Expanding the Digital Payments Ecosystem in India

By India Briefing

Posted: 15th September 2016 08:36

India’s digital payments ecosystem will be worth around US$ 500 billion by 2020, according to the latest research put out by Google and the Boston Consultancy Group (BCG) in a joint study. Their forecast sees the digital payments sector contributing to 15 percent of India’s gross domestic product (GDP) in four years time.
Multiple factors and institutional and behavioral trends are powering this transition towards a cashless economy. The rapidly increasing penetration of smartphones and internet on mobiles, digital payment services provided by non-banking institutions, consumer expectations of one-touch payments, and progress in regulatory governance, have altogether shaped India’s payments landscape in favor of digital solutions.
 
Highlights of the Google – BCG Report

The joint study is based on research executed by the global information and measurement company, Nielsen, which included group discussions, online surveys, and interviews with users and merchants across India’s major cities – Delhi, Mumbai, Bangalore, Ludhiana, Lucknow, Indore, Surat, Visakhapatnam, and Coimbatore.
Key predictions of the study are:
Changing Consumer Behavior in India

Convenience and greater confidence in the security of digital transactions dominate the reasons why the payments landscape is so drastically changing, both globally and in India. Online payments through debit and credit cards, followed by the emergence of digital wallets, have become the most preferred transaction channels in the last few years, due to their ease of use, the availability of smartphones and affordable internet, and enhanced security and encryption methods.

In India, the following the sectors and payment service providers have enabled the push towards greater cashless transactions:
How Will ‘Going Cashless’ Impact the Indian Economy?

According to the RBI, the currency with the Indian public stood at US$ 252.15 billion (Rs 16.8 trillion) as of July 8, 2016, more than 95 percent of the total currency in circulation. To meet this demand, banks added around 18,000 ATMs in the financial year (FY) 2015-2016; the cost of maintaining these along with the capital expenditure for new ATMs is about US$ 2.36 billion (Rs 15,800 crore). Such high-cash usage has also facilitated the continued existence of black money. All in all, broad estimates put the direct cost of running India’s cash-dependent economy as being close to 0.25 percent of the total GDP.

Consequently, there will be massive benefits in moving India towards a cashless economy for everybody – bankers, regulators, government, and consumers. There are other indirect benefits as well, namely the boost for startups in the digital payments space (fintech sector), expanding e-commerce market share, and greater financial inclusion for the segment of the digitally unbanked demographic (who range from workers to dependents like students and housewives).

What must now emerge is the ubiquitous acceptance of digital payment methods by bankers and merchants, the maintenance of the security of networks, and ‘reliable speed of transactions during peak hours’. In this regard, the ‘Digital India’ program and the central bank’s regulatory push towards adopting cashless strategies of making payments will definitively promote their growth and usage.
 
Conclusion

The forecast by the Google-BCG study indicates that India’s digital payments ecosystem will grow by ten times to reach US$ 500 billion. This is vital for the Indian economy as it enables greater financial inclusion and propels innovation in the financial sector, while reducing the massive costs of running a cash-based economy. The growth of digital payment service providers will also promote transparency, becoming an indirect check on the presence of black money in the market, and thereby increasing the contribution to the country’s GDP. Principal challenges now lie in the architecture that will facilitate this behavioral change – secure and stable mobile internet services, high speed connectivity, usage by merchants and banks, and a progressive regulatory framework to match the rapid evolution of the digital payments market.
 
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