India has the world’s second largest population behind China, and until recently its payments infrastructure has lagged far behind the rest of the developed world. But it’s catching up fast, with significant digital payments activity over the last five years. With 1.3 billion people who are mostly unbanked in an economy where 85% to 95% of all transactions are still conducted in cash, few other markets have such an opportunity to modernize payments.
Key initiatives by India’s government and its central bank have significantly accelerated mobile payments development. One catalyst was 2016's demonetization, which recalled small-value cash bills and put a spotlight on nascent mobile payments services. The temporary cash drought triggered higher mobile payments usage and venture capital flowing into what could become one of the world’s top mobile payments within a few years.
What follows is a snapshot of that potential.
Electronic payments transaction volume as a whole is low in India. Currently there are between 50 and 60 million merchants in India, and more than 90% of them accept only cash, with lower rates in rural areas. Visa, Mastercard and India’s domestic payments brand RuPay are the only general-purpose card networks, with sparse penetration. For example, there are 820 million debit cards issued in India, and only about 40% are active, according to Eric Grover, a principal with Intrepid Ventures.
The transactions from emerging mobile phone-based payment services tend to be small. The average transaction for a mobile phone top-up is about $1, retail purchases rarely exceed $3 and the average domestic remittance is for about $50, according to MoneyOnMobile, which has reached 350,000 retailers in India since launching in 2010.
But as more mobile payment services get traction in India and gain momentum, transaction values and overall volume are expected to increase significantly, according to a forecast by the Associated Chamber of Commerce & Industry of India.
India’s fintech adoption rate already ranks higher than most developed countries, but its current growth puts it on track to have the highest ratio of fintech usage in the future, according to a survey last year by EY. In online interviews with 20,000 digitally active consumers around the world, EY measured the present and future usage of fintech products and services in 20 developed markets.
It’s not surprising that China ranks first in the world in fintech adoption. The rapid growth of digital services that blend communications and finance, such as Ant Financial’s Alipay and Tencent’s WeChat Pay, have made rapid inroads for person-to-person, online and in-store payments. India’s adoption rate reflects strong growth from a vast, mostly unbanked base.
The biggest growth in India’s mobile payments sector is coming from mobile wallet providers, some of which have been in the market for years. Paytm, launched in 2010, is growing fast and backed by China’s Alibaba and other investors. ItzCash launched in 2006 with a prepaid card-linked solution, followed in 2009 by MobiKwik, which has recently seen significant growth.
Hike is a new mobile wallet concept launched in 2017, built on a popular messaging app that uses Unified Payments Interface (UPI), a payment scheme supporting bank-to-bank account transfers.
Facebook and Google also have moved into India with UPI-based mobile payment systems.
Paytm was primarily a mobile phone top-up service when it launched eight years ago, and has since expanded its capabilities to support payments with 3 million merchants. It’s now India’s largest digital wallet by users, with founder and CEO Vijay Shekhar Sharma vowing to grow to 500 million users by 2020. That goal, announced more than a year ago, seems more feasible now that Paytm is 49% owned by an arm of China’s Alibaba Group and Ant Financial. Paytm expanded to Canada last year.
The demonetization in late 2016 was a boon for Paytm, and it maintained steady growth in the following year with strong marketing and interoperability with UPI.
The National Payments Corp. of India (NPCI) is a nonprofit payments agency that operates as a government arm. In April of 2016 NPCI encouraged banks to create their own UPI apps to support account-to-account payments via mobile phones. The platform aims to drive interoperability for bank and retail payments, supporting instant payments via mobile phones for person-to-person transfers, bill payments and online and in-store purchases.
India’s NPCI operates its own mobile UPI app called Bharat Interface for Money (BHIM), which launched in December 2016, enabling users to send or receive money directly from other UPI-based accounts and to non-UPI accounts by scanning a QR code. Users may create a QR code for a specific amount to make purchases from individuals or merchants with a UPI account.
UPI transaction volume is growing more than 10% each month in India, and it’s the backbone of several of the newest available mobile wallets. Facebook’s WhatsApp supports a UPI-based mobile wallet in India, and Google last year launched a wallet called Tez leveraging UPI. Though still in its early stages, Tez drew 12 million users in the first 10 weeks after its launch, Google said late last year.
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