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

How have low-income communities embraced digital payments in India?

Posted on by MSC

Rajas, a 40-year-old widow, started a grocery shop in Bhiwani in the state of Haryana to earn a regular income after her husband—the sole breadwinner of the family—died five years ago. Her shop caters to 20-30 customers per day with an average daily sale of INR 3,000 (~USD 41). Although most of her customers preferred to pay through cash, her children suggested that she accept digital payments as well since many of her customers find it more convenient.

While Rajas had a smartphone and was fairly comfortable using it, she knew that not many customers had smartphones in her area. She asked her bank about the possibility of accepting digital payments without smartphones and learned about BHIM Aadhaar Pay (BAP). Subsequently, the bank put her in touch with a third-party provider, which onboarded her onto the platform and installed a BAP device in 2019. Since payments through BAP only require Aadhaar and biometrics, it quickly became a convenient payment mode for Rajas and her customers.

Despite being new to this payment mode, Rajas could conduct transactions through BAP and even encouraged her customers to pay through this mode. The COVID-19 pandemic further propelled the adoption of digital payment modes. Many customers turned to their friendly neighborhood Kirana shops to stock up on daily provisions and preferred to transact using digital modes rather than cash. Beneficiaries of government cash transfer programs, migrants, daily wagers, and other informal sector workers are some of the major user segments of BAP that continued to keep the transaction rates high during the pandemic. Small and emerging merchants like Rajas are among millions of micro-merchants who fueled the digital payments growth as they continued to transact digitally post the lockdown.

Just like Rajas, the pandemic changed the way of life for Manak in Chhattisgarh—about 1,300 km away from Haryana.

Manak is a 35-year-old technician at a power plant in Durg, Chhattisgarh. Despite receiving his salary directly in his bank account, he used to transact in cash. Due to pandemic-induced restrictions it became difficult for Manak to visit ATMs frequently to withdraw cash. He had very little cash in hand and was unable to buy even the bare essentials for his young family. His friends suggested using a mobile wallet on his smartphone, but he was not comfortable making digital payments as he had never used it before.

Today Manak is an advanced user of digital payments, even though he first started using it during the lockdown. Manak’s friends helped him immensely to switch from cash to digital payments. They transferred some money into his account and explained how to use digital payments. Manak began watching videos online to understand how to use mobile wallets and eventually UPI.

Manak is among the 80 million people who adopted digital payments during the pandemic. Restricted mobility and the fear of contracting the virus pushed many like Manak to start using digital payments for the first time.

The growth of digital payments since the pandemic

The changes in the payments landscape induced by the pandemic have altered the outlook of several customer segments. With limited access to ATMs and long queues outside bank branches, COVID-19 brought many first-time users like Manak into the fold of digital payments, and further, onto the path of financial inclusion. Digital payments growth continues to observe an upward trend even though the pandemic continues to subside.  The usage of UPI and QR codes has attracted nearly 150 million users since its inception and became the most common mode for P2P and P2M payments. Transactions made to merchants account for 19% of UPI transactions and have grown in transaction volume by 20% during Q2 2022 as compared to the previous quarter.

Source: National Payments Corporation of India—UPI and BAP Product Statistics

While UPI and QR codes emerged as the frontrunner, BAP also gained popularity in rural areas and semi-urban areas. The usage of BAP soared high as many merchants like Rajas adopted it in rural areas. The average transaction value for BAP increased to INR 2,681 (~USD 33.62) in FY 2021-22 from INR 398 (~USD 5.38) in FY 2017-18 and continues to grow. More than 2.3 million BAP devices have been deployed across the country. As with UPI and BAP, other digital modes, such as BBPS and AePS have also gained significant pandemic-driven usage. AePS transactions grew by 88% over the past financial years from 2018-20. Largely these payments were made by LMI customers who typically lack conducive infrastructure and require handholding support to conduct digital payments. 

The growth is also a direct result of the relief funds disbursed by the government to support citizens during the pandemic. These payments were largely made to vulnerable rural and semi-urban households. Although the growth of payments through cards as a category decreased by 25%, the market share of RuPay in total debit cards issued increased.

COVID-19 boosts digital payments uptake but usage of cash persists

Source: RBI – Money supply data   

Despite the growth in digital payments in 2022 we observed that cash and digital payments continued to coexist and grow throughout the year, as consumers sought both the contactless safety of digital payments and the convenience of cash. While the value of non-cash payments in India has increased steadily since 2007, cash transactions still dwarf the alternatives. Most customers are oblivious to the fact that cash handling incurs several tangible and intangible costs, such as waiting time, transaction charges, cost of transit, and the effort involved to access cash, among others.

Way forward to improve the adoption of digital payments

The pandemic has created a positive impact on the attitudes of both merchants and their customers to digital payments. Customers like Manak are now keen to use digital modes owing to the convenience and abundance of options available. Meanwhile, merchants like Rajas are ready to explore and adopt other modes of digital payments to offer ease and convenience to their customers.

Today, India is one of the leading countries in the world when it comes to the adoption of digital payments. Digital payments adoption has grown multifold from meager 8% penetration around a decade ago. It is all set to grow to 58% by 2025.  Financial service providers (FSPs), government, and infrastructure providers have made concerted efforts to increase usage across all user groups. However, despite the tremendous potential to digitize the existing cash-based transactions in the country, we are still a long way from the ubiquitous use of digital payments. In our next blog , we unpack this huge untapped opportunity for FSPs to digitize payments in India and also highlight a few challenges that need to be resolved to tap the opportunities available.

 

How digital payments drive financial inclusion in India: Abridged report

Posted on by MSC

India’s digital payments story is akin to none. Several factors have transformed India’s payments ecosystem. These include 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. Besides, the increased adoption of smartphones, greater access to the internet, and people’s growing comfort with using technology and their improved financial capabilities have also aided this growth.

This report is an abridged version of the detailed whitepaper, “How digital payments drive financial inclusion in India.” It charts the evolution of digital payments in India and looks at the different barriers and triggers for providers and users in the ecosystem. It focuses on how various stakeholders can work together to empower users and drive the adoption of digital payments among the LMI segments. 

The last-mile reach: Postal banks across the globe that serve the rural and the remote

Posted on by MSC

In our previous blog, we focused on the Target segment-Technology-People-Process (2T2P) approach that postal banks can use to enhance their offerings to low and moderate-income customers. With the changing financial inclusion landscape, it becomes essential for postal banks to meet the needs of their customers. Our framework highlights major areas a postal bank can focus on to keep up with the changing financial services landscape.

In the following section, we focus on some successful practices that postal banks have followed across different countries under the 2T2P approach and the impact of these developments on customers, such as Ramesh, Ali, Dizola, and others worldwide.

1. Target segments: Postal banks that cater to the changing needs of the customers

Customer segmentation and profiling focusing on different use cases can be critical for postal banks as they serve a large set of customers through their network. Customized products for different customer segments based on their financial behavior will be vital to improving customer experience.

Some postal banks, including Al-Barid Bank in Morocco and Tunisian Post in Tunisia, have been leading the way and targeting a specific set of customers through their network:

  • Focus on low-and-moderate-income groups:

In some countries, post offices receive banking licenses to offer limited products and services. This allows them to compete with regular banks or supplement them for specific customer segments. In 2010, a subsidiary of Morocco’s post office received a limited banking license, and it floated Al-Barid Bank to serve low-income consumers. Since its inception, Al-Barid Bank has opened 400,000 to 500,000 bank accounts every year and improved access to banking for those in remote areas of the country. Similarly, Egypt Post has supported customers like Ali through their banking services.

  • Improving customer stickiness to the platform:

The Tunisian postal bank, La Poste Tunisienne’s mobile banking services for virtual accounts increased retention among young customers, who usually switch to other banks once they start earning. Once La Poste Tunisienne extended mobile payment services to virtual accounts and started offering additional benefits, it became popular among young customers. Adem, an engineer from Ariana, opened his account at La Poste Tunisienne in 2019 and uses the platform digitally to make mobile payments due to the ease of performing transactions.

Tunisian Post has also been focusing on advanced use cases and is exploring this through big data and blockchain to expand the reach of digital financial services. Recently, it launched a new payment infrastructure with the Swiss tech platform, Monetas. The new digital payment infrastructure enables e-Dinar users to make instant, secure peer-to-peer mobile transfers, pay online and offline merchants, pay their utility bills, send remittances, and manage official government identification documents. Tunisian Post now seeks new use cases to expand digital financial services to its customers.

These postal banks are exploring newer use cases and keeping stickiness at the forefront for their loyal customer base. With this strategic focus, they have to potential to expand digital financial services to the unserved and underserved.

2. Technology: Unique scalable solutions using emerging tech

Postal digital transformation is difficult to achieve by simply layering technology over legacy systems. It requires building a modular tech infrastructure and an easy-to-use interface that target segments whom we met in the first blog – like Ramesh, Ali, and Dizola finds intuitive and convenient. Several postal banks have been implementing innovative solutions at the front end to provide a better user experience and at the back end to build scalable infrastructure.

  • SmartCard solution introduced by NamPost Savings Bank in Namibia:

Namibia post offers banking services to its customers through its “SmartCard.” Whenever customers open their account with NamPost Savings Bank, the financial services arm of Namibia’s post, they get a smart card. The biometric card helps customers withdraw money in post offices and ATMs, transfer money to an account or another card, and pay in retail shops across countries via Point of Sale devices.

  • Partnership with mobile operator networks (MNOs) to improve technological capabilities:

Tunisia Post partnered with three major MNOs in the country, Tunisie Telecom, Ooredoo, and Orange, to offer mobile postal financial services. This allowed customers to transact conveniently from anywhere in the country. The partnership had a significant impact on improving financial inclusion among last-mile customers.

  • Partnership to digitize traditional financial products:

Benin Post partnered with the FinTech e-Savings club to digitize and formalize rotating savings and credit associations (ROSCAs). The postal agents collected monthly savings from customers at the convenience of their doorsteps. Further, they were also responsible for sending timely reminders to reduce the delinquency rate among customers. Once the amount collected is deposited in the post office, the customers receive a confirmation message.

The digital revolution has allowed these postal banks to use emerging technology, build innovative solutions, and provide different financial products through FinTech partners. The introduction of customized financial services through the network of postal banks can potentially disrupt and scale them—and extend their reach to the last mile.

3. Process: Building efficient processes and operational models to deliver relevant products to specific segments

Service providers can offer several services at low cost through digital and non-digital channels, thanks to the expanding internet and smartphone user base across the markets. Postal banks can build “phygital” models and processes, that combine technology with human assistance, to deliver efficiently to their target segments.

  • An agile approach to adopt innovations in the market and serve customers adequately:

Elta Hellenic Post, commonly known as ELTA, is Greece’s national postal service. Doorstep delivery of social security payments through bank checks was one of ELTA’s essential tasks, besides other postal services. However, when a law was introduced to outlaw the physical delivery of G2P payments during the COVID pandemic, ELTA was quick enough to respond to this change. ELTA introduced giro accounts to serve beneficiaries. Beneficiaries approach the postal delivery staff to open giro accounts to access their social security payments at home. This helped ELTA retain its customer base and adopt a robust system to deliver no-contact payments.

  • Co-branding approach and effective processes to deliver financial products:

In the UK, many private-sector banks have partnered with postal banks to offer co-branded basic financial products, such as customer savings accounts and current accounts for merchants. The partnership also enables banking agents to use post offices as a physical touchpoint to help customers conduct transactions, such as deposits and withdrawals. Several banks in high-income countries show similar trends to maintain their presence in rural areas. In Spain, Slovenia, and the Czech Republic, post office employees execute customer transactions on behalf of several private sector banks. In effect, these post offices act as agents for banks.

4. People: Capacity-building of the agent network and staff within the organization

Traditionally, the role of a postal agent is limited to mail delivery services, and they are not well acquainted with digital interfaces. The transition from being a mail carrier to financial inclusion enabler requires training. Further, postal banks also need strategic leadership at the top to drive innovation in service and processes to maintain a sustainable business model over time.

  • Training and capacity building through creative tutorials:

India Post Payments Bank introduced creative video modules for its network of 189,000 agents. These modules are constantly updated and available in regional languages across India for postal bank agents to understand the content without any challenges. This includes engaging comic strips that have generated higher awareness among agents of IPPB to serve customers effectively.

  • Leadership from both banking and startup experience can help drive innovation and growth:

Some post offices focus on building a solid leadership team to drive innovation. The leadership of Anas Alami, former Director General of Poste Maroc, laid the foundation of financial inclusion for the Morocco Postal Bank. The in-house experts’ knowledge base helped the bank minimize expenditure on hiring external consultants. Further, the experience of the senior management team comprising different age groups and diverse backgrounds helped Morocco Postal Bank to make well-informed strategic decisions.

The future is now, and postal banks can use their competitive advantage to make the most of the opportunity

Several postal banks, such as those in Japan, India, and Morocco, have adapted to their country’s cultural nuances, customer needs, and technological developments. Most importantly, they use the postal networks’ widespread presence to provide financial services, specifically in pockets that lack traditional banking outlets for customers, such as Dizola and Ramesh.

Postal banking played a crucial role in increasing financial inclusion globally and was a game changer during COVID-19 for beneficiaries like Ali receiving social security payments. They enabled multiple use cases across P2P and G2P payments during those difficult times. Thus, if postal banks can build their model around local requirements, they are here to stay, sustain, and thrive.

How digital payments drive financial inclusion in India

Posted on by MSC

India has been at the forefront of transforming the global digital payment landscape. The past five years have seen a massive transformation. While UPI has hit record high numbers, AePS has transformed how beneficiaries access subsidies. Merchants now conduct digital B2B payments, while FinTechs continue to evolve unique solutions to disrupt the space. 

This whitepaper has been developed in partnership with the National Payments Corporation of India to showcase how digital payments continue to drive financial inclusion in India. The whitepaper shares insights on the evolution of digital payments in India and looks at the different barriers and triggers in the current state of play for providers and users in the ecosystem. It focuses on how various stakeholders can work together to empower users and drive the adoption of digital payments among the LMI segments. 

This paper was launched at the Global Fintech Fest in Mumbai, India on 20th September, 2022.

Customer-centric and responsible digital credit solutions for urban and rural non-farm entrepreneurs and smallholder farmers

Posted on by MSC

MSC conducted a deep-dive analysis of the digital credit users in India, Indonesia, and Kenya to assess the impact of digital credit on their financial health. The analysis presents the insights from the assessment and recommends actionable interventions at the level of providers, regulators, and policymakers to enhance the financial health of digital credit users.

This report was launched at the Global Fintech Fest in Mumbai, India on 21st September, 2022.