The evolution of payments in India—looking ahead

Posted on by MSC

The previous blog discussed the state of India’s digital payments ecosystem. This blog looks at where and how it may evolve further.

NPCI

The National Payments Corporation of India (NPCI) is the backbone of the country’s retail payments and settlement systems. NPCI’s efforts to build an open source and safe digital ecosystem have transformed how digital payment solutions reach the masses. NPCI now boasts an extensive product suite comprising UPI, AePS, BAP, Bharat QR, BBPS, RuPay, CTS, NACH, IMPS, NEFT, and eRUPI. NPCI will continue to play a pivotal role in enabling India’s 1.2 billion mobile phone users to adopt and access digital payments.

These products are replete with innovation, promote inclusiveness, and create a seamless payments experience for individuals, businesses, and governments. NPCI’s role in pushing India toward a digital economy remains critical. NPCI should address the country’s growing needs through stronger partnerships, besides new relationships with FinTechs, payment service providers, regulators, banks, and other institutions. Concerted efforts are now required from service providers to augment digital payment solutions by developing tailored use cases for each customer segment in the country.

New Umbrella Entity (NUE)

The exponential increase in smartphone users, coupled with the widespread adoption of new-age digital payment solutions, such as UPI, has positioned India as one of the fastest-growing digital payment economies worldwide. The acceleration toward digital payments has come about quicker than planned during the pandemic. PWC and the Payments Council of India (PCI) expect India to contribute ~2.2% of the global digital payment market by 2023. By 2025, digital transactions in India are expected to rise to 167 billion in volume and INR 238 trillion (~USD 3.21 trillion) in value. It presents substantial business opportunities for existing and new players in the digital space.

The New Umbrella Entity (NUE) could bring about greater financial stability and efficiency in the backend system, which NPCI currently manages single-handedly. Key players and allies in the payments ecosystem, such as HDFC, Paytm, PayU, Visa, Punjab National Bank, Union Bank, Google, Amazon, Flipkart, and Tata, have applied to obtain the license for NUE. These entities should make the payments ecosystem more competitive, add to the existing product suites, and bring tailored use cases. These entities will also add to the overall innovation, insights around customer needs, and spending patterns, enabling them to align their offerings to increase the overall financial inclusion for several customer segments.

Payments channels

Four payments channels have tremendous potential to be digitized—P2B, P2G, P2P, and B2P. Targeted interventions through digital payment solutions across these channels will help address the specific financial needs of the unserved and underserved LMI customer segments. Promising examples include digitalizing domestic remittances, house rental payments, cash on delivery (CoD) payments in e-commerce, offline merchant payments, repayment of microfinance loans, recurring payments in agriculture and allied value chains, utility bill payments, and transactions in the public transit system.

The performance of these payment channels shows potential for growth:

  • Migrant workers comprise the largest user segment of remittance services in India. About 120 million migrant workers from rural areas account for 80% of the country’s domestic remittances valued at ~INR 700 billion (~USD 9.45 billion). Presently, around 60% of domestic remittance transactions occur through non-traditional channels, such as friends, family, and agents for remittances. This untapped market offers an opportunity to digitize remittance transactions worth more than INR 400 billion (~USD 5.4 billion).
  • India has 63 million micro-merchants in the country who facilitate P2B transactions. Many live in rural areas. While financial service providers have acquired around 10 million merchants, most are more prominent merchants from urban areas. Approximately 90% of micro-merchants currently transact exclusively in cash. The dependence on cash creates a massive potential to digitize cash-based transactions worth INR 4,200 billion (~USD 56 billion), as per MSC’s analysis based on IBEF estimates.
  • India’s e-commerce sector is currently worth INR 2,600 billion (~USD 35.1 billion), a value that is forecasted to grow at a CAGR of 27%. Presently, around 17% of India’s total e-commerce transactions occur through cash-on-delivery (COD) payments. Converting even a conservative 10% of these cash transactions to digital presents an opportunity for digitizing transactions worth ~INR 45 billion (~USD 0.61 billion).
  • India has 202 microfinance institutions (MFIs) with a branch network of 19,073 and 152,000 employees, per the Bharat Microfinance Report 2020. These MFIs have more than 59 million clients, primarily women, and an outstanding loan portfolio of ~INR 2,600 billion (~USD 34.6 billion). MSC’s analysis suggests that more than 95% of these loan repayments happen in cash through MFI field agents, highlighting the potential to digitize 5.8 billion transactions annually. Digitizing these MFI transactions can serve as anchor use-cases for women borrowers and increase the uptake and usage of digital payments across women in India.
  • Salaries comprise the most significant use-case of payments made through the B2P channel but most of these payments are already digitized.
  • Individual contract payments or payments for agriculture input and allied sectors constitute the next big use case under the B2P channel. MSC’s analysis suggests that transactions worth INR 880 million (~USD 40 million) flow through this channel annually, of which only 20% have been digitized thus far. This gap highlights the massive opportunity to digitize B2P payments.
  • MSC’s analysis highlights that the P2G channel sees transactions worth ~INR 36,000 billion (~USD 486 billion). These include payments for government services, donations, bills, and taxes. However, more than 80% of these transactions occur in cash due to the consumers’ limited awareness and capability regarding digital payments and the institutions’ complex legacy systems.

Iris authentication payments

Currently, one in every three AePS transactions fails, with around 17% due to biometric mismatch using fingerprint authentication mode. The high failure rates in AePS transactions through fingerprint-based authentication have created a need for alternate authentication modes. Iris-based authentication provides a better alternative to fingerprint authentication. The iris-based mode is safe and secure—since the iris is difficult to forge, hygienic—as it is a contactless solution, and convenient—since it involves fewer scanning attempts than fingerprints. It is also far more accurate, with a false rejection rate (FRR) of 0.1-0.2% compared to 2-3% for fingerprint authentication.

Around 200,000 iris devices have already been installed across India to manage beneficiary authentication for various government schemes—public distribution systems, pension distribution, and mid-day meals. Currently, five banks—ICICI Bank, Andhra Bank, Fino Payments Bank, Central Bank of India, and RBL Bank are adopting iris-based authentication for AePS transactions. The average cost of an iris device is around INR 3,500 (~USD 47) compared to ~INR 2,000 (~USD 27) for a fingerprint device. Despite the comparatively higher device cost, iris devices have seen good adoption as 9% of Indians use them compared to the global average of 3%.

Way forward

The country’s payments ecosystem has many opportunities to grow and improve. NPCI has made moves to seize many of these opportunities. Meanwhile, the NUEs will encourage and enable innovation and diversification, which should further expand the frontier for digital payments.

That said, concerns about approaches to include those without access to smartphones persist. Regulators can address these concerns by enabling improved and intuitive USSD-based interfaces or agent-assisted transactions. This work will assume increased importance as user competition rises over time.

The evolution of payments in India—the state of play

Posted on by MSC

In recent years, India has moved to a leading position in digital payments and developed an ecosystem that enables the uptake and usage of digital payments. Many countries now seek to replicate India’s payments systems, particularly the Unified Payments Interface (UPI). This blog highlights the evolution of India’s payments landscape and looks into issues and ideas that contributed to this evolution. It briefly discusses the controversial waiver of the merchant discount rate (MDR) to increase the number of use cases in the person-to-merchant (P2M) category.

Digital payments in India have grown rapidly. Transactions increased from 23.4 billion in 2019 to 46.7 billion in July 2022, aided by several digital payment products, such as UPI and Aadhaar-enabled Payment Systems (AePS). The number of first-time digital payment users increased with these payments products, coupled with growing apprehensions about handling cash during the COVID-19 pandemic. Improvements in payments infrastructure, disruptions in information and communications technology, a responsive regulatory framework, a conducive policy environment, and a greater focus on customer-centricity have transformed India’s payments ecosystem.

Market offering or share of leading players—evolution over time

The major digital payment products available in India are Aadhaar-based payments such as Aadhaar Enabled Payments System (AePS) and BHIM Aadhaar Pay (BAP), contactless payments such as Unified Payments Interface (UPI) and Bharat Bill Payments System (BBPS), and card-based payments such as RuPay and debit card:

  • AePS transactions increased by 290 million from 113.8 million in 2018 to 404.45 million as of July 2022 as people withdrew more money, thanks to increased domestic remittances and governments’ emergency cash transfer programs. AePS has boosted DBT payments in rural geographies with 407 million average monthly transactions. More DBT payments have led to the inclusion of users who do not own smartphones and need assisted services.
  • UPI transactions grew at a CAGR of 119% and 138% by volume and value in the past five years, from FY 2017-18 to FY 2021-22. Today, UPI drives India’s digital payments with 300 million active users and 57 billion average monthly transactions. UPI offered one of the safest payment modes for person-to-person (P2P) and P2M transfers and outstripped all other payment platforms during the pandemic. In 2022, NPCI launched UPI123Pay, allowing feature phone users to use the UPI platform via Interactive Voice Response (IVR). UPI123Pay’s launch points toward the further adoption of digital transactions in the countryside, where most citizens still do not own smartphones.

  • BHIM Aadhaar Pay (BAP) is the merchant version of AePS. Unlike UPI, it enables merchants to receive digital payments from customers through Aadhaar authentication, whereas UPI requires customers to have a smartphone, UPI ID, and PIN. The transaction volume for BAP increased by 91% in the past five years. The average transaction value has risen steadily from INR 398 (~USD 5.38) in FY 2017-18 to INR 3,189 (~USD 39.92) in FY 2022-22, which indicates people are increasingly using BAP for large ticket-size transactions. The push from the acquiring banks and the cashback rewards available on transactions till December 2019, drove merchants and consumers to adopt BAP widely across semi-urban and rural India.

  • Bharat Bill Pay System (BBPS) has consolidated India’s recurring bill payments industry under one payment system. It provides the convenience of round-the-clock bill payments to multiple billers from a single platform. Transaction volumes have grown significantly by 62% over the past five years, which indicates more customers now prefer BBPS for bill payments. By integrating recurring payments, BBPS has added 19,500 unique billers across 19 additional categories besides utility bills and airtime top-ups, such as education fees, loan repayments, insurance, fees for cooking gas, municipality taxes, and subscription fees.

  • RuPay is a homegrown card payment network. It offers low processing fees and wide acceptance at ATMs, PoS devices, and e-commerce across India. RuPay’s market share in total debit cards issued increased from 17% in 2017 to 60% in 2020. More than 1,224 banks have issued 94 billion RuPay debit cards. Transaction volume grew by 388% over the past five years. Both offline and online merchant payments remain significant use cases for consumers.

30% cap (of total volume) imposed by NPCI

The NPCI declared a 30% market cap on the total volume of UPI transactions for all third-party app providers (TPAPs) on 5th November 2020. The cap is calculated on a rolling basis per the total volume of UPI transactions during the preceding three months, starting on 1st January 2021. NPCI will inform all TPAPs over email once their total UPI transaction volume reaches 25% to 27%. Players will receive a second alert upon crossing the threshold of 27%.

Once players cross the threshold of 30%, they must stop onboarding new customers immediately. PhonePe, Paytm, and Google Pay continue to dominate the UPI market. They collectively hold 94.8% of the total UPI transactional volumes and 93% of the total value as of March 2022. This new policy on market cap was formulated and implemented to ensure that the UPI infrastructure offers a positive customer experience and discourages a handful of players from monopolizing the digital payments landscape.

QR code-based payments

India has approximately 750 million smartphone users, which is projected to reach 1 billion by 2026. The increasing affordability of smartphones, growth in the number of users in rural India, and government initiatives have grown India’s smartphone user base in recent years. Rural India has propelled this rise in smartphone use with a projected CAGR of 6% from 2021 to 2026. QR code-based payments can potentially create significant growth in digital payments, especially among customer segments with low financial literacy across India. With low infrastructure requirements, two-way transaction flows, secure transactions, and overall simplicity, QR codes offer an easy on-ramp to digital payments.

The COVID-19 pandemic aided the acceptability and uptake of QR code-based payments mainly due to their contactless nature, quick turnaround time, and ease of usage. So far, QR codes offer multiple use cases in both P2P and P2M transactions. Examples include toll tax payments, payments at grocery stores, mobile app downloads, and utility bills. They present a broader opportunity to increase use cases to allow more customers to pay using QR codes across various platforms.

Moreover, the regulatory environment in India is focused on open banking and making all QR code-supporting platforms interoperable. This interoperability enables customers to make payments across different FSPs, wallet players, and other platforms.

MDR 

Policy initiatives, such as the waiver of MDR charges for providing financial incentives to promote digital payments, show the government’s intent to further financial inclusion through digital pathways. This initiative was expected to make onboarding merchants easier for businesses and influence more customers to adopt digital payments. However, the zero MDR policy hurt the payments ecosystem as it threatened the survival of several payment gateway entities, hampered innovation efforts, and slowed down India’s expansion of the digital payments infrastructure. This is demonstrated by RuPay’s performance, even though it commands 60% of the Indian debit card market, its monthly average transaction volume was less than 50% as against other debit cards in FY 2021.

Banks now hesitate to invest in improving their technology stack to smoothen the flow of digital payments due to the lack of incentives. The MDR may discourage players in the payments ecosystem from promoting digital payments. Therefore, some reimbursement or reconsideration may be needed to prevent this.

Future opportunities

India’s payments ecosystem is in good health. With the boost that COVID-19 provided, it is poised for further growth. The following blog in this series examines the future and opportunities to further turbo-charge the growth of digital payments in the country.

Grievance redress mechanisms in welfare programs: A milestone yet to be achieved

Posted on by MSC

“Calling on the toll-free numbers does not help, as most of the time, the numbers do not work or the call disconnects. Visiting government offices is the only way for us to register grievances.”

– A National Pension Scheme beneficiary in India

“We have to visit the offices several times without knowing the point of contact or where to raise our grievances. We often return without getting any resolution, losing a day’s wage.”

– A PM-KISAN beneficiary from the state of Madhya Pradesh

Many Indian citizens receive social security from government-backed schemes—a term used in India for large-scale programs. The Government of India relies heavily on Direct Benefit Transfer (DBT) schemes to deliver the scheme benefits to people who need them most. Yet many beneficiaries across India’s far-flung corners face a barrage of challenges linked to unresolved grievances, which lead to their exclusion from the schemes altogether.

Why do beneficiaries of welfare schemes struggle with grievance resolution?

Like many government bodies, the Department of Administrative Reforms and Public Grievances established a process to resolve grievances at the central level. These methods to manage grievances are known as Grievance Redress Mechanisms (GRM) in South Asia. Yet its effective implementation falls short. MSC’s evaluation of many DBT schemes suggests that existing systems to resolve grievances are not robust enough to respond to the many challenges faced by beneficiaries.

Source: MSC’s evaluation study of PM-KISAN

This blog compiles data on the state of GRM from the study of DBT schemes alongside observations from corresponding field visits. We document challenges with the GRM systems and suggest ways to transform them into more beneficiary-centric mechanisms.

4-A: The pain points:

The “4-A pain points” framework elaborates on the major challenges the beneficiaries face to get their issues resolved:

Awareness:

Many beneficiaries remain in the dark regarding grievance registration and resolution. They are not informed of the dedicated portals, toll-free helpline numbers, or other channels of grievance resolution launched by the government. An assessment of DBT in Education in Uttar Pradesh, India, reports that 83% of respondents who did not complain about failure to receive benefits did not know of the concerned channel to resolve their grievances.

Accessibility:

For many DBT schemes, the government helpline numbers are inactive. The beneficiaries lose wages as they travel long distances and search frantically for the relevant authorities at the block (sub-district) or district offices. Many beneficiaries choose to forgo registering their grievance due to these accessibility issues. “The district office is more than 15 km away from my village. It becomes difficult to travel such long distances and register a complaint at the cost of my work,” says Murali, a farmer from Rajasthan, who missed his last two installments of the PM-KISAN scheme.

Availability:

Dedicated, beneficiary-centric GRM units to address the beneficiaries’ grievances are absent. “We lack designated offices close to our village that could solve our issues. We are told to visit the block office, but we are unaware of the point of contact,” notes a PM-KISAN beneficiary farmer from Chhattisgarh. When the beneficiaries approach the concerned officials, their issues remain unsolved. The officials are frequently swamped with other administrative priorities and fail to solve their problems or even provide guidance.

Accountability:

The current GRM for welfare schemes does not place accountability on the supply-side stakeholders. Most GRM systems used in DBT schemes lack a standardized operating procedure (SOP) to resolve grievances. Although the system has in place essential components, such as a standard turnaround time (TAT), escalation matrix, and feedback mechanism—beneficiaries fail to use these to their advantage. For example, the PM-KISAN guidelines mention a TAT of two weeks for the registered complaints. But our study suggests that many beneficiaries had unresolved complaints for months, even after they approached concerned authorities. They did not know about the TAT and their rights to escalate the problem.

How to tackle these pain points?

The following recommendations would help build responsive and beneficiary-centric GRM systems:

1. Below-the-line advertising: An important tool to spread information

Currently, communication campaigns for the DBT schemes focus on mass marketing strategies, such as hoarding and banners at prominent locations and advertisements in the electronic media, rather than through awareness-building at the individual level. Below-the-line advertising strategies, such as customized pamphlets and SMS in the regional language, could help in better penetration of the information at the individual level and improve the rate of grievance registration. The SMS that beneficiaries receive on benefit transfer can also include additional information on channels to register grievances and guidance on using them

2. Setting up local grievance resolution centers for improved accessibility and availability

One step is to use the nationwide network of 373,877 Common Service Centers (CSCs) as GRM centers. Our study suggests CSCs are the critical point of contact where digitally illiterate beneficiaries extract information on the status of their application or reasons for non-receipt of scheme benefits. These centers can be equipped and empowered to make specific basic edits to beneficiary records. For example, they could be empowered to update the Aadhaar details, contact number, and errors in application forms. However, providing access to beneficiary data to CSCs must not happen at the cost of privacy, and the SOP needs to specify this clearly. The vast CSC network can save beneficiaries the effort and time of visiting a government office with grievances. The 140,000 India Post branches could also be used for this.

We can also draw inspiration from the Rajasthan Government’s flagship “Prashasan gaon ke sang” campaign, under which camps are set up to provide local access to government services and resolve grievances in the remotest villages of the state. These camps give people access to 22 government departments for immediate identification and resolution of issues related to government schemes and services. The “e-mitra” kiosks are also present to facilitate any immediate online formalities related to the schemes. These camps serve as a one-stop destination for citizens who face issues of inaccessibility, digital illiteracy, and lack of information on resolving grievances. Such mobile GRM units can be replicated across states to offer an accessible and approachable mechanism of grievance redress for the G2P DBT schemes.

3. Revamping the grievance management portals and setting up accountability mechanisms

An SOP should be prepared to outline the processes to resolve grievances for these schemes clearly. It should contain clear guidelines on TAT for grievance resolution, the escalation matrix, and a feedback mechanism. The introduction of an escalation matrix would speed up the resolution process and inculcate a sense of accountability among the officials. This would also help the state GRM cell monitor the complaints regularly, ensuring a seamless process flow. The feedback mechanism will help understand the beneficiary experience and gauge their satisfaction level.

A Complaint Management System (illustrated above) should be introduced to make grievance redress transparent. This system is similar to the process flow of the Central Public Grievance Redress and Monitoring System (CPGRAMS)

A “State GRM Ranking” could be prepared based on regular audit and monitoring results. Such an initiative would encourage a spirit of competition among the states and ensure effective grievance resolution at their level. The best-performing ones could be incentivized, and training and learning sessions can be structured for laggard states.

The Government of India has recently announced its commitment to target 100% coverage of welfare schemes. The recommendations in the blog are ambitious. Yet if implemented, they could significantly improve the GRM system for DBT schemes in the country and thus speed up the maximum inclusion of beneficiaries.

Women at the heart of G2P initiatives: The Primary Education Stipends Program in Bangladesh

Posted on by MSC

“No one can withdraw money without my consent after I receive stipends directly in my account. The stipends also help me save for my child’s educational needs, as we would earlier spend any cash doles mostly on household expenses,” says Rabia, a beneficiary of Bangladesh’s Primary Education Stipends Program (PESP).

Nearly all women we spoke to in Bangladesh prefer digital transfers over cash. To them, digital transfers translate to more direct control over their stipends.

Substantial evidence shows digitized G2P programs improve access to financial products and services and enable their use while streamlining the delivery of social security benefits. Digitized G2P programs are associated with positive effects for both the programs’ governments and beneficiaries. However, experts often debate if it is better to deliver benefits to women in programs that target the household or children.

Impact evaluations of gender-centric conditional cash transfers have looked at drivers of gender outcomes, such as monetary control and bargaining power in household decisions. The Primary Education Stipends Program (PESP) in Bangladesh directs the benefit to women through mobile money. PESP intends to increase the enrolment, attendance, and retention of children in primary schools. The program distributes quarterly G2P benefit of USD 1.6 (BDT 150) per beneficiary with an upper limit of USD 5.23 (BDT 500) per family to the mothers of children enrolled under the program.

BMGF’s D3 (Digitize, Direct, and Design) framework highlights that digitized G2P programs directed at women have a more transformative impact on them. Such targeted programs can help them make better decisions, include them financially, and lead them to adopt digital behavior. This blog uses the D3 framework to review PESP’s impact in Bangladesh on gender empowerment and reviews findings from an assessment of PESP conducted by MicroSave Consulting (MSC) and the Centre for Global Development (CGD).

The digitization of PESP

Since 2013, the Government of Bangladesh (GoB) has made active progress in digitizing several social security net programs (SSNPs). With the rapid rise of mobile financial services, policymakers saw merit in distributing G2P benefits digitally to reduce costs and introduce transparency in program administration. In 2016, the PESP was shifted from cash to mobile money. This shift was crucial to ensure the financial inclusion of women, especially those from rural areas.

The digitization of PESP led many women (79%) to open mobile money accounts for the first time. In MSC’s assessment, 93% of mothers who experienced both cash and mobile money transfers reported a clear preference for digital stipends.

Mothers appreciated mobile money transfers for their convenience and low-cost access, and in cash-out. In contrast, with the cash disbursement system, they incurred high opportunity costs in travel and time needed to visit schools to collect the payment.

The digitization of PESP stipends also led to an increased usage of financial services. 46% of respondents mentioned using their mobile money accounts beyond PESP cash-outs. These women used their accounts for funds transfers (96%), savings (68%), and value-added services such as bill payments and mobile bill top-ups (17%).

Directing the benefits to women

Besides ease of access and convenience, mothers also preferred mobile money for better monetary control over the quarterly stipend benefits. A recent mandate from mobile money providers requires the beneficiary mothers’ national identity cards (NID) to be linked with their SIM. Before this requirement, several women did not own mobile phones and gave their husbands mobile numbers when they enrolled with PESP. In fact, a recent study by GSMA (2021) indicated that only 64% of women in the country have access to mobile internet as opposed to 84% of men. The mandate ensured that the stipend benefits reached the sole intended female beneficiary of the program and family members did not divert the funds into non-educational outcomes.

Evidence from the MSC-CGD assessment indicates a strong positive relationship between mothers who use their own mobile wallet accounts for PESP benefits and their economic decision-making agency. Several mothers use PESP stipends to buy school supplies (stationary and school uniforms) and private tuition after school hours. Digital stipends also help mothers save a portion of the payment for future education needs. The households of marginalized PESP beneficiaries are highly susceptible to income shocks. Therefore, the savings help prevent disruptions in primary education.

The disbursal of PESP benefits mandates the students to maintain a minimum grade and attendance. Hence, women push their children to study to receive the stipends. Such efforts also mean that mothers prioritize the quality of learning outcomes.

Directing the benefits to women has significantly increased their control over the stipends. 74% of respondents who received PESP mentioned that they have more control over digital stipends than cash disbursement. 92% of respondents who received PESP mentioned that they have more control over the stipends because no one can withdraw them without their consent.

However, since digital benefits are being transferred directly to women, many women express the need for more knowledge and skills to transact digitally. Anecdotal evidence suggests that as nascent mobile money users, women with feature phones need agent assistance and hesitate to navigate digital banking channels independently.

Designing the program to expand opportunities for women

Before 2019, school-level committees were formed to target mothers eligible for PESP. Other targeting mechanisms, such as categorical and means testing, were deployed with mandatory rural coverage of 60%. In 2020, policymakers in Bangladesh took yet another stride to introduce greater transparency and accountability in the program by universalizing PESP coverage. Through this step, policymakers intended to reduce the role of politics in beneficiary selection and expand geographical coverage to include several poor urban children.

The expansion of program coverage also amplified ripple effects on women’s economic and digital inclusion. PESP provided predictable income streams through the quarterly PESP stipends. The program was made shock-responsive during COVID-19. The stipends were increased from USD 1.05 (BDT 100) to USD 1.6 (BDT 150) per child, with a cap of USD 5.23 (BDT 500) per family. Two children from the same family receive USD 3.14 (BDT 300) each, three from the same family receive USD 4.18 (BDT 400) each, and four from the same family receive USD 5.23 (BDT 500 each).

Deciding stipend use and timing of cash-out helped women hone their financial decision-making skills. They started to increase their bargaining power in household decision-making related to savings, investments, and health. Despite 90% of women continuing to depend financially on their husbands, 73% of PESP women reported higher participation in several household decisions after their enrolment.

PESP has made a significant difference for low-income women. It has expanded financial inclusion, enhanced control over household decisions, and increased their agency over the stipends. The program has succeeded since digitization and incorporated gender centrality in its design.

In the future, program implementers must take measures to address exclusion errors and ensure timely communication with beneficiary mothers on evolving program conditionalities such as NID-SIM card linkage. The database of 13 million PESP beneficiaries can help policymakers target and enroll women effectively into other gender-centric social protection programs, such as livelihood generation and the provision of health insurance.

During a crisis, policymakers could also use the database to provide women immediate cash transfer benefits. Complementary linkages between gender-centric social protection programs can ensure a more meaningful and long-term impact on gender equity and quality of life for women—allowing them to take control of their financial life and beyond.

How do we envision digital payments beyond 2022?

Posted on by MSC

Twenty-seven-year-old Vaishali runs a kirana (grocery store) in Uttar Pradesh. She started using QR-code-based payments and started accepting UPI. Vaishali also began to take customer orders through WhatsApp during COVID-19. Before the pandemic, she had limited exposure to digital payments and used to collect cash and deposit it weekly in her bank account. Despite her initial reluctance, Vaishali embraced both contactless payments options. “They are faster and easier. Initially, I thought contactless payments were just a way to please my customers. Now I know how much they help me.”

Vaishali now also uses an app to run her business, manage her books, and track all payments and orders at the store. As a mature user of digital payments, she now believes it has helped her increase efficiency and improve her business. Vaishali’s story reflects the financial livelihoods of many of the 60 million-plus micro-merchants in India. FinTechs and rising innovation in the payments sector now cater to merchants like her through business management and financial services apps. These organizations and products have transformed the payments experience for many such small merchants in the country.

Data from India’s central bank, RBI, suggests that digital payments grew at a CAGR of 38% in volume in the past five years (FY 2017-18 to FY 2021-22), which indicates the high pace of digital transformation in India. Several factors contributed to the rise in innovative solutions in the country, such as the proliferation of digital-savvy customers with high internet usage, rising smartphone penetration, and the arrival of an enabling regulatory environment. These have led to enhanced convenience and transaction experience for consumers and businesses.

However, persistent barriers in the digital payment infrastructure impede the uptake of digital payments. These include low smartphone ownership—especially among female customers, complex user interfaces, and low internet penetration in rural areas. People like Vaishali encounter challenges with only a handful of acceptance devices and inadequate cash-in-cash-out (CICO) networks, which further hinder the growth of digital payments. See our second blog  for potential use cases in digitization and the untapped market for digital payments.

FinTechs have been approaching this market space with newer and creative models as they look into customer data, their behavior, and their perceptions. They have developed customized products for the mass market through machine learning, artificial intelligence, blockchain, and data analytics. These tools intend to provide a seamless experience to a large customer segment that has so far remained financially unserved or underserved.

As India becomes the fastest-growing FinTech market in the world, FinTechs and payment banks have continued to disrupt the space. Large players have emerged as key entrants, including WhatsApp, which provides payment options, and Amazon, which offers online payment and delivery options of goods and services in the neighborhood to support local store owners. Similarly, the launch of ONDC (Open Network for Digital Commerce) will digitize the e-commerce space and help small merchants expand their business further. ONDC is a community-led network that works to create an open, inclusive, and competitive marketplace.

The demand for digital payments will continue to rise and accommodate newer players in the market. Meanwhile, several payment solutions are expected to lead the adoption and usage of digital payments. These include:

  • Convenient, automated payments, which would allow customers to set up recurring payments for multiple bills, for investments, such as SIPs, and to automate other transactions. The industry currently has the capability and technology required to make frictionless payments seamless, with RBI considering the development of a sovereign digital currency in the country and mandating tokenization of cards—which currently apply only on credit cards.
  • Speed and ease through contactless payments, which are envisioned to be a key solution for people to make payments by 2020, with systems like “pay-and-go” under NFC. Contactless payments constituted 15% of the overall digital payment solutions and are expected to expand with wider acceptance of NFC-based infrastructure and NPCI extending UPI’s reach in the future. The recent introduction of UPI123Pay for India’s 400+ million feature phone users, the launch of wearables for making payments, and the linkage of credit cards with UPI are expected to expand the use of contactless payments further.
  •  Voice-based technology and offline payments have the potential to reach the oral segments, as well as remote areas with low internet penetration, which can lead to last-mile penetration of payments. Merchants who cannot embrace technology will find voice-based solutions easier to use and can start accepting digital payments from their customers. The
  • Increased transparency and personalization through analytics-based solutions, which will further enhance customer experience as users’ digital footprint deepens. Blockchain and AI/ML are expected to disrupt the payments space as they enter the markets. NPCI has already been gearing up to set up a blockchain platform, Vajra. Many FinTechs may also introduce solutions that would lead to customized products for the LMI segment based on their needs and data-driven information.

For merchants, these personalized solutions will provide additional value-added services, such as access to credit and sales dashboard analysis, leading to better business management and growth in the long run. Similarly, the launch of the Account Aggregator will expand data usage through a consent-based data sharing framework and improve access to financial services using analytics-based solutions.

The way ahead for financial service providers (FSPs) and regulators to encourage the sustained use of digital payments

FSPs need a better understanding of the needs, aspirations, perceptions, and behavior of customers. They need to know the barriers that hamper the customer journey of adoption. Several interventions can increase awareness and trust among people for digital payments and amplify usage among existing customers.

  • Develop anchor use-cases for customer segments: Providers should create need-based anchor use-cases to enable the adoption of digital payments by various sub-segments of the population, such as women, farmers, merchants, and urban poor segments. Without anchor use-cases, payment solutions will unlikely find acceptability and uptake among customer and merchant segments like Vaishali in the long run.
  • Conduct UI/UX testing of the product to ensure intuitive product design: Providers must create a positive experience for customers who have recently started experimenting with digital payments, to sustain their usage. Vaishali’s lack of intuitiveness and dependency on the regional language was a primary concern when she started using digital payments. Payment apps that offer regional languages can ensure a clear, engaging experience with digital payments for customers who struggle with English.
  • Develop offline solutions to conduct transactions in regions plagued by low connectivity: Unstable internet connectivity in the hinterlands makes digital payments difficult for users who live there. This creates an urgent need for providers to develop offline payment solutions where transactions can either be processed without a data connection or processed later once a data connection is available. While the launch of UPI123Pay is a step in the right direction, the product must crucially offer a simplified user flow for the target customers to use it.
  • Providers should deploy more PoS devices, such as smart PoS devices, BAP devices, and even Bharat QR codes, to improve the country’s acceptance infrastructure and build merchant capabilities. Devices like smart PoS can facilitate card payments and provide UPI transactions, pull-based transactions, and QR codes, among others, and use data analytics to offer payment-plus services, such as credit and insurance.

Despite the barriers, India’s evolving digital payments landscape suggests that the time is ripe for players in the ecosystem to work together and build secure and interoperable digital platforms ready for adoption by customers—especially ones from the LMI segments. FSPs should seize this opportunity and digitize the payments market, which will be worth USD 10 trillion by 2026.

Retail digital payments in India: A massive opportunity worth at least INR 45 billion (USD 608 million)

Posted on by MSC

In recent years, India has experienced rapid growth in retail digital payments. In FY 2021-22, transactions conducted digitally increased from ~55.5 billion in the previous year to ~74.2 billion, aided by Unified Payments Interface (UPI) and the Aadhaar-enabled Payment System (AePS). The adoption of these products, coupled with people’s apprehensions about handling cash during the COVID-19 pandemic has pandemic has led to the inclusion of several first-time digital payment users. As the danger of the pandemic dwindled, these trends however showed no signs of stopping, resulting in an upward curve. However, several challenges hamper the user experience for digital payments.

Challenges related to the ecosystem

  1. Infrastructure challenges

The overall wireless teledensity[1] in India was reported at ~83.3% as of June, 2022. Yet it is much lower in rural India at only ~58.2%. Among barriers that prevent customers from adopting digital payments include low smartphone ownership and inadequate availability of the internet, with only 16% of rural and 45% of urban customers reportedly using the internet to transact digitally. The lack of appropriate infrastructure also means that the merchant ecosystem in many areas does not offer customers opportunities to pay digitally, which compels them to continue depending on cash.

  1. Product design challenges

Several digital payment solutions struggle at the product design stage to create intuitive and convenient modifications that are specific for user segments. The interfaces of payments services often have multiple steps for registration while only a handful of services are available in regional languages. Moreover, most products that use UPI solutions require certain prerequisites that prevent customers from adopting the product—both during onboarding and while navigating the product. These include a need for the customer to own a smartphone, email address, and active debit cards, among others. However, in 2022, NPCI launched UPI123Pay, allowing feature phone users to use the UPI platform. The launch of UPI123Pay points toward the further adoption of digital transactions in the countryside, where most citizens still do not own smartphones. UPI123Pay will make UPI accessible to a section of society so far excluded from the digital payment landscape—400 million[2] feature phone users. Last year, NPCI also initiated a new process to improve the onboarding mechanism to UPI. Based on this recent change, customers can be easily onboarded to UPI through an Aadhaar card and OTP instead of a debit card, which currently remains a prerequisite for making a UPI ID. This will greatly facilitate onboarding customers who lack a debit card, especially many PMJDY beneficiaries who have a bank account but have not been issued a debit card. Such developments will bring a transformative shift within this decade across the country’s digital payments ecosystem.

  1. Segment-related challenges

Payment products are characterized by their generic approach, which fails to serve the needs of all customer segments. The products tend to require customers to have some familiarity with digital payments. This causes exclusion among vulnerable customer groups, such as women and the rural population, who are often characterized by comparatively low literacy rates and lack of exposure to technology. Women in rural India are often secondary users of mobile phones, late adopters of technology and the internet, and excluded from having official government IDs, and therefore remain unfamiliar with digital payments.

There is still a long way to go, as service providers need to address the above gaps and improve the overall digital payment experience for all customers. In India, 80% of total consumer transactions still take place in cash, which highlights the tremendous opportunity for payment service providers to digitize transactions.

Opportunities to digitize payments and their market potential

Figure 1: Opportunities to digitize critical payment use-cases in India

Based on the evolving customer behavior, we have used a 3X3 matrix[3] to analyze various transactions across several channels to assess their level of digitization. These channels include P2P, person-to-business (P2B), business-to-person (B2P), and person-to-government (P2G). This framework highlights the untapped market potential for each use case that offers service providers a chance to explore the ecosystem and make targeted interventions to boost the adoption of digital payments.

P2P use-cases (domestic remittances, rental housing payments):

Currently, P2P transactions comprise the most prevalent use-case in retail digital payments. These transactions range from splitting a dinner bill between friends, paying rent, monthly remittances, to paying for an auto-rickshaw ride. These transactions are being increasingly digitized through UPI or mobile wallets.

MSC estimates indicate that a market worth INR 900 billion (~USD 12.16 billion) can be potentially digitized by focusing solely on two promising use-cases that dominate the P2P channel—domestic remittances and house-rent:

  • Migrant workers comprise the biggest share of remittance service users in India, accounting for domestic remittances worth INR 700 billion (~USD 9.45 billion). While 60% of such transactions happen through informal and often risky modes, it offers service providers a window to digitize remittance transactions worth more than INR 400 billion (~USD 5.4 billion).
  • The booming rental housing market in the country tends to account for a large share of informal bill payments in India. Most house rental payments are paid in cash and some via bank transfers. The Economic Survey 2018-19 projects the urban population in India to rise to 600 million by 2031. Thus, a digital payment product that allows people to pay house rent offers a sizable opportunity for digitization.

P2B use-cases (e-commerce, micro merchant transactions, MFI loan repayments):

The P2B payments segment has been growing at a rate of 118% in the past five years and is set to grow up to USD 1.1 trillion by 2025. This could be achieved by improving the penetration of both offline and e-commerce merchants and increasing the propensity for cashless payments.

Today, many stakeholders, ranging from a street vendor to a supermarket, display a QR code at their sales counter. These trends can be replicated across other P2B use-cases. We highlight a few examples of online and offline merchant payments that offer a huge potential for financial service providers to digitize payments:

  • 17% of e-commerce transactions in India are still conducted using cash-on-delivery. This creates the opportunity to digitize transactions worth INR 494.2 billion (~USD 6.2 billion). While a few service providers already use digital modes to accept payments at the customers’ doorstep, such solutions have limited popularity in capturing the cash-on-delivery market and gaining the customer’s trust to transact digitally. Digitizing even a small share of these transactions presents a huge opportunity to drive digital payments.
  • Of the 63 million micro-merchants in the country, more than 90% deal exclusively in cash. Service providers have acquired around 10 million merchants, most of whom are in urban areas and do not fall into the category of micro-merchants. This has resulted in mainly rural merchants being left out of the reach of digital financial services, which presents a massive potential to digitize cash-based transactions worth INR 4.2 trillion (~USD 56 billion).
  • Microfinance institutions (MFIs) in India account for over 34 million clients with an outstanding loan portfolio of INR 965.6 billion (~USD 13 billion). More than 95% of these loan repayments are made in cash. This highlights a potential to digitize around 5.9 billion transactions annually, which can become anchor use-cases for female borrowers and further drive digital payments for women in India.

B2P use-cases (payments for agriculture and allied sector inputs):

The agriculture and allied sectors in India offer the second-largest use-case under B2P after salary disbursements. According to MSC’s estimates, these sectors account for more than INR 3 billion (~USD 40 million) worth of transactions, only 20% of which has been digitized so far. With such a vast volume of financial transactions taking place, digitizing even a small share of the agri and allied sector can increase the digital transaction volume significantly.

P2G use-cases (bill payments, ticketed transportation):

The P2G channel consists of payments against government services, bills, and taxes, among others. As per MSC analysis, such payments add up to INR 36 trillion (~USD 486 billion) transactions, of which more than 80% are currently conducted in cash. While the government has been making several efforts to create simpler and more convenient platforms to collect payments, these are yet to gain popularity with the masses. The two most significant use-cases in this category are utility bill payments and transport payments:

  • As per MSC’s estimates, recurring utilities make up 72 billion bills in India, out of which 70% are paid in cash. Owing to the COVID-19 pandemic and resultant lockdowns, Bharat Bill Payment System (BBPS) could consolidate most of India’s recurring bill payments industry under one payment system. However, several barriers such as lingering preference for cash, limited awareness of BBPS, and the perception of BBPS as a costly solution, hinder the potential of BBPS for massive adoption.
  • Indians make 88 million trips each day via public transport, while also using other means including auto-rickshaws and cycle-rickshaws, among other modes. Though the numbers might be skewed owing to travel restrictions brought about by COVID-19, it still holds a significant opportunity for stakeholders to digitize millions of ticketed transactions.

Way forward

We estimate, digitizing even a conservative 10% of the cash transactions above presents service providers with a massive opportunity worth more than INR 45 billion (~USD 608 million). Currently, digital payments are characterized by a one-size-fits-all approach, which needs to change. Our next blog in this series emphasizes solutions that can not only resolve some of these challenges but will also drive the next phase of digital payments.

[1] Number of telephone connections for every hundred individuals in a specified geography

[2] Times of India. “Explained: What is 123PAY and how you can use it to make UPI payments without internet connection.” timesofindia.indiatimes.com. March 9, 2022, Accessed June 22, 2022. https://timesofindia.indiatimes.com/gadgets-news/explained-what-is-123pay-and-how-you-can-use-it-to-make-upi-payments-without-internet-connection/articleshow/90090779.cms.

[3] Based on the Better Than Cash Alliance (BTCA) payments grid