Revolutions don't happen overnight. Situations (technology, economy, availability of resources) change, pain areas increase and then people demand more. The payments landscape in India has been through this cycle in the last three years. We are now beginning to see the signs of non-cash transactions taking over cash's dominance. A recent report by Google-BCG has also predicted that digital payments industry in India will grow 10 times and will touch $500 billion by 2020, when they will also surpass cash payments in India.
There are multiple barriers that stop consumers in India from using digital payments for their everyday transactions. The biggest barrier is habit.
However, today's reality is different. According to the 12th edition of the World Payments report by Capgemini & BNP Paribas, non-cash transactions in India are way below market potential. Does that make India a cash loving nation that is unwilling to change? Or like a hockey stick curve, slow and stable growth at first, followed by sudden and fast growth ahead? And if so, what would be the requirements for such a push?
Positive signs
With the ever increasing reach of smartphones and ease of access to the internet, the adaptability of electronic transactions is slowly growing in India. People are now comfortable transacting using mobile wallets and swipe cards at point-of-sale (POS) terminals and not just using them to withdraw money from ATMs. The regulatory policies towards digital payments have been supportive as well, paving the way for new opportunities—cases in point are the Unified Payment Interface (UPI), the Goods and Services Tax (GST) and India Stack.
Challenges
There are multiple barriers that stop consumers in India from using digital payments for their everyday transactions. The biggest barrier is habit. We Indians love the security of physical cash and the satisfaction of handing it over to someone in exchange for goods and services. Even with the growing popularity of e-commerce websites, cash on delivery is the most preferred mode of payment among consumers. The entire idea of not having to deal with physical cash seems very complex at the outset. Consumers also fear for the safety and security of their transactions.
On the vendor side, small merchants encourage consumers to transact in cash as there is a transaction fee attached to digital transactions. Also, small businesses need to settle with suppliers and creditors on a daily basis, instantly and on demand at odd hours, irrespective of how many customers are in their shops. Cash is the only viable option.
We believe that to digitize India we need to digitize the points of sale. This will give a major push to non-cash transactions...
With these factors posing many challenges, advancements in the digital payments space will take a few years to pick up speed, but at the same time we believe that the fintech industry will witness unprecedented growth.
The road ahead
Cash-backs and convenience in transactions have attracted many consumers to transact with digital currency. Wallet giants are encouraging consumers to transact using their wallets in the offline world and buy. But there are only 1.2 million POS terminals in India and most of them are not equipped to accept all kinds of payments. We believe that to digitize India we need to digitize the points of sale. This will give a major push to non-cash transactions such as credit/debit cards, mobile wallets, Bitcoins and UPI.
The other game changer will be the introduction of GST from April 2017. Imagine an India where all merchants can digitally sign up for a tax number, report sales and submit returns real time. This requires digitization of every business. In this scenario, mobile, multilingual solutions that answer the peculiar needs of the small businessperson will have the advantage.
We also believe that the Smart Cities initiative of the government will lead to our smaller cities driving the growth for digital payments in India. The digital payments story will be dominated with micro-transactions and merchants accepting digital payments that are even under ₹100. The day this happens, India will truly be a digital and cashless economy.