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Be it paying bills, booking movie tickets, making reservations, shopping, lending, or borrowing - cashless payments have become the preferred choice for numerous consumers. The robust fintech ecosystem in India has led to the world becoming our oyster and at every step, digital transactions are helping us save both time and money.
Nearly a decade ago, India as a whole hesitated to even indulge in online/digital transactions finding cash-based transactions as the most trustworthy means of conducting business, money transfers, or general purchases. With e-banking prevalent for big business transactions in the early 2000s, the real digital wave hit us in 2016 with the advent of demonetization when the government banned the usage of Rs 500 and Rs 1000 currency notes after which there was no looking back.
Most countries saw a gradual rise of digital ways of payments, but with the right push from the Government, Central Bank, and technological advancements, India saw a meteoric rise in digital payments almost overnight in November 2016. This wave even hit the rural areas which were highly unorganized in such cases.
(Image Credits: Zee News)
Unifying Payments
In April 2016, the National Payments Corporation of India (NPCI) launched an instant real-time payment system to facilitate interbank transactions called UPI-Unified Payments Interface. This platform is regulated by the Reserve Bank of India and has made the transfer of funds between two bank accounts via a mobile platform easier.
UPI was a revolution in the Digital Payment ecosystem of India which, according to a PwC and Payment Council of India Report is likely to have a share of around 2.2 percent in the world’s digital payments market by 2023. UPI grew from $928 million in FY17 to $117 billion in FY 2019 in transaction value, it is likely to further grow to $117 billion by FY 2023 at a CAGR of 228 percent. In terms of volume, it is likely to scale from 5.35 billion in FY19 to 59.77 billion in FY23 at a CAGR of 287 percent. A similar trend was visible in transaction volumes for BBPS and NETC. For BBPS, the volume fell from 15.9 million in March to 12.7 million in April followed by a near V-shaped recovery to 17.6 million transactions in June. NETC volume was down from 110.1 million in February to 10.3 million in April but scaled to the 81.9 million mark in June 2020.
Ever since its launch, UPI has grown without a fall which is predicted to continue even during the pandemic. Launched before the demonetization took place, UPI essentially set the base for the digitalization of the payments system.
Giving it the AADHAR
Another step towards digitalization was giving every Indian a digital identity using full digital fingerprints and iris scans that can be easily authenticated. This gave a great foundation in banking the unbanked leading to financial inclusion of everyone.
Where UPI acted as a ‘Payments Rail’; easing transfer of funds, AADHAR acted as an ‘Identity Rail’; giving financial institutions a secure means to identify would-be customers -- and the government an easy way to make cash transfers to the beneficiaries of various government schemes.
While the government created systems to facilitate digital payments, it is the Indian fintech startups that deserve credit for making these payment methods popular. What began with Paytm and FreeCharge offering a digital wallet and an intuitive platform to pay bills has now transformed into a wide host of players in the space offering financial solutions digitally to both consumers and businesses.
The Kick-Start(ers)ups
Paytm, launched in 2010, began by offering just mobile and DTH recharges, its initial success enabled it to raise funding from marquee investment firms and expand the product offering to digital wallets, UPI payments, financial ledger maintenance, e-commerce platform, investment portal, etc.
True to its name, Freecharge started as a service to recharge or pay pending utility bills, but with time not only did it venture into couponing and e-commerce(Snapdeal Acquisition) but also added UPI to its app. Recently, Freecharge’s founder, Kunal Shah, also launched his new venture - CRED, to reward the creditworthy individuals, creating an advantage for the digital payment ecosystem.
PhonePe, another similar platform, launched in August 2016 also provides services like send and receive money, recharge mobile, DTH, data cards, make utility payments, pay at shops.
Among other prominent digital payment products in the country are Bharat QR and BHIM QR, which has gained significant traction in the Indian market, along with the Bharat Bill Payment System (BBPS) which has shown CAGR growth of 1,590% in terms of volume. This growth trend was also shown by Aadhaar Enabled Payment System (AePS).
Another trend that took off during digitization was that of the adoption of online financial ledgers. Launched in 2017, OkCredit was the first bookkeeping app in India. It brought ease in maintaining records of small businesses and raised around $84 Million within 20 months of its launch.
But what actually made it to the top was Khatabook, launched in December 2018, it revolutionized the way Kirana Shops and small businesses managed their borrowings and loans. Providing an extremely user-friendly interface, Khatabook indeed made business easy as it states in its tagline.
It is now the leader in the space and has 2-3 times more users than peers Paytm Business and OkCredit — which incidentally are better funded. The startup recently raised $60 million in a Series B funding round from investors led by Facebook co-founder Eduardo Saverin’s venture firm B Capital, taking its total funding to $80 million. Other big names associated with the ledger app are Sequoia India, Tencent, and partners of DST Global. Former Indian cricket team skipper Mahendra Singh Dhoni too has been reported to have invested an undisclosed amount in the young company. The Advertisement Campaign during the ongoing IPL Season by the former skipper is also very effective in helping the startup penetrate into the smallest of rural areas in India helping organize the unorganized sector.
Khatabook has been downloaded more than 41 million times, 3.88 monthly active users, and has recorded 21 million downloads in the first 10 months of this year. The PCI-PwC Report released added that the Indian digital payments space will undergo consolidation, as players look to generate additional revenue for up-selling and cross-selling products. The same was seen as OkCredit started looking to associate with other big names to sustain themselves. They also contacted the leading player in this market, Khatabook who offered $100 Million for the deal but it didn’t take place.
The Future
In June this year, the Reserve Bank of India (RBI) estimated that digital transactions are set to rise four times by 2021. The Central Bank’s Report revealed the total digital transactions in volume terms recorded a growth rate of 58.8% during 2018-19, on top of a growth of 50.4% during 2017-18.
UPI has registered 2.07 billion transactions worth Rs 3,86,106 crore in October, data released by NPCI shows. In comparison with September, this is a 15% and 17.3% surge in volume and value, respectively. On November 5, NPCI also placed a 30% cap on UPI transactions from third-party payment apps to avoid the monopoly of a few players in the digital payments landscape.
This transition is soon going to deeply imbibe itself in every sector in India, making it a cash-lite economy. Efforts are being made to reduce the bottlenecks in this industry, like the inefficiencies related to KYC and cybersecurity trends. Certain restrictions to innovation also come with government policies like Zero MDR in UPI transactions which will lead to loss of revenue for banks as well as digital payment players competing heavily to penetrate a customer base by offering incentives to users.
Seeing the world grow with innovative, useful, and convenient technology during this pandemic, the Digital Payments’ Sector is already geared up to mold into the current trends by providing security and convenience to people. As the future is concerned, the next generation is set to witness multiple developments and innovations in the digital payments sector.
Khyati Dahiya is a second-year undergraduate student pursuing B.A.(Hons.) Economics at Hansraj College, University of Delhi. She is an avid reader and is currently heading the Media and Communications Department of the Strategy Consulting Society at her college.