Digital Dash

Amitabh Kant, CEO of National Institution for Transforming India (NITI) Aayog, hit the nail on the head. "My view is in the next five-six years, you will see the death of physical banks," he said at an IAMAI event last year, pointing out how low-cost Internet-based transactions and proliferation of mobile phones could soon kill cash and disrupt today's incumbents. It may sound overambitious, but NITI Aayog's principal advisor Ratan Watal provided supporting statistics, saying that digital payments grew 55 per cent in volume and 24.2 per cent in value in FY2016/17 over FY2015/16.

A recent report by investment banking firm Credit Suisse also estimates that the total digital payment market in India will grow to $1 trillion by FY23E (expected), led by the growth in mobile payments.

Understandably, the volume growth in the digital payment space has been triggered by the fast-evolving technology. In the 1950s, digital payment options were strictly limited to a bunch of credit cards. Decadess later, the arrival of online banking changed the way financial transactions used to be done, providing customers with a quick, easy and secure option. In India, net banking was first introduced by ICICI Bank in 1997. The shift from traditional to the electronic channel (we call it Digipay-Phase I) also led to a plethora of developments, including ATMs, phone banking, mobile banking and digital bank accounts, but more on that later.

Digipay-Phase II kicked off with the launch of prepaid mobile wallets, or e-wallets, a quick tap-and-transact format that popularised mobile payment and addressed the pain points of net banking. For instance, some of these payment tools can operate offline; security checks are not as elaborate, and it does not require too much time to set up mobile payment systems. In contrast, adding new payees to net banking is a lengthy procedure as you need to enter bank details and then there is a cool-down period before transactions can take place. Banks also slap limits on the amount one can send. But e-wallets were hardly invincible. Their offerings are easy to replicate, and most of the banks have jumped on the bandwagon and come out with their custom wallets. Plus, the earlier issue regarding interoperability meant users had to be on the same platform for money transfer and needed to download multiple wallets to transact with different companies.

Its UPI Versus Wallets In Phase III

Big PPI (prepaid payment instrument) players including Paytm, ItzCash, MobiKwik, Oxigen and Citrus, as well as banks and telcos with similar services, saw an explosive growth post demonetisation due to excessive cash shrinkage. But e-wallets failed to strike gold for long as the options got broader and more user-friendly, kick-starting the use of third-generation payment systems. Take, for instance, the Unified Payments Interface, or UPI, launched by the National Payments Corporation of India (NPCI) in August 2016. The platform is built on the existing IMPS infrastructure, which means it runs 24/7. It seems fast and convenient as users can send and receive money by using a Virtual Payment Address or VPA - a user ID linked to UPI-enabled bank account/s - without revealing additional bank details.

Keeping in mind its great functionality, quite a few UPI-compatible payment tools have been launched recently and grabbed a big chunk of the market share. Bharat Interface for Money, or BHIM, launched on December 30, 2016, is emerging as one of the fastest growing apps. Its key feature: All UPI transactions can be carried out from a single app, and you need not download multiple banking apps for transactions. The receiver requires a valid UPI ID or Aadhaar number linked to a bank account or a bank account number with IFSC code for fund transfer.

There are other game-changers in the UPI space such as Flipkart's payment arm PhonePe, Google's Tez and the newest kid on the block - WhatsApp Pay. PhonePe has recently launched point-of-sale machines for small merchants to ensure digital inclusivity and assures customers of hassle-free payments via the app for products bought online.

Tez is, indeed, a highly user-friendly app, going by the services on offer and its breezy modes of payment. Designed as a Lite app so that it can run on a patchy Internet connection, it has tied up with major banks to facilitate payment processing across 50-plus UPI-enabled banks. Once you log in, Tez asks your UPI PIN, syncs your bank account with the platform, and enables you to transfer funds, pay utility bills, purchase gift cards and also share expenses with friends free of charge. It also allows you to transfer money to a nearby person by tapping the Pay and Receive option. This feature runs on a patent-pending technology called Audio QR. Tez also allows payment through Bharat QR and other UPI-compatible QR codes.

The latest kid on the block is, of course, WhatsApp Pay, a beta version rolled out by the Facebook-owned messenger app for one million of its users. The payment tool is UPI-compatible and allows person-to-person money transfer but currently excludes merchant outlets.

PwC noted in one of its insight papers that in a low-margin business like payments, where each transaction yields little profit, the ability to generate high transaction volumes assumes great importance. Therefore, WhatsApp, one of the most popular messaging platforms, may soon disrupt the digital payment space as it already has a huge user base - around 250 million monthly active users. India's biggest wallet player Paytm (now UPI-compliant) reportedly has about 310 million active users.

Unlike the stagnation in the wallet business in value terms, UPI continues to see strong growth both in terms of volume and value. It has clocked 737.18 million transactions worth `85,659 crore between April 2017 and February 2018 compared to 17.86 million transactions worth `6,947 crore in FY2016/17, according to NPCI.

So, how does the rise of UPI hinder the once-roaring wallet business? As stated earlier, wallets are early innovations and still suffering from technical and regulatory hiccups. Over the years, lack of interoperability turned out to be a significant issue. While multiple accounts of the same bank and different banks can be linked through a single UPI app, multiple wallets cannot be linked to each other. Also, transferring money via credit or debit card to a wallet requires a third-party gateway authentication. Now that RBI has mandated full know-your-customer (KYC) compliance for all wallet users and, in turn, assured interoperability (among KYC-compliant wallets and later, linking with bank accounts), both providers and users need to embrace the central bank's guidelines if the mobile wallet industry, with monthly business of `12,563 crore in January 2018 (as per RBI data), has to survive and grow. On the other hand, industry players fear that around 80-90 per cent of their customer base will be lost as the full KYC process is too complicated for people and too expensive for the wallet providers. Moreover, both wallets and banks charge a nominal fee for transactions while UPI is free, a big lure for customers in a price-sensitive country like India.

Nitin Chugh, Country Head, HDFC Digital Banking, also questions the current cashback model and whether it supports sustainable growth. "In general, cashback is going away. You cannot buy customer behaviour by rewarding them. If a customer has done one transaction and I am rewarding him/her, it becomes unprofitable after some time."

According to Deepak Sharma, Chief Digital Officer at Kotak Mahindra Bank, "Wallets have become more or less stagnant now. Other methods of payments have been catching up fast." One way to survive is to evolve in a way Paytm has done. The biggest wallet provider in India has tweaked its strategy and is now focussing on its payments bank.

Interestingly, UPI and wallets are not wildly different. "Innovation is driving the next level of adoption and people will choose between the two things. Either people will go to the option that they trust, or they will go wherever there is convenience," says Chugh. The jury is still out on who will finally win the war, but here is a quick look at the pros and cons of the UPI platform.

Pros

• On UPI platform, money can be transferred instantly from one bank account to another.
• Transfer can be done by using a phone number. With Tez, you can transfer money to a phone near you.
• Stringent security is assured as it requires a three-step authentication. First, the app binds to a device's ID and mobile number. Second, a user must sync it with his/her bank account. Third, a PIN is needed for app login. Plus, the UPI PIN is required for every transaction.
• Those without access to data services can use BHIM by dialling star99hash (USSD-based mobile banking service) on their phones.

Cons

• Unlike wallets, transactions cannot be done via credit cards.
• BHIM supports only Hindi and English, but a number of mobile wallets support several regional languages, making them more user friendly.

Other Up-and-Coming Payment Tools

QR code: It is a black-and-white, two-dimensional and machine-readable code, which has details of a merchant's bank accounts and URL. It is an easy way to make a payment as you only need to scan the picture and you are ready to go. Paytm has an option to pay through QR code, which is convenient and simple. Similarly, BharatQR is an interoperable payment mechanism, which allows you to make payments without physically carrying your credit or debit card. To pay via BharatQR, a user has to open his/her payment mobile app, select the scanning option, scan the BharatQR code provided by the merchant and get the payment processed. BharatQR, the common interface for Visa, MasterCard, American Express and RuPay, has done away with the problem of separate QR codes issued by separate companies.

"QR payments have been around for some time now, but as they were not interoperable, the adoption rate is not high," says Rajeev Anand, Executive Director at Axis Bank. "But with the launch of Bharat QR, those issues are resolved. The entire banking ecosystem is working towards enablement, which will allow large-scale usage across consumer needs."

While banks are updating their apps to enable 'scan and pay', players like Visa and BillDesk are setting it up on the merchant side, says Anand. They are onboarding retailers and utility providers to accept payments via BharatQR. It means consumers can simply open their mobile app and scan the QR code on their electricity, mobile or insurance bill. As BharatQR is made available across consumers' payment needs, adoption should increase. Merchants also welcome the low-cost of adoption as they only have to take printouts of QR codes instead of setting up expensive PoS machines for card payment. To boost the QR code, NPCI has come up with new guidelines that mandate every UPI application to be QR-enabled. The last date for implementing it is April 16, 2018.

Pros

• The cardholder has to scan the merchant's QR code using the smartphone and enter the PIN and the amount to pay.
• All transactions on BharatQR require authentication using an MPIN.
• One need not swipe the card; hence, the chances of card loss, theft or fraud are slim.

Cons

• Interoperability was an issue, but it has been resolved with BharatQR.

Aadhaar Pay: It allows one to pay using Aadhaar number-linked bank accounts. The transaction requires the payer's fingerprint for authentication and eliminates the use PoS machines for card swiping. It works either on micro ATMs that come with in-built fingerprint scanners or on the Aadhaar Payment app for merchants, which works on smartphones with fingerprint scanners.

Pros

• It is easy to use and only requires fingerprints for payment.
• ConsUsers must have Aadhaar-linked bank account, and merchants must have fingerprint scanners.

Mobile Payment Systems: These are extremely popular abroad and leverage various technologies to ensure contactless payment. Instead of carrying physical cards, download an app and save your card details there. To make a payment, flick your phone at the PoS machine. When the machine captures your card details, it displays the amount. Enter your PIN, and the payment will be through. Samsung Pay is the pioneer in this field, followed by Android Pay and Apple Pay.

Pros

• No need to carry physical cards as payment can be done via mobile
• You can pay all utility bills using Bill Payments on Samsung Pay

Cons

• Only available on selected high-end phones

Digital Accounts: A digital bank account can be opened via an app without visiting any branch. All you need to do is complete KYC formalities using PAN and Aadhaar numbers. Unlike traditional bank accounts, digital accounts do not require maintaining a minimum balance. DBS Bank's mobile-only service Digibank and Kotak Mahindra Bank's 811 Digital fall under this category.

Pros

• You can open a bank account from the comfort of your home.

Cons

• Digital accounts may come with restrictions on transactions. For example, NEFT/RTGS transactions may not be allowed, and chequebooks are not issued.

Payments Banks: In spite of the fast growth of third-party apps, banks remain the favourite payment channel among Indians even in the cashless segment. For instance, debit card transactions have jumped significantly post demonetisation, indicating these have been used not only for withdrawals but also for swiping and making payments. Anup Bagchi, Head of Retail Banking and Executive Director, ICICI Bank, says, "People are most comfortable with mobile banking when it comes to person-to-person transcations. Most banks are trying to simplify the overall banking experience." Although a new genre, payments banks operate just like any commercial bank but on a smaller scale, and they cannot issue loans or credit cards. India has four payments banks, Paytm, Airtel, India Post and FINO.

Opening a digital bank account at a payments bank is a paperless process minus the cumbersome and time-consuming documentation and verification. However, one can only keep up to `1 lakh in a savings/current account. They have also done away with the minimum balance requirement.

Pros

These institutions currently offer higher interest rates compared to traditional banks. For instance, Airtel Payments Bank is offering 7.25 per cent interest while commercial banks only offer 4-6 per cent. Remember that it can be a welcome offer to bring more customers on board.

Cons

Different payments banks have different charges for cash withdrawals. For instance, Airtel charges 0.65 per cent of the withdrawal amount while India Post does not charge any fee if withdrawals are made from its ATMs or any Punjab National Bank ATM.

Now that you know everything about the latest digital payment tools, go ahead and take your pick.