly data reveals.

 

 

Let us finally look at the retail electronic clearing data, which accounts for more than 90% of all retail electronic transactions in terms of value. In fact, all the other four payment methods we have examined here combined account for just about 5% of retail electronic clearing like NEFT, IMPS and ECS. The analysis of retail electronic clearing data shows that the monthly usage in terms of value grew 44% between August 2016 and August 2017, marginally higher than the 40% growth witnessed in the annual usage in the previous year (2015-16) and 38% growth witnessed in the year before that.

 

Demonetization has very little impact on driving the growth of electronic bank payments. 

 

So, what is the final conclusion?

 

The significant growth in debit card usage and mobile wallet usage shows that demonetization did push up the usage of electronic payment in the segments that use them. The explosive growth in these two segments showcase that many users who did not use electronic payments earlier came into the ‘system’ and started using electronic payments. To that extent, demonetization did democratize electronic payment in India to a great extent—not a mean achievement. However, did it turn India into a digital economy by significantly pushing digital payments? The answer is a BIG no. More than 90% of the payments are through banks like NEFT, ECS and IMPS. That has not shown any major disruptive mpact from demonetization.

 

 

How does it matter?

 

But beyond demonetization, the big question is how the future unfolds. 

 

Non-cash transactions in India are likely to grow at a CAGR of 26.2% between 2016 and 2020. Further, the Government has an aggressive target of 25 billion non-cash transactions for 2017–2018, with priority areas being mobile, government benefits/subsidy transfers, and micropayments. That total is expected to comprise 11 billion card systems transactions, 6 billion mobile transfers, and 8 billion online transfers. A focus on contactless payments for public transport is the next item on NPCI’s agenda to boost digital payments in India. 

 

 

Beyond politics, why is this question and its answers important for business?

 

The future strategy of most consumer businesses will depend on how the digital payment scenario evolves. Depth—more value transactions happening online—will have a different implication than breadth—a wider base of digital payers. The implications for consumer businesses selling high value, low volume items such as electronics, furniture etc. will be different than the implications for low value, high volume businesses like retail, telecom, transport and FMCG.

 

A wrong assumption—like demonetization has significantly increased the value of online transactions in India—will result in wrong expectation and possibly wrong business strategy. Similarly, not taking into account the significant upsurge noticed in terms of spread of digital payments may cost companies in terms of opportunity lost while formulating future selling and distribution strategies.

 

A wider digital payment network impacts most industries, especially B2C businesses, in more ways than one.

 

Most obvious, though less dramatic, impact of this democratization of digital payment will be enhanced efficiency of revenue cycles. This will be fairly secular across industries. Secondly, as digital payments become more widespread, companies can reach segments hitherto unreachable. This will be enabled by the fintechs whose models allow them to reach these sections at a fraction of the costs than the traditional banks. B2C businesses can take their help to reach out to these segments.

“As collaboration becomes more accepted, merchant and third-party provider (TPP) partnerships are expected to become widespread as banks are bypassed in the development of customized offerings and innovative and secure payments solutions,” notes World Payment Report 2017, released by Capgemini and BNP Paribas.

And finally, certain segments such as retail can directly leverage the hitherto unreachable to offer innovative value ads.

 

“The increased digitization of services means retail merchants must find new and better ways to engage with their customers, and payments will be central to this,” says the World Payment Report.

 

In India, many large consumer businesses have taken to creation of their mobile wallets. In e-commerce, it has almost become an industry standard. While Snapdeal started it by buying Freecharge (since then it has sold it to Axis Bank), Flipkart bought PhonePe. Amazon has been aggressively pushing its own Amazon Pay, offering attractive incentives to its customers for using it. Ola Cabs, the prime challenger to Uber, has its own Ola Money. The telecom companies—Airtel, Vodafone and Jio—have their own wallets; not to talk of banks, which have launched them for their non-customers too.

 

“India has lower per capita non-cash transactions, therefore there is substantial opportunity for growth, particularly as financial inclusion and digital payments initiatives are rolled out,” it notes. As digital allows greater flexibility, newer business models will emerge. Payment APIs can be integrated to the service itself.

However, like all business model shifts do, this change will be accompanied by new questions about value chains as they will get readjusted. Security will be a big concern, as in a digital payment regime where all sections of society use digital payments, the possibility of direct impact on consumers, of a security breach, is high. One large incident at this stage will significantly derail the shift. That is another story, for another day.

 

The democratization of digital payment has laid the foundation stone of a digital India far more realistically than disparate, disjointed big bang digital projects. To that extent, it is truly the beginning of a new phase.