BS Banking Annual 2016: Digital is here

Demonetisation will be a boon for digital transactions. Is the banking system ready for this tectonic shift to a less cash-intensive economy?

For Vihaan Arora, a suburban Mumbai resident, not much had changed on November 9, a day after the country learnt that their valuable Rs 500 and Rs 1,000 notes were no longer legal tender. Even though the news did rattle Arora like many others, he realised that he wasn’t going to miss cash much. He started his day by booking a cab for which the payment was made via his mobile wallet, lunch in the office canteen was paid for by swiping his card, and groceries for the week had been ordered online, for which payment was made via Net banking. As on any other day, he didn’t use cash at all.

However, Arora belongs to a tiny percentage of the country’s population whose dependence on cash has reduced significantly over the last few years. The rest of the country has only begun warming up to the idea of plastic money as banks had also stepped up the focus on digital transactions in the last two years.

One thing that remains undisputed is that the government’s demonetisation drive will significantly increase digital payments in the country, and as more and more people use cards and online payments, they will begin to ditch cash because of the convenience it offers. Kunal Bahl, co-founder and CEO, Snapdeal, which also owns online recharge and wallet player Freecharge, said, “The quantum of India’s economy moving through the digital pipes will witness massive growth.” 

A Moody’s report after demonetisation said, “As it is, there has been a sustained significant growth in cashless payment transactions in India over the last few years. In addition, on the supply side, both banks and new-generation players such as e-wallet providers have been very focused on developing this segment. Thus, in an already favourable ecosystem for retail payment systems, this development may act as a further stimulus.” 

This also comes at a time when banks have been pushing digital banking. Experts agree that if the demonetisation drive had happened two years ago, the chaos would have been far more widespread, as significantly fewer people were using online or mobile banking then. While the timing is better than what it could have been in the past, it still raises the question: Is India ready to become a cashless economy? 

The road ahead is not smooth. Experts say that for this transformation to take place, certain bottlenecks need to be cleared first. “The availability of public infrastructure in terms of bandwidth, connectivity and the penetration and performance of smartphones is a prerequisite,” says Nitin Chugh, country head - digital banking, HDFC Bank. 

“Expectations of market development have to be calibrated in the context of a relatively low starting point and infrastructure constraints, like the penetration of smartphones. Use of mobile internet banking, while increasing at a rapid pace, is still at a low level of less than 20 per cent of the overall mobile subscriber base,” added the Moody’s report.

For card transactions to increase, the number of Point of Sale (PoS) terminals has to be increased significantly. According to Reserve Bank of India data, in August, there were only 1.46 million PoS machines, compared to 712.46 million debit cards in circulation and 26.3 million credit cards.

A State Bank of India (SBI) report estimates the current size of digital banking (including credit card and debit card transaction through PoS terminals, transactions through prepaid payment instruments [PPI] like mobile wallets, PPI cards, etc and mobile banking) at around Rs 1.2 lakh crore. Soumya Kanti Ghosh, group chief economic adviser, SBI says, “This size has to increase from the current level to at least Rs 3 lakh crore, which is a conservative estimate of the gap between the actual currency in circulation and required currency in circulation.” The report also stated that if the size of digital banking has to increase to Rs 3 lakh crore then the acceptance infrastructure also has to be ramped up significantly. “It is estimated that we may require around 20 million extra PoS terminals.” According to Digital Payments 2020: The Making of a $500 billion Ecosystem in India, a BCG-Google report, India has two PoS terminals for every 1,000 debit cards, while the US has 13.1, and China has 12.5 terminals for every 1,000 cards. 

“Further, we have to ensure that per-mobile banking transactions increase from the current (September 2016) Rs 10,000 to Rs 25,000 monthly. To fully utilise the potential residing in the digital channel, banks also need to focus on prepaid payment instruments, particularly on mobile wallets,” says Ghosh. He adds that mobile wallet transactions need to increase from the current Rs 3,200 crore a month to around Rs 10,000 crore. “This means that the value per transaction needs to increase significantly from the current level of a mere Rs 425 to around Rs 1,000.” 

After demonetisation, the pace of moving towards a less cash-intensive economy has already increased. Bankers say that there has been a significant increase in requests for PoS terminals. What is interesting is that lenders are seeing requests for PoS deployment increasingly from the self-employed segment such as doctors, architects, smaller merchants, grocery stores, etc.

The rise of mobile wallets with the increase in smartphones and the fact that, unlike PoS, there are no setting-up costs, is also helping the growth of digital transactions. Now, grocery stores and vegetable vendors accepting money via wallets are no longer isolated cases and has become more widespread. 

The unified payment interface (UPI) has not picked up traction, but experts believe it will catch on as larger banks such as State Bank of India and ICICI Bank get on to the platform.

“This demonetisation has prompted people to use their plastic money and once they get used to it because of the convenience factor, we will see an increase in these digital transactions. We have also seen a huge rise in demand for PoS in the last few days and also from smaller merchants, which means that the payment infrastructure will improve, going ahead,” says Rajiv Anand, executive director-retail banking at Axis Bank.

Both the RBI and the government have also been focusing on reducing the incidence of cash transactions. In its vision document released earlier this year, the regulator had said it wants to reduce the share of paper-based clearing instruments, increase the growth of the digital payments space, improve growth in acceptance infrastructure and ensure accelerated use of Aadhaar in payment systems.

With this in view, RBI will look at directly regulating payments gateway service providers and payments aggregators, and will revise the current guidelines. It will look at developments in technology such as distributed ledgers and blockchain, among others, and will ensure that a regulatory framework is put in place as required. Guidelines regarding prepaid payment issuers, mobile banking and white label ATMs will also be reviewed.

To improve the payments space, RBI will also look to improve the payment infrastructure space by improving the ATM and PoS network. There will also be measures to ensure that there is better fraud monitoring and enhanced customer service. 

India’s cash-to-gross domestic product proportion was a little over 12 per cent in 2014, higher than several other economies, and the cost of managing this currency for the RBI and commercial banks is Rs 21,000 crore a year. 

However, all of this still largely remains an urban phenomenon. Bankers believe that it will still take at least a decade or more for usage of plastic money and digital money to increase in rural areas as well.