The next orbit of financial inclusion will be in the offline world

Payment solutions will allow transactions when connectivity is poor or if there is a systems breakdown

Last Wednesday saw the launch of a heavy-lifter in payments: UPI Lite X for offline. This offering from the National Payments Corporation of India (NPCI) will enable millions to transact digitally, dancing around connectivity issues and rejected transactions. Just how big is the addressable market for offline payments in the country? “It’s essentially the personal consumption expenditure where customers do not spend digitally, either via Unified Payments Interface (UPI) or cards. This market is about $2 trillion,” says Ranadurjay Talukdar, partner and payments sector leader, EY India. 

Let us situate offline in the wider digital payments universe: buoyed by new and innovative payment products, higher smartphone usage, and faster payment modes (yes, 5G will be another variable). Before 2010, digital transactions grew in single-digit rates; between 2010 and 2016 they rose to 28 per cent, doubling to 56 per cent in 2017, thanks to demonetisation, says PwC’s The Indian Payments Handbook: 2020-2025 report. The pandemic gave it a fillip. “These factors are likely to create a revenue pool of Rs 2,937 billion (Rs 2,93,700 crore) by 2025 for payment players — a figure that stood at Rs 1,982 billion (Rs 198,200 crore) in 2020.”

And all this was before the offline mode entered the picture. Now that UPI Lite X will be accessible to anyone with a compatible device that supports near-field communication (NFC), it will extend the reach of UPI for offline merchants using point-of-sale (PoS) devices. PwC believes it will also help NPCI compete with Visa and MasterCard, which have strong associations with banks in terms of contactless payments (Tap & Pay) made via their NFC-enabled chip-cards.

Building blocks

It was on January 3 last year that the Reserve Bank of India (RBI) waved in offline payments through cards, wallets, and mobile devices. What’s in your face now is that the per-transaction limit has been upped to Rs 500 from Rs 200 (the daily limit stands at Rs 2,000). What else? “The material change that has given offline payments a significant boost is the increased acceptance and availability of technology that can transfer data without the need for internet access, particularly in proximity-based payments,” says Kumar Abhishek, co-founder and chief executive officer (CEO), ToneTag. Launched in 2013 and backed by Amazon, MasterCard, 3one4 Capital and Amensa, ToneTag claims to be the largest sound-wave communication technology platform in the world. It helps encode data into sound waves, which are transmitted between smartphones and PoS terminals. “This technology links to offline payments by allowing users to transact without the need for an internet connection, NFC, or users who don’t own a smartphone or are not digital literate.”

Offline impact

As on date, it’s in mass transport that offline has made an impact. “Our mobility card technology may be better than OysterPay (United Kingdom),” says Ambarish Parekh, CEO, PayCraft. His point: With the advent of the National Common Mobility Card (NCMC), we have moved to a complete open-loop ecosystem where a bank-issued card will work both in offline mobility payments as well as online PoS, e-commerce and ATM transactions. PayCraft has issued 2 million NCMC cards. Parekh refers to a spin-off from a better mass-transit experience: Less use of private vehicles and a lower carbon footprint. “It will help move a larger number of people per hour.”

Cash vs digital

Cash-in-transit (CIT) firms on a daily basis move anywhere between Rs 20,000 crore and Rs 23,000 crore; at the lower end, this figure works out to Rs 51.4 trillion a year. Three CIT firms are now listed on the bourses: CMS, AGS Transact Technologies, and Radiant Cash Management Services. According to a report by Frost & Sullivan, cash-on-delivery (CoD) is the most popular way of payment for e-commerce retailers: It accounted for more than 60 per cent of e-commerce payments in FY22. Its share moved up from the metros (50 per cent CoD) to Tier-II (70 per cent) and Tier-IV regions (90 per cent). “As e-commerce penetration rises in these lower tiers, the percentage of CoD payments is likely to rise in lockstep.”

Despite UPI transactions hitting a record 10 billion in August, cash-in-circulation as a percentage of gross domestic product continues to hover at 11 per cent levels (see chart: Cash report). Some proprietary industry studies have estimated the cost of cash handling at anywhere between 4.5 per cent and 12 per cent, whereas for digital payments it is a mere 2-3 per cent. Just how offline play impacts the usage of automated teller machines, and the cash management industry, will require gazing into a crystal ball.

The elephant in the room is: Will the likes of Paytm, Google Pay, Amazon Pay, and PhonePe continue to blow tonnes of money to acquire customers for offline payments when there is no clear revenue stream? It brings into the spotlight Mint Road’s Discussion paper on charges in payment systems (August 17, 2022): “In any economic activity, including payment systems, there does not seem to be any justification for a free service, unless there is an element of public good and dedication of the infrastructure for the welfare of the nation. But who should bear the cost of operating such an infrastructure, is a moot point.”

That said, there is another strategic factor at play here. It is the backup when there is a network outage (and cash has reduced to a point where it can’t provide it; we are nowhere close to such a situation). But UPILiteX, Pix in Brazil and Swish in Sweden are ways of doing so. In fact, Swiss Re even sees a new business opportunity opening up. June 2023’s ‘Systematic Observation of Notions Associated with Risks’ observed payment system outages would mean transactions at a restaurant or the cashless check-out in a supermarket, among others, would be blocked. It could be that salaries cannot be paid, or that an entire payment system is down for days.

Disruptions by cyberattacks, power outages and natural disasters are a threat to the cashless economy. “But they also bring new risk pool opportunities like cyber and digital fraud insurance,” says the Swiss Re report.

But there’s no denying that we are on the next orbit of financial inclusion in India. The launch of credit line on UPI, Hello UPI, UPI Lite X, NFC-enabled Tap & Pay, “are all segment agnostic and will enable each strata of the ecosystem to benefit,” says Anand Kumar Bajaj, founder, managing director and CEO, PayNearby.

Welcome to the offline world.