By Prashansa Srivastava
According to new data released by the National Payments Corporation of India (NPCI) the UPI, or Unified Payments Interface, continues its strong growth, having clocked 171.4 million transactions in February, up 13.5 percent from the previous month. UPI allows instant money transfers between bank accounts through mobile phones. The popular mobile wallet operator Paytm alone clocked 68-million transactions via UPI in February, accounting for almost 40 percent of the total UPI transactions in the country.
UPI obviates the need for mobile wallets by providing a direct connection to a bank account. In other words, any one among the 525-550 million bank accounts in India could be easily accessed through UPI. This has increased the appeal for the service, leading to a large number of companies entering the mobile payments game, which in turn increases competition in the online finance industry.
The service gains traction
The government has been aggressively pushing for a cashless economy. Never before has a government in India thrown its might behind digital payments with as much enthusiasm. The Prime Ministers Jan Dhan programme, to open zero balance bank accounts, has reached more than 90 percent of households. The government aims to formalise the economy and connect the scattered small suppliers and small consumers into a unified marketplace. Demonetisation was a shock jump towards the governments dream of a cashless economy. The lower costs for small digital transactions has further boosted economic growth.
Indias digital payments industry is expected to grow by ten times to $500 billion by 2020, up from current estimates of $40-50 billion, according to a report by advisory firm IMAP. Demonetisation has paved the way for the future of digital transactions in India. Point of sales (PoS) transactions have crossed the Rs 70,000 crore mark through the use of banking cards. Prepaid instruments, like m-Wallet, PPI cards, paper vouchers and mobile banking, have also seen an increase in terms of non-cash transactions. For example, Rs 107 billion worth of PPI transactions were made in May 2017 compared to Rs 51 billion in November 2016.
Slowly yet steadily, digital payments seem to be gaining traction in India. The growth has been due to factors such as increased smartphone penetration, widespread Internet, booming e-commerce, a growing dependence on apps and more. India has recently witnessed a growth in m-commerce transactions, which is a testament to the wide availability and penetration of inexpensive smartphones and decreasing mobile data charges.
Benefits of digital payments
Digital payments are crucial in developing ‘smart’ cities. Digital payments eliminate the hidden costs of cash payments and make the process more cost-effective for both individuals and governments. Traceable electronic payments lead to more transparency and compliance, which reduces corruption. The increased use of digital payments is economical in terms of the time spent making transactions by consumers and businesses. It can also reduce cash-related crime, boost business sales, and increase tax revenues for the government.
Digitising payments have been shown to slash costs and cut corruption. More general adoption of digital payments could enhance productivity by reducing the amount of time spent on payment related activities. The greatest opportunity to help poor people access financial services arguably lies with large employers paying electronic wages and large buyers paying suppliers directly.
Governments are way ahead of the private sector when it comes to the use of such digital payments, which is important in emerging economies where most wage earners are still paid in cash. However, to include more people in the net of digitisation, the government must be aware of the problems raised by the ‘digital divide’.
The challenge of providing connectivity
There are many challenges before the full benefits of digitalisation can be realised. Limited digital literacy and a lack of adequate infrastructure threats to put the disadvantaged on the wrong side of the digital divide. Although there has been a quantum leap in connectivity, penetration is still low. Indeed, lack of infrastructure to support card payments in rural areas has been the primary reason card transactions remain at less than 1 percent of total transactions. By excluding poorer states, the inequalities between states can further widen.
Age-old cash habits could act as another deterring factor. The economically disadvantaged will not benefit from financial access unless handling bank accounts is cheaper and easier to use than its alternatives. Inadequate infrastructure and the lack of any concrete incentives have left people nostalgic for cash.
Keeping services affordable will shore up trust and help draw new people into the formal financial system. Both government and private players should keep consumers and merchants motivated to use cash-alternative payment instruments. Growth inhibitors can be overcome by providing incentives to small merchants to use mobile services for small transactions. Digitally aware consumers are the key to ensuring the permanence of the digital revolution.
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