The Digital Payments Ecosystem in India has seen a huge increase in traction, especially over the past few years. This can be attributed to innovations like UPI, NFS, BBPS etc coming into the picture. This growth has been further accelerated by the COVID-19 outbreak and the social distancing norms that it has brought with it. With people switching to contactless payment methods, the number of digital transactions in the country has skyrocketed. This trend is likely here to stay. Apart from the pandemic aspect, the Indian government has also been a big contributor to this digital push. In the Union Budget of 2021-22, the Indian Government has announced a sum of 1,500Cr to be allotted to boost the digital payments sector in the country.
Independent Payment Business will continue to Lack Profitability
Payments as a business is heavily infrastructure-based and was created to facilitate other banking functions. The revenue models associated with payments as a business are generally margin driven and are facing dwindling profitability as the country continues to move towards lower MDR. Almost all payment startups have started offering other financial products like lending or wealth to make their business model viable. Thus we predict that the following phenomena are bound to take place.
An Increasing Number of Payment Fintechs Will Look Towards Lending Financial Institutions across the board earn most of their revenue via lending activities. Multiple Payment Fintechs have also adopted the same thought process and are pivoting to integrate lending into their suite of products. Through this, they have an existing pool of already onboarded customers to whom they can upsell credit offerings. Entities like Razorpay and Pine Labs have moved into this segment. They provide credit products like working capital loans and immediate access to funds to their customers i.e. merchants. They underwrite these merchants’ on the basis of their past customer transactions which gives the entities full insight into their revenue generation.
Cashfree Payments has created an end-to-end payments product suite, i.e. Payment-As-A-Service, to cater to the wide ranging variety of needs that any business may have. They allow customers to collect payments (including recurring), reconcile, make payouts (domestic and international), verify identity and are also moving into BaaS by providing platforms with an option to offer financial services easily by linking with banks. It can thus be observed that they are working to become a one-stop destination for all payment needs of the market.
Juspay is also delving into the credit space by adding an offering to enable BNPL so lenders have access to the company’s existing pool of merchants to offer end-customers the option to make payments on a deferred basis.
CBDC will Gradually Take Centre Stage
The Reserve Bank of India plans to implement CBDC (Central Bank Digital Currency) in the near future. The RBI describes it as ‘legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to- one with the fiat currency. Only its form is different.’
Its introduction would bridge the gap in the circulation of paper currency and also provide an alternative to the private virtual currency that is being offered on the market today, thus preventing the potential instability and other repercussions that it would have caused. Additionally it would make payments, both domestic and international, easier as there is no requirement for interbank settlement as the transaction is final.
Tokenisation Will Witness Widespread Adoption
The RBI has issued guidelines for Payment Aggregators, Payment Gateways and Merchants to implement Card-on- File (CoF) tokenisation norms. This means that online entities will not be allowed to store card holder details like primary account number, PAN, service code and expiration date during domestic online transactions. Instead, these details will be assigned a token by network providers like Visa, Mastercard, Discovery, Rupay, etc, which will then be used for processing the transaction. This is set to be implemented on 30th June 2022, after multiple delays. Visa has launched CoF tokenisation services in partnership with Juspay. This will be available on online platforms like Grofers, BigBasket and MakeMyTrip. Mastercard has partnered with Google Pay to offer this service to GPay Android users.
B2B Payments Remain Unresolved
India is a global leader in Digital Payments, with robust infrastructure and innovation in this segment. However, these payment systems are primarily built to cater to retail customers only. There are minimal offerings targeted at Micro, Small and Medium Enterprises and Corporates due to which they struggle with payments, invoicing & taxation and manually complete these processes, causing unnecessary wastage of time. The industry should look at building end-to- end solutions for the B2B space with these functions integrated into the process. Larger banks, such as ICICI and HSBC, are building
API stacks to provide B2B payment solutions to corporate entities.
Number of Reconciliation Platforms will Surge
Reconciliation platforms help businesses become agile by bringing interoperability between the different tools used by organisations in the payment process. They also provide infrastructure and ensure compliance and security. It is a massive requirement for BFSI entities and corporates, and is still unsolved. There is a gap in the market for platforms which can provide flexible reconciliation processes. India has a handful of end-to-end reconciliation platforms, and with Stripe’s acquisition of Recko, we predict that this space will soon see more startups. Existing and aspiring players should explore a more intrinsic approach to reconciliation and build the platform on blockchain, which would offer accelerated and more secure processes.
Recko is one of the few players leading in this industry, and offers end- to-end reconciliation, commission calculation, payout orchestration and reporting services to corporates, thus making it easier for entities to conduct business.
Government and RBI Support will Continue to Propel Innovation
The Government and Regulator have supported and nurtured the fintech ecosystem through Joint Working Groups, IFSCA (International Financial Services Centre Authority), IMSC (Inter-Ministerial Steering Committee on Fintech) and many more initiatives. They will continue to aid this innovation. With the Regulatory Sandbox (RS), the RBI continues to identify the different problem areas in the segment and address these problems by allowing selected entities to test their new products or services in a controlled regulatory environment. The regulator is currently focussing on Retail and Cross-border Payments with the initial two cohorts of the RS.
Retail Payments Offline payments is seeing major action with the focus that RBI has brought towards it through RS. As of September 2021, six entities had completed the test phase- PaySe, Citycash, IND- e-Cash, ToneTag, BHIM Voice and Eroute Technologies. This will lead to more widespread adoption of digital payments in areas with limited infrastructure and has the potential to transform and enable IoT devices with payment processing capabilities. This will be a game-changer for the country.
The RBI has recently issued a framework for facilitating digital payments in an offline mode. Users can make payments through any channel or instrument in face to face mode only. Offline transactions are enabled on the instrument post explicit consent from the customer, but shall be allowed without a requirement to switch on the contactless transaction channel. The highest amount of such a transaction is capped at INR 200 and the total limit for an instrument shall be INR 2,000. The user can replenish the used limit through online mode only.
Cross-Border Payments India is the largest recipient of inbound remittances across the globe accounting for 15% of global share, said the RBI. However, remittance is unwieldy for retail and corporate customers, leading the RBI to intercept and induce disruption in this space through the RS. The purpose of this cohort is to encourage innovation in the remittance space and make it cheaper, more secure and transparent. The companies which have been selected for this cohort are- Book My Forex, Cashfree, Fairex, Flyremit, Paynearby, Open, SoCash and Wall Street Finance.
Recurring Collection as a Service
The Collection business has always been intertwined with the Payment business and we have not come across innovative collection offerings since UPI Collect in the market. The lending industry is awaiting newer solutions other than Cheques, NACH, eNACH, UPI and Debit Card mandates. These present multiple challenges as none of them are created while keeping the user’s experience in mind. If the user is in the middle of purchasing an insurance plan or registering to automate their utility bill payments, then the process of setting up the mandate should be embedded into the journey without posing added friction.
Additionally, mandates are not flexible and have a high turnaround time (TAT). This is because old world processes have simply been translated into digital instead of relooking at them from a design thinking perspective. For example, eNACH gives users the option to choose a fixed or maximum amount for debit and a frequency of monthly, quarterly, half yearly, yearly or when presented. These options pose limitations for users and should be changed to be better suited for the wide range of requirements that exist.
Reimagining collections beyond this model, which is reflective of the previous physical era, would solve for:
— End-to-End Collections for Merchants / NBFCs, etc
— Logical Network level Reconciliations
— Irregular amount/ duration linked collections (going beyond fixed amount and fixed duration)
Prepaid will Scale
The RBI updated the Master Directions on PPIs in November, 2021. In this, they have increased the amount that can be loaded on a Full KYC PPI (i.e. instruments issued after completing KYC of the holder) from INR 1 lakh to INR 2 lakhs and have also permitted interoperability facilitated by UPI. With these changes, anybody can build a liabilities business using a PPI licence. PPI will be used to issue more cards as they are now very similar to a Savings Account. With the availability of UPI, this segment is bound to scale.
The unicorn Slice has built their credit business around this segment and is leading the change. They have incorporated UPI as a transfer method, alongside IMPS and Paytm as an option in case their users require emergency cash.
BNPL will become a Default Payment Option
The country has seen numerous BNPL players crop up over the past few years. This is majorly because the service can be availed by more individuals as the platforms do not have a stringent credit underwriting process (unlike credit cards from banks.) Additionally, they offer an enhanced user experience with one-tap checkouts. These factors are aiding in the adoption of BNPL services from players like Lazypay, Flexmoney, Simpl, Zestmoney and more. Entities across the board, like Amazon, Flipkart, HDFC Bank, ICICI Bank, Visa, Mastercard and more, have also joined in on the action and launched their own BNPL offering on a standalone basis or in partnership with fintechs. This trend will continue till BNPL is present as a payment option on checkout with all merchants, both offline and online.