Demonetization – The Real Picture

By:Jayath Aditya, Head, Strategic Alliance, Electronic Payment and Services (P)

It’s 7 AM on a Sunday and India is buzzing with news about the myriad digital payment modes that have taken Her by storm. There is repeated mention of UPI, Aadhaar, Smartphones, Mobile Wallets, e-commerce, mcommerce and other associated digital transaction services in almost all the literature available at my disposal.

There is palpable excitement in the air both in India as well as around the world. A revolution is underway that will most definitely change the way people look at payments. But is India ready for such a challenge? Why don’t you be the judge of that.

Before we begin to understand the realities that exist in India, let us first understand her landscape.
Total Population – 1.3 Billion / 130 Crore
Urban Population – 370 Million / 37 Crore

Rural Population – 930 Million / 93 Crore

Total SIM Cards Issued – 1 Billion / 100 Crore
Number of Unique Mobile Phone Users – 616 Million / 61.6 Crore

Mobile Internet Users – 350 Million

Mobile Broadband Users – 100 Million

Total Number of Smartphones – 250 Million / 25 Crore
Number of Unique Smartphone Users – 210 Million / 21 Crore

Total Number of Debit Cards – 700 Million / 70 Crore

Total Number of Credit Cards – 30 Million / 3 Crore

Yes. The numbers seem impressive. But consider this, there are anywhere between 12-14 million merchants in India. Out of these merchants, only 1.2 – 1.4 mn are enabled to accept card payments in the form of card swipe machines. Basically, the Indian customer has the tool (in this case payment cards) but very few areas where he can use these cards.

Demonetization was never about making India a cashless society. It was about addressing the issue of black money and currency counterfeiting. While I am not an expert on black money and counterfeit currency, I can with utmost surety say this – we have lost a golden opportunity of bringing about a comprehensive change in the customer’s transaction behavior. While the motive and intent behind such an initiative may have been commendable, the execution of bringing out these changes has been dismal. Comprehensive change could have been brought about by a large scale nationwide deployment of card swipe machines (wired as well as wireless). India’s push towards a cashless society has skipped a few rungs to directly target mobile based payments. Are cards not cashless?

There is no medium of payment that is completely secure. Cash can be stolen, Cards can be cloned, SIM cards can be cloned, payment gateways get hacked on a frequent basis, sensitive bank data has time and again been compromised and servers which hold critical payment information can be hacked. The issue is not about how secure or convenient a mode of payment is rather about how safe a customer feels using that mode. And for the time being, cash is beating every other mode of payment hands down.

Now consider this, the Jan Dhan Yojana was a massive nationwide initiative by our government to disburse Rupay enabled debit cards. 70% - 80% of the population has just been brought under the gambit of the Indian Banking sector. This was no small feat. But now we have shifted our focus to mobile phone and smartphone based applications. Why? Why did we not give emphasis to a simple card swipe machine? Do you believe that a customer who has been issued a debit card for the first time will start using his phone to make payments? When one has always been comfortable transacting in cash, why would one shift to a debit card let alone a mobile phone? Per the Indian customer, cash based transactions were and are seamless. Why else would people be queuing up outside ATMs even when mobile payment modes have been advertised so ubiquitously? People have been queuing up outside ATMs right from the day the demonetization drive was announced. Cash will be king for the next 5-6 years and will be a relevant form of currency for the next 15 years.

Do not innovate for the sake of innovation. In a country as mature in transaction behavior as the US, mobile payment modes have still not flourished. Globally, the mobile wallet industry is highly fragmented with everyone from Banks, Payment Processors, Merchants and Software Vendors launching their standalone offering. This chaos has spread to India as well. Banks have jumped on this bandwagon and have started promoting their wallet offerings. What exactly does a mobile wallet bring to the table? A single click checkout process and a loyalty platform. That’s it! There is a mobile wallet that has become synonymous with Mobile Wallets purely because of the massive discounts and cashbacks that it had thrown to its customers over the past few years. It’s losses now stand at thousands of crores of Rupees. In my opinion, such entities have a negative influence on the ecosystem. Once the cash flow in India returns to normal levels, there will be a definite drop in mobile transactions.

UPI with its various functionalities was meant to be a game changer. Yes. It is a game changer but in the field of peer to peer transactions (P2P). But what exactly was wrong with our existing setup of P2P payments? And if there was or is something wrong, why are they still available to the customer? Are NEFT and IMPS not sufficient?

Yes. India is going have the largest smartphone user base in the world. At approximately 350 million users, India will overtake the US for top spot. In a country of 1.3 Billion, with a user base of 350 million smartphones leads me to believe with my basic math skills that approximately 1 Billion people will not have smartphones. The push for smartphone based banking applications astounds me. Especially when these initiatives are driven by the government. Is the government not supposed to address the needs of the general population? One can understand if a third party mobile wallet organization is targeting this niche segment but why is it that the government gone overboard in launching applications such as BHIM (Bharat Interface for Money) which is an Android based application that lets you perform a UPI transaction? What about the billion users left out of this product launch? The USSD based functionality of UPI is still flawed. Network time outs and errors are commonplace. While I understand that new products especially those based on technology will have teething problems, what I cannot seem to wrap my head around is why was there a sudden push for mobile payments? Aadhaar enabled payments have a long way to go before they become relevant. The problems plaguing this mode of payment are similar to the issues plaguing the other forms. Why would a customer use his fingerprint to authorize a transaction? This medium of payment has a very high chance of instilling fear and anxiety in the customer’s psyche.

So far all I have described are the problems. Is there a solution? Yes. There is a solution that will bring about a gradual organic change in the customer’s behavior and help benefit the industry in general. A systemic change needs to take place across the digital payments domain. A systemic change that focuses on addressing the comfort of the customer and the merchant. Simply put people should not be forced to make digital payments because they have to but because they want to do so. And they will want to do so only when they feel safe. A centralized dispute resolution mechanism needs to be implemented wherein the customer and merchant are rightfully protected when there are cases of transaction failures or fraud. When a transaction fails, the customer should be able to log his concern with a centralized authority whose sole purpose is to resolve these concerns as quickly and effectively as possible.

Additionally, NPCI needs to launch a nationwide bank agnostic literacy drive that educates the masses regarding the various products and solutions available to a customer. They need

to focus on the advantages that these mediums bring in both at a micro level as well as a macro level. They need to take over the execution of promoting awareness.

Banks need to stop focusing on mobile wallets. Most banks seem to have implemented UPI functionality purely as a favor to NPCI. This UPI functionality is packaged so deep inside most banking applications that one has a better chance of finding the lost kingdom of El Dorado. There is no use case for mobile wallets as of now. In future, a mobile payment application based on the lines of NFC, QR code or even biometric could be explored. But now is not the time to do so.

ATMs will be relevant and even more so in rural areas. Deployment of these terminals need to increase. Card swipe machines need to be given preference wherein rural and semi urban merchants are not charged a single dime for accepting card based payments. There is no incentive for a merchant to accept these card payments now. Let the banks share the merchant processing fee for the time being.

Lastly, RBI and NPCI should include third party payment providers into the transaction landscape. They have the potential to add much-needed innovation that will cater to a sector of the population that will benefit from it. The problems facing e-commerce and m-commerce and the solutions for the same will make for another story altogether. Perhaps for another time?