Digital Payments Ecosystem- August 2023
Digital payments have experienced a substantial increase, exhibiting remarkable growth in both volume and value over time. The pandemic played a pivotal role in capturing a significant market segment and cultivating a preference for convenient payment methods, ultimately shining a spotlight on the fintech industry.
In this dynamic ecosystem, the Indian Government emerged as key driving force, working tirelessly to enhance customer experience through robust regulations that prioritize data security and streamline processes among financial institutions.
As customer trust in digital payments deepened, it became a lucrative spot for investors, leading to heavy funding in this segment over the past couple of years.
Considering the significant level of activity witnessed in this sector, The Digital Fifth unveil its comprehensive representation of The Digital Payment Ecosystem of India.
Financial Institutions: The bottom layer of the ecosystem consists of Banks, serving as a vital foundation for digital payments ecosystem. Governed by stringent RBI rules, they offer various payment systems to customers and act as both issuers and acquirers on both sides of transactions. These entities play a central role in the RBI/NPCI Payments framework and Networks, and they foster collaboration with FinTech’s through Open APIs for payments. To compete in this environment and reach out to more and more customers they heavily rely on incumbent players to provide the necessary technology stack, going forward banks will look to work on their digital stack and partner with payment platform providers through APIs to extend their services to much larger customer base. As we see the traction coming in through other service providers in collaboration with banks to form Payment Banks like Jio, Airtel etc, which tells us that Indian payment landscape has a bright future.
National Payments Corporation on India (NPCI)
NPCI is revolutionizing the Payments Industry in India. It is an Umbrella organization for operating retail payments and settlement systems in India (an initiative of RBI & IBA). It was set-up under the provisions of the Payment and Settlement Systems Act, 2007.
NPCI has successfully launched multiple payment methods, including IMPS, RuPay, BBPS, AEPS, UPI, and NETC (Fast Tag). These innovative payment solutions have significantly contributed to the country’s exponential growth of digital payments.
NPCI has undertaken initiatives to globalize various payment methods like UPI and BBPS, extending their benefits beyond India’s borders. For NRIs, UPI now offers the convenience of linking mobile numbers to NRE/NRO accounts for seamless payments. Additionally, the UPI One World initiative allows tourists to use UPI as an alternative to cash or cards during their visits.
In the case of BBPS, Indian users residing in countries like UAE, Kuwait, and Oman can utilize partnering exchanges to make bill payments. These exchanges also facilitate cross-border remittance and offer bill payment services, with payments being made in the local currency, converted through Rupee Drawing Arrangements with partner banks. These efforts by NPCI contribute to the wider adoption of digital payment methods on an international scale.
Aadhar Enabled Payment System (AEPS)
AePS (Aadhaar-enabled Payment System) facilitates online interoperable financial transactions at Point of Sale (PoS) or Micro ATM using Aadhaar authentication. Developed by NPCI, it serves as a payment system specifically designed to accelerate Financial Inclusion in tier 3 and tier 4 villages across the country. The services offered through AePS include balance inquiry, cash withdrawal, cash deposit, and Aadhaar to Aadhaar bank transfers. Companies operating in this segment provide solutions to retailers, enabling them to set up their own Aadhaar-enabled Payment System.
AePS plays a significant role in granting access to disbursements of Government entitlements such as NREGA, Social Security pension, Handicapped Old Age Pension, and more, offered by various Central or State Government bodies. These disbursements are facilitated using Aadhaar authentication, as supported by UIDAI.
Bill Aggregators
Bill aggregators are authorized entities regulated by the Reserve Bank of India that streamline the payment process for utility bills by integrating with customers and billers on a single platform. They act as intermediaries, receiving payments from customers and pooling them before transferring the funds to the respective billers.
By connecting billers, such as state electricity boards, with customers, bill aggregators simplify the bill payment experience, making it convenient and efficient for all parties involved.
BBPS has created an opportunity for bill aggregators to become BBPOUs, allowing them to offer bill payment services. Gpay and Paytm have been approved to operate as BBPOUs under this scheme.
Unified Payment Interface (UPI)
UPI or Unified Payment Interface is a Payment system Developed by the NPCI. It connects multiple bank accounts into a single mobile application (of any participating bank/Fintech), merging several banking features, seamless fund routing & merchant payments into one hood.
The impact of UPI on digital payments has increased digital transactions and led to the emergence of business models focused on PSPs partnering with banks. The focus of UPI is getting more advanced and digital like UPI 2.0 being introduced which will enable customers to check the invoice right after the payment, with 123 pay voice-enabled payments, it will redefine how future of payment will look like.
It has achieved disproportionate growth with transactions significantly facilitating small-ticket transactions for both P2P and P2M, with its volume growing at a faster rate compared to its value. The transactions increasing at a CAGR of 55% from FY’23, with UPI values growing at 50% CAGR, signifying widespread adoption and creating prospects in the sector such as UPI123, Lite, and more.
The integration of third-party apps has boosted UPI adoption, leading to an increase in their customer base. It also enabled for customers with multiple options to choose their favourable app. UPI transactions have significantly surged and are now widely accepted throughout India. Three major players (Google Pay, PhonePe, and Paytm) hold 96% of the transaction volume in FY2023 through their platforms.
Cross Border Payments
Cross-border payments are those payments where the payer and the payee are located in 2 different countries. This transaction may or may-not involve converting one currency to another.
These companies are providing solutions for global payments and remittances. This segment includes Companies dealing directly with customers to make global payments and some providing Cross Border Payment Solutions to different companies.
Cross-border payments hold immense growth potential for digital payments, fueled by rising remittance and trade-based forex flows. Integration of UPI with SWIFT GPI and RBI’s regulatory guidelines will drive and promote these transactions.
Online Payment Gateway Service Provider (OPGSP)
OPGSP services, in collaboration with AD Category I banks, allow you to receive Export Payments from Buyers in approved countries. They also provide foreign exchange and bulk payment services.
India’s overall exports are expected to reach USD 770.18 billion in FY 2022-23, growing by 13.84% compared to FY 2021-22. Merchandise exports reached a record high of USD 447.46 billion, with a growth rate of 6.03% in FY 2022-23, surpassing the previous year’s record. Services exports are leading the overall growth and are projected to reach a record value of USD 322.72 billion, growing at 26.79% in FY 2022-23 over FY 2021-22.
As exports continue to increase, the OPGSP segment will see new players entering the market, and they will play a crucial role in offering smooth payment experiences for merchants.
Escrow Payment Platforms
The escrow payment platform secures transactions between buyers and sellers by acting as a third-party intermediary, reducing fraud risk and ensuring protection. Escrow accounts will bring more transparency, and automation in the process will solve the cash flow within the supply chain. We see this trend growing as Payment service providers such as Cashfree and Razorpay have come up with escrow management solutions.
Full Stack Players
This category includes those players who provide a complete suite of payments to customers.
They focus on cross-selling financial services and products by driving customer experience.
We Expect to see further growth in this segment as more players are expected to turn into a one-stop platform for all customer needs offering Fintech as a Service. The players in this segment are making several innovations to improvise their offerings and gain maximum market traction, they also aim to diversify their offerings into digital lending segment. Many players going forward will look to develop themselves to provide complete digital stack at one place as this will increase omnichannel customers services & improve their client retention by helping them offer multiple types of services by singular integration.
Payment Gateways
A Payment gateway is an online payment service that is integrated with E-commerce platform to make and receive payments. They play a vital role in facilitating smooth transactions between merchants and customers. Its responsibilities include approving the transaction process, managing the redirection of payments to the respective method selected by the customer, and finally, ensuring that the customer is redirected back to the merchant’s page after completing the transaction. In essence, it acts as the intermediary that ensures a seamless and secure payment experience for both parties involved in the transaction process.
Payment gateways are a crucial segment in the growing e-commerce industry. Many platforms have evolved as white-label solutions, offering technology services to payment service providers. This segment is also under regulatory view now, leading to enhanced customer data security and building trust among customers.
As digital payment sector grows many payment gateway providers are enabling themselves to become payment as a service, which led to multiple partnership model between banks and fintech’s like PineLabs partnered with ICICI bank to accept Digital rupee and POS segment seeing innovations like mPOS & SoftPOS.
Point of Sale (POS)
POS solutions enable merchants to accept card payments from customers, available in various categories such as POS Terminals, mPOS, and SoftPOS. SoftPOS, being mobile-centric and NFC-technology based, has gained popularity due to its cost-effective card acceptance solution. It allows smartphones to function as POS devices for micro-merchants and SMEs in India. Presently, providers do not levy any charges on their applications, but as the segment expands, subscription charges may become applicable.
Several POS providers are entering the online payment gateway space, while Online Payment Gateways are exploring offline POS opportunities. PineLabs introduced its online payment gateway “Plural,” and Razorpay’s acquisition of Ezetap aims to tap into the offline POS segment. As ecommerce grows, we can expect payment gateways and POS systems to expand, supporting various payment methods and driving innovations in the near future.
Networks
These companies drive payment innovations in the Cards segment with features like Tap & Go Cards, Push for in-app payments, and Contactless payments enabled through NFC technology & Tokenization. Google Pay, in partnership with VISA, Axis Bank, and SBI Bank, introduced NFC-based Tap & Pay solutions. Rupay’s Credit Card on UPI and the launch of ONDC networks in the growing e-commerce industry will further enhance secure payment transactions.
RBI also allowed non-bank PSPs, including PPI issuers, white-label ATM operators, and card networks, to use NEFT and RTGS, aiming for neutrality between banks and non-bank PSPs, improved settlement processes, and an enhanced customer experience.
Payment Switch
Payment switch platforms are software systems or platforms that act as intermediaries between different payment channels, financial institutions, and merchants, facilitating secure and efficient electronic payment transactions. These platforms are designed to handle the complexities of processing various types of payment transactions, such as credit card payments, debit card payments, mobile payments, online payments, and more.
ATM Switching has been primarily dominated by big international players like FIS, Euronet, and ACI Worldwide. However, the emergence and deployment of specialized product switches at Banks for NPCI payment methods like UPI, IMPS, and AePS are provided by existing platforms such as Mindgate and OliveCrypto.
Banks are considering adopting cloud-based microservices switch platforms to meet API requirements for product innovation, customization, and partner integrations. This move is expected to give rise to new-age switch platforms that can respond more effectively to the dynamic landscape of digital payments in India.
KYC/ AML/ Fraud Management
These companies offer businesses comprehensive solutions for conducting KYC (Know Your Customer) and AML (Anti-Money Laundering) checks on their customers. Additionally, they provide digital onboarding services for both customers and vendors. These solutions incorporate AI/ML algorithms to monitor data patterns, detect anomalies, and issue warnings to businesses regarding potential risks.
As payment transactions shift towards digital platforms, ensuring security and preventing fraud will be of paramount importance. In 2023, there will likely be a greater focus on implementing advanced security measures and fraud prevention technologies to safeguard consumers and businesses from potential fraudulent activities. Given the large influx of customer details and payment data received by banks daily, they are increasingly turning to machine learning to swiftly detect and thwart potential threats.
Reconciliation
Reconciliation software ensures that all payments made by the Financial Institutions are processed and all deposits are correctly made on time. This ensures that all payments are accounted for and that there are no errors or fraud.
Reconciliation platforms are becoming essential for payment operations, supporting automation and handling multiple payment-system reconciliations. The growing demand from regulators and customers for timely transaction settlements has driven the shift from manual Excel-based reconciliation to automated platforms. These systems facilitate reconciliation for multi-payments and high-volume transactions efficiently.
As volume of transactions increase through UPI and other Digital payment options also the new payment innovations emerge, the reconciliation sector will witness significant traction. However, this growth also brings with it the potential for cyber security fraud attempts, making the need for faster reconciliation more crucial than ever.
Payment Platforms
Digital payments have experienced a substantial increase, exhibiting remarkable growth in both volume and value over time. The pandemic played a pivotal role in capturing a significant market segment and cultivating a preference for convenient payment methods, ultimately shining a spotlight on the fintech industry.
In this dynamic ecosystem, the Indian Government emerged as a key driving force, working tirelessly to enhance customer experience through robust regulations that prioritize data security and streamline processes among financial institutions. As customer trust in digital payments deepened, it became a lucrative spot for investors, leading to heavy funding in this segment over the past couple of years. Considering the significant level of activity witnessed in this sector, The Digital Fifth unveils its comprehensive representation of The Digital Payment Ecosystem of India.
Contactless Payments
It is a rising segment primarily in the retail space. The players in this segment use technology like Near Field Communication (NFC), Radio Frequency Identification (RFID), and Sound Waves to enable payments. The future of payments lies in contactless methods, which eliminate the need for physical cards or cash. With UPI introducing Voice Enabled payments and Tonetag offering a sound-wave based technology platform, we’ve witnessed several partnerships in recent years that will continue to grow. Notably, Titan partnered with SBI Yono, foreign players like Tappy Technologies are teaming up with Axis Bank Wear N Pay to enter the Indian Market. Additionally, Bank of Baroda collaborated with GOQii, a preventive health company, for the BoB Wave World watch, and BillBox introduced TapTap, a wearable device enabling payments.
B2B Payments: These companies provide payment gateways and payment solutions for B2B transactions. By using the solutions of these companies, businesses can track working capital, payables and receivables through reports and dashboards. The B2B payment segment is still awaiting the level of transformation that the retail segment has experienced. Payment gateways may evolve to handle large B2B payments and support corporate complexity and scale. Banks have not yet fully transformed their technology capabilities to support the complexity of B2B payments. Leading fintechs have begun expanding their B2B payment services, and more technology players are expected to enter this segment.
Credit Card Payments: The companies operating in this segment reward individuals for their timely credit card bill payments. Pioneered with Cred being the most prominent player in this space, paytm came along and now we see some new emerging fintech CheQ entering into the segment. Allows credit card users to manage multiple cards along with an analysis of their credit score. Only customers with a credit score above a certain number are allowed entry on this platform. This enables the company to create a cohort of customers with high credit scores who can then be used to cross-sell other products. They also provide exclusive offers and access to premium experiences on the platform. They provide notifications to their customers for timely payments and avoid penalty charges while ensuring payments are made seamlessly and build a customer engagement layer to ensure customer satisfaction & loyalty.
Prepaid Cards: Prepaid Cards are payment cards pre-loaded with funds, not tied to a customer’s bank account. They serve various purposes, such as tracking employee expenses and making blue-collar job salary payments. Additionally, these cards are used for customer loyalty schemes and reward programs. The usage of Prepaid Payment Instruments (PPI) was limited due to other transaction methods. However, we can expect growth in this segment with the UPI and PPI interoperability, allowing more transactions through prepaid cards.
Commercial Cards: These companies provide credit cards to startups, SME, and MSME segments. They enable companies to track employee expenses also provide them better access to credit through the card. The players in this segment are backed by banks that provide credit cards. Corporate cards currently lack control features that are needed by organizations and being expensive they are mostly provided to top management or frequent travellers. However, their usage is expected to grow due to an increase in online business purchases made with cards and the rising adoption of SaaS software, which leads to more recurring monthly payments within companies. Additionally, employees, especially those from young generation, are less willing to cover expenses for their employer and wait for reimbursement.
Investors
Though the payment sector attracted a record-high investment of around 4.8 billion USD in 2021, it witnessed substantial reduction in funding to 1.2 billion USD in 2022. However, in 2023, it has so far remain stable and brought in 700 million USD until June 2023. With the rise in digital payment volume in 2023 and the continued traction in segment, investors will keep a close eye on innovative payment solutions and business models. With payments Fintechs extending their service portfolio to lending, investors may have long term view on this segment.
Conclusion
The government and regulators will continue their efforts to promote digital payments among a large population. This will lead to the entry of new players, creating a competitive landscape in the Indian ecosystem. Reconciliation Platforms will also develop to handle payment complexities. The globalization of Indian payment methods will accelerate, and new business models will emerge, incorporating e-Rupee and IoT-based payment systems. Throughout these developments, security, fraud management, and compliance with RBI guidelines will remain a top priority.
