By Moin Qazi
India’s fintech sector is witnessing a new boom. WhatsApp, the near-ubiquitous messaging app, has recently launched a Unified Payments Interface (UPI) payments feature. Developed by the National Payments Corporation of India, UPI is an instant, real-time digital payment system for mobile-to-mobile money transfers between participating banks. There are more than 200 million active users of the service in India—the largest anywhere in the world—and WhatsApp is expected to redefine the system by driving up peer-to-peer (P2P) payments for its services. This will likely become the preferred platform for merchant payments. India is slated to be the first country globally to get this payments service from WhatsApp.
Growth in the fintech sector
The fintech sector, considered to be the most disruptive and agile sector in the tech industry, seems to have struck a particularly promising market in India. A report by Google and Boston Consulting Group (BCG) titled Digital Payments 2020 predicts that digital payments in India will grow 10 times from $50 billion in 2016 to $500 billion by 2020. Fintech in India—A Global Growth Story, a report by India’s software and services industry association Nasscom and consulting firm KPMG, estimates that the total fintech software and services market in India was around $8 billion in 2016 and is likely to grow 1.7 times by 2020. The Indian software market alone is expected to reach $2.4 billion by 2020. The report adds that the transaction value for the Indian fintech sector was approximately $33 billion in 2016 and is slated to reach $73 billion in 2020, growing at a five-year compound annual growth rate (CAGR) of 22%.
Although it would be impossible for India to become a cashless economy in the immediate future, this is definitely something the country can look forward to. However, there are several challenges peculiar to India that may constrain a full-scale digital transition in the foreseeable future. On the surface, this transition may not appear to be very deep, but as it plays out, this tectonic shift will have much wider implications and will lead to a diversity of societal changes. The race to go digital cannot be turned into a marathon sprint. India is still culturally tied to cash, and a paradigm shift in thinking will need time and resources. This will involve a change in social and cultural patterns and habits. In a way, the transition to a cashless economy is more of a cultural-economic revolution than a merely technological change.
Demographic challenges
There are marked demographic and class issues which are built into India’s cashless transition. To start with, India has 438 languages according to The Economist, with each having multiple dialects and different scripts. The tech revolution will have a better chance of success if it is driven less by punditry of financial experts and more by empathetic governance. People only adopt new technologies when they see clear benefits and find it convenient and affordable. The painful reality is that providers too often focus on short-term incentives at the expense of long-term consumer trust and loyalty. Nobel prize-winning economist Daniel Kahneman advises us “not to persuade, but to assess the source of resistance and address that”.
Consumers will come to the digital platform and embrace the new opportunities technology offers, only if they believe that it will resolve existing issues in the economy. Thus we have to address real pains, not just offer benefits. “You have to look really hard and ask, ‘What problems are being solved?’” says Nick Hughes, who shepherded the team that turned M-PESA into a revolutionary financial tool. “Unless problems aren’t being solved, it becomes a bit of hype.”
In addition to cost savings, digital financial services offer a wide array of benefits. Providers can use the financial history of clients to develop automatic reminders and helpful default options via mobile phone menus that provide convenience and save time. Mobile-finance clients keep their money in a digital form, so they are able to send and receive money often, even over great distances, without significant transaction costs.
Financial flows can be accurately tracked, resulting in safer and speedier transactions as well as less corruption and theft. Providers can get useful insights from looking at the transaction patterns of their clients. This helps them to design products that are better suited to customers’ needs. Direct deposits allow money to ‘bypass’ the client’s pocket, helping users save rather than spend—which also often gives women more financial authority within the family. Digital mobile platforms link banks to clients in real time. This means that banks can instantly relay account information or send reminders and clients can sign up for services quickly on their own.
The shift to Fintech must include everyone
Although India must continue to make the case that responsible digital finance is good business, we know that is not enough. Independent and well-resourced regulators, consumer groups, and other organisations are critical to ensuring the consumer protections afforded by law are actually followed. In India, RBI has been instrumental in enabling the development of the fintech sector and espousing a cautious approach to addressing concerns around consumer protection. The key objective of the regulator has been to create an environment for unhindered innovation by the fintech sector.
India should avoid the usual overreach and haste in the way it pushes millions of users onto the digital economic grid. Indeed, the country has already risked this by forcing many into online banking by the virtual fiat of demonetisation, which triggered large-scale social and economic disruption. India must assure that the pace of this journey is determined by the ability of people to cope with it. In attempting to leapfrog the development of a fully-functioning cash economy to a digital economy, it should take a route that leaves millions by the wayside, as happened with demonetisation.
Increasing financial and digital literacy alone will not be enough. Some things are better addressed through regulation. If there are aspects of the financial system that are clearly negative for consumers then these should not be perpetuated. However, changing the financial framework is also not enough. Consumers will have to walk that extra mile themselves if they want to reap the full rewards of the new financial tools.
The government is responsible for social inclusion
Building inclusive digital economies requires the collective action of governments, industry, financiers, and civil society. Before speeding ahead, we need to build the infrastructure, align our policies, and create the tools that will enable the poor to board the digital train.
When we design solutions that recognise everyone as an equal partner we will have a real chance of achieving our aims. Each society is at a different stage of digital financial inclusion and thus the solutions needed to bring it up-to-date must be appropriate to the cultural and economic context. By respecting the cultural outlook of the people and embracing their concerns, we enlist their support for the change and that is what will pave the way for lasting and sustainable success.
Featured Image Source: Pexels
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