A Glimpse At What India’s Digital Payments Sector May Look Like In The Not-Too-Distant Future

Smahi Foundation has recently published a detailed report on Digital Payments in India.

Digital payments is an exciting space changing the way business is conducted in India, bringing in greater formalization, compliance and financialization. The report brings out the tremendous growth experienced in this regard especially after the Jan Dhan Accounts were opened and the JAM trinity came into play.

The report notes that India has built an expansive, secure, efficient and scalable public digital infrastructure and the entry of well-funded and aggressive technology-first companies (erstwhile dominated by Banks).

This has made digital payments ubiquitous in India and laid a strong foundation for digitization and cross-selling of other financial services and products.

The authors suggest that select regulatory unlocks can further incentivize innovation among fin-tech players driving accelerated digitization of financial services and helping greater financial inclusion.

Future Trends In Payments

• The authors mention a pilot scheme on offline retail payments through cards, wallets and mobile devices (for example, USSD) to tackle the challenge of poor internet connectivity, and expect to see them grow in the future like UPI
  
• They also expect a boost to contactless payments with the RBI increasing the limit to Rs 5,000. They mention the mass market use case of contactless payments in the digitization of transit systems - metro, buses, trains etc.
  
• The authors also predict a wave of mass digitization of small businesses which will not only boost retail consumption but also increase transparency in bookkeeping, paving way for better credit access for the MSMEs. The report notes that FinTech players are already targeting the small traders and the Tier 2 and Tier 3 cities.
  
• The report also notes that digitization can help bridge the large financing gap within MSME as well as individuals, where the credit penetration in India is below 15 per cent. The authors note that Open Banking with Open Credit Enablement Network (OCEN) and Account Aggregator framework along with the proposed Public Credit Registry (PCR) would help plug the information gaps and give a fillip to lending to MSMEs.
  
• The report lists government initiatives such as GSTN, Udyog Aadhar formalization (UAM), Trade Receivables Discounting System (TReDS), Project Kashi (direct benefit transfer-based digital lending service of small-ticket loans to farmers, labourers and other low-income families) and KYC Setu (integrated KYC sharing protocol) as aiding in faster digitization and formalization in India.
  
• The authors also note that Super-apps - a platform developed by a company offering various services under one umbrella - could prove to be a major disruption. Examples listed include SBI YONO, Paytm, MyJio, etc.
  
• The reports says that Buy Now Pay Later also has a huge potential in consumer credit in India, due to its ease of transaction.
  
• The authors also note the attempts for internationalisation of UPI and Aadhaar. NPCI is attempting to take its products UPI and RuPay card global and assist other countries in establishing a ‘real time payment system’ or a ‘domestic card scheme’ through its subsidiary NPCI International Payments Limited (NIPL).
  
• Apart from these, the authors expect the Public Credit Registry (PCR); AtmaNirbhar App Store; India’s sovereign digital currency; and the Blockchain technology to change the landscape of digital payments in India.

Recommendations

The Smahi Foundation report makes the following recommendations to further drive the adoption of digital payments and realize greater value and true potential of this space:

• Restoration of Merchant Discount Rate (MDR) on transactions via UPI / RuPay
  
• Regulation of online predatory loan apps / digital lending
  
• Further strengthening the Account Aggregation framework
  
• Balancing cybersecurity needs and customer experience for online commerce
  
• Ease of KYC compliance for banks and NBFCs
  
• Increased focus on digital literacy
  
• Common, interoperable digital platforms

The report holds that India’s digitization journey has just begun; and financial inclusion is just the first step towards a highly financialized society.