The coronavirus pandemic has brought about a permanent shift in the way consumers approach digital payments. The contactless nature of the digital modes — enabled by innovative technologies and regulatory flexibility — has given millions of Indians a choice to practice social distancing while making payments.
Many of these new payment behaviours could well be irreversible. In an hour-long panel, moderated by Mihir Gandhi from PwC, industry captains deliberate on trends that are driving the burgeoning sector at The Economic Times–Back to Business Dialogues–The Future of Digital Banking and Payments in a Post-pandemic World.
Consumer Behaviour
Mihir Gandhi, Leader, Payments Transformation, PwC
Five years ago, the percentage of digital transactions as a share of retail payments was less than 10%. Now, it has grown to 25% due to the efforts of the government, regulators, technology enablers and marketplaces. They say, the first 15% is the toughest to achieve, following which the network effort kicks in. On this note, I want to ask Praveena Rai from NPCI about the consumer behaviour trends that we have seen over the pandemic and how do you see them playing out in future.
Praveena Rai, COO, NPCI
We have broadly seen three trends, one of which is obvious — the adoption of digital by small merchants, led by critical goods such as food and groceries. They are moving towards offering something we call ‘phygital.’ Taking orders through, say WhatsApp, SMS or calls and then delivering at the doorstep while accepting payments remotely.
This is a critical trend and innovation. At this point… growth is far more prominent on ecommerce — even more than pre-pandemic and during the first phase of the lockdown. The conversion of cash on delivery to DoD is interesting. CoD was an animal we were trying to tame, and it seems that its day has finally come. And, of course, contactless, or rather touchless card payments. These are the three trends.
TR Ramachandran, Group Country Head, India and South Asia, Visa
My observations are not dissimilar to Praveena’s. I just want to point out a couple of things. We are seeing a massive surge in new debit card customers entering the payments ecosystem for the first time. They were using ATM cards earlier, but now they are getting comfortable making card payments, both online and offline. Ecommerce trends have been salient, too. Some of the biggest categories include insurance premiums, along with pharma and medical goods.
Food and grocery as a category are big, too. We are also seeing ‘online to offline’ or ‘O2O’ which is an interesting hybrid between online and offline. Another significant trend is the entry of small businesses into digital payments. Over a million small merchants have entered this space over the last year.
This brings me to my last point. It is on the notion of cyber security, data privacy and online frauds. We have to be responsible about this…customers as well as merchants. It is a very lethal combination for fraudsters to insert themselves for phishing and vishing attacks.
I think if we look strategically, digital payments should be secure while having the convenience of cash — this is the gold standard we are all vying for. It shouldn’t be one step forward and two steps back once the external stimuli go away. Debit card trends are across the country, and especially encouraging in tier-5 and semi-urban geographies. There are tailwinds.
Ravindra Pandey, Chief Digital Officer, State Bank of India
Consumer behaviour towards digital is here to stay even after the pandemic. There is no doubt. Empirically, that has happened for leisure, travel and high-end spend segments. After May, it has started for several retail spend categories as well. The card spends in September on point-of-sale terminals at shops are about 60-70% of January levels. This means that people are using digital payments in physical modes — such as shopping or cash on delivery.
UPI is an online story. The number is increasing on the P2P segment. However, one sector that has been hit the most is travel and hospitality. As far as banks are concerned, we are separating growth between need-based and non-discretionary payments on channels. Another trend is that the digital propensity for credit in the remotest corners of the country is increasing.
Sameer Nigam,CEO, PhonePe
On the UPI, we are processing 11-12 million QR-based transactions, largely on P2P2M segments. We are looking at the recovery in payments since the lockdown as an ‘upward tick mark’. Our offline presence through kirana (corner store) networks have now expanded to around 500 and 600 cities across the country.
Wherever lockdown was lifted, the transactions in those cities have also surged. There has been increased adoption of cards such as Visa, Mastercard and Rupay. There is also adoption in online payments, led by UPI in the heartland districts. While malls and lounges have been shut, the kiranas are open. When the dust settles, the network effects will kick in.
Digitising Transit Payments
Gandhi
Contactless payments should definitely be accepted at all metros across the country and should be interoperable. Unfortunately, this is not happening. What are your views?
Nigam
I feel India is missing out on this, the consumer adoption of contactless payment in the transit and transportation sector. When the market recovers, it would be amazing if we could figure out a way to do queue busting. When I was young, I remember the queues to get a ticket or monthly pass on the Mumbai Western Line. We have to find a way for every consumer to pay digitally everyday up and down and make the habit irreversible.
On the merchant side, the behaviour trends are permanent. It’s here to stay. The biggest opportunity for digital payments in a post-Covid-19 world is transit, and contactless will have a big role here. In general, I’m cynical about any government programme. I think private-public collaboration works well. But, for long-lasting change, the industry needs to rally.
When we say one card to be adopted by everyone and all the metros, the government can fix the supply-side. They can ask metros to accept a card. This is harder for private players. But, on the consumer side, for experience, the private sector does a better job. The private sector has a better chance to provide customers that experience.
Rai
I’m very excited about offline payments and queue busting. In the newspapers you see long queues of people trying to reach from point A to point B. This can be solved using QR and offline payments. The key is contactless payments without two-factor authentications.
Ramachandran
Transit is a use-case we together have to solve, as it is a cash displacement opportunity and real customer pain point. We have worked on over 500 projects across the world in iconic cities and metros such as the London Tube, Bucharest and Turin transit systems. The behaviour shift it instantly brings is truly remarkable. Currently, there are more than 40 live transit projects with various stakeholders and about 13 live metro projects. 
Regulatory Impetus
Gandhi
The Reserve Bank of India has been very active in facilitating digital transformation for the industry, while maintaining safety. The nuances in policies have helped to increase adoption and usage. Specific regulatory initiatives include offline payments pilot, reducing limits on contactless cards by lowering the limit and setting up a customer grievance portal.
Rai
I’m more excited about what is happening at the two edges of payments. The video-KYC and the online dispute resolution in process will be a game-changer. If customers can quickly get issues resolved, then that confidence will quickly result in digital adoption.
Ramachandran
I’m keen on how RBI’s regulatory sandbox plays out. We are also working with some participants. It’s a progressive move and is a step that was adopted by the Malaysian and Singapore regulators as well. The other development which is exciting is the Payment Infrastructure Development Fund.
There is recognition that India is punching below its weight in terms of acceptance infrastructure. The regulator has come up with a target — 30 million digital acceptance including QR in the next three years. It is the first instance, I think, globally where a regulator has put money in such a corpus (Rs 250 crore of the Rs 500 crore fund). This will help take acceptance to semi-urban, rural and north-eastern states.
Pandey
I think there are two issues close to our heart. One is transit payments and the other is the offline pilot where the State Bank of India is also participating. RBI wants offline for tier-10 and beyond villages. For bankers, the challenge is how to ring-fence fraud and risk management systems. There are elements which want to game the system and the fight is constantly how to stay ahead of them. People at down-level game the system and by the time we recognize this, it gets too late. As a result, we build a fraud engine and it becomes restrictive to consumers.
There has to be quid pro quo between risk and business. The best way to avoid risk is to not do any business. The regulator must provide some margin to manage risks. Obviously, customer protection must be an important pivot as well. I also believe the big game-changer would be the account aggregator model. We are going slow on it right now, but it truly can be disruptive in the future.
Umbrella Entities
Gandhi
We have studied parallel payments systems across the world. Only in two or three countries such systems could be effectively deployed. For example, Indonesia has three or four ATM networks providing switching services, but the model is not doing too well and there are talks of scrapping it altogether. Poland, too, has a system of digital wallets. What in your opinion will the New Umbrella Entity (NUE) envisaged by the RBI bring to the table?
Nigam
We studied the NUE opportunity from three dimensions — objective, opportunity and feasibility. The fact that it is a ‘for-profit’ got fintech companies excited. This has got more to do with prevailing merchant discount rate battles.
The question is, if players such as SBI, networks and other players who are reportedly vying to set the entities can work with prevailing open market forces, what is to prevent the government from again changing the MDR regime in 3-5 years? This question needs to be answered and till then such opportunities are fuzzy and hence we are sitting out.
The second is objective. If it is to accelerate the pace of innovation, we have some existing networks. NPCI has done some stupendous work. For Visa and Mastercard, too, the best days are ahead with all regulatory changes coming.
There is not a lack of attempt for innovation. India needs sector-specific regulations. I don’t know if we need our own NUE. We have to solve for fraud and we need to open up the market. I don’t think NUE solves these things necessarily. The lynchpin is interoperability. The NUE should be interoperable with NPCI — if that’s the objective, then just buy more servers for NPCI.
Pandey
Like any other bank, SBI, too, is reading the circular. In terms of objective — one needs to experiment. There are systemic concentration risks — a few banks have more market share. HDFC, SBI and Bank of Baroda have more than 50% of the digital market share. But there is a sense of fragmentation at the settlement level as NPCI and RBI are entirely responsible for this. I believe RBI would give licences to all but 1 or 2 large players or consortiums.
Ramachandran
Firstly, we don’t need new products just for the sake of it. There are multiple ATM networks and card scheme operators. As a student of payments, I would say one could conceivably think of several use-cases that an NUE can solve. Just, as an example, B2B payments is a massive opportunity. Other use-cases include vendor chain systems, cross-border transfers and remittance. There are various niches an NUE can take. Payment needs are heterogeneous. How different people approach this would be interesting. I would say there is no harm in innovation.
Gandhi
What about examples for digital payments being taken abroad? India is watched very closely on the global landscape. There are so many innovations in the acquiring business, issuance, Aadhaar payments, UPI. While NUE is exciting, how does NPCI view the opportunity for going international?
Rai
We will continue to find ways to reach depth in the market. The focus is on what we do for non-smartphone segments of the population, those segments that are not savvy with digital instruments and how we can bring them to the fore to use our innovative systems. There is also the question of how we find ways to make it replicable beyond the shores of India to expand some of our solutions. We also need to be disconnected from India-specific architectures.
For example, for biometric payments abroad, there is no Aadhaar. India offers a thousand problems to us every day. While developed markets are looking at us keenly, the biggest value-add would be taking our solutions to the fragmented markets.
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