Digital Payments is inevitable.
It is not a question of if but when.
In this series, I will explore the various causes that will inevitably push India towards the world of digital payments.
Digital Payment methods for Consumers
Broadly speaking, there are two different channels: online and offline. In the online world, the payments are digital by default. Barring commerce goods where cash on delivery is still accepted, one cannot transact online without making the payment upfront. In the offline world, there are only 2 major payment methods available for the customers: cards and UPI. For a variety of reasons, the usage of cards did not grow significantly. Offline became extremely interesting with the advent of QR codes: no more having to deploy an expensive POS device at a cost of 10000 rupees but just take a sticker of QR code that would just cost 10 rupees and paste it at the counter.
And that story has so far unfolded as this:
UPI is clocking about 1.5 billion transactions per month. That’s 50 million digital payments per day. 34722 transactions per minute. 578 transactions every second.
This is no mean feat. NPCI should hold its head very high.
Interventions
Govt of India decreed 0% fees on all UPI payments (and Rupay debit cards) in a bid to bring about more acceptance from merchants. Some of the steps taken by RBI (1) Recurring payments are allowed in UPI for transactions upto 2000 rupees (2) Biller category approvals for automatic on BBPS (3) NEFT availability is now 24x7 and its pricing has been reduced to zero (4) Wallet accounts exclusively for P2M using min KYC for 24 months.
Cause and Effect
RBI seems to believe that its campaign for digital payments has worked its charm on people and that hard work is paying off now. They are estimating that we can continue to grow digital payments at the rate of 60% every year for the next 5 years. At that rate, we are looking at close to 10x growth by 2025 from the current level. Govt of India seems to believe that its policies are yielding results. But are these the real reasons behind such tremendous success of digital payments and specifically UPI?
Planck’s principle: A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up that is familiar with it.
#1 Digital Native tribes of India
It is the younger generation which is lapping up digital payments so enthusiastically. Smart phones are an essential part of their lives and they just can’t seem to get away from their mobile phones. They are fascinated by the idea of purchasing everything from Flipkart/Amazon, ordering food from Swiggy/Zomato, calling Ola/Uber for transportation, watching moves on Netflix/Hotstar. These have become an integral part of their lives. Online commerce depends on digital payments. And hence, digital payments have become slowly but surely become a way of life.
In complete contrast to this, the previous generation is comfortable doing things their own way. Paying electricity bill at the electricity board offices, paying in cash to the neighbourhood grocer, cable charges paid in cash to the service provider, walking to the auto rickshaw stand for commute and paying the driver in cash. These are habits that will not change anytime soon for the previous generation.
Habit is stronger than reason. — George Santayana
A simple truth is that change is hard as we grow old. This is how we are built by nature. And so, the older generation is left behind.
#2 India’s demographic advantage
Given India’s population of ~140 crores and life expectancy of 70 years, that’s 2 crore people moving through the age spectrum every year, on average. Assuming 50% of this population (which is 1 crore) embraces digital payments into their way of life, and an average person makes about 30 digital payments in a month, that’s additional 300 million new monthly digital transactions added every year.
India has about 50% of its population below 25. Thats about 70 crores of under 25 people. So, people moving through this age spectrum is about 3 crores per annum, for the next two and a half decades. Assuming our model remains the same, this means an upward revision to 450 million monthly transactions.
(50% of 30 million) x (30 txns per month) => 450 million monthly txns
Increasing any of the above numbers while is definitely possible will be hard and will require substantial investments in infrastructure. [I will cover this in detail on a different day.]
#3 Increasing Acceptance in Urban areas via QR codes
This sight is now very common in Bangalore. When asked, the vegetable seller nonchalantly replied that customers are asking for it. Neither does he understand smartphones and apps nor does he feel comfortable going to ATM for withdrawing cash. His 15 year old son helps him cash out the collections everyday.
Personally, my own purchases in Amazon and Flipkart are carefully planned. But this is not the case with the casual purchases at the neighbourhood stores. I commonly see young people using QR scan and pay for their regular purchases such as vegetables, milk, chai, sutta, etc..
Before you think that my claims are anecdotal, let me bring to bear the report from RBI. In the recent report on QR code, the authors have mentioned that 20 million QR codes are deployed across the country. I guess all that money raised by firms such as Paytm, PhonePe, BharatPe have resulted in such explosive growth. In just over 3 years, these companies have together deployed QR codes in such massive numbers. In comparison, even after two decades, we still have only 5 million POS devices in the country.
The way forward
For any two sided system to thrive, both supply and demand will have to grow hand in hand. We seem to have struck a nice balance and this is only going grow in the coming years.
Important questions to ponder over:
- In the absence of UPI, would we have seen such explosive growth in digital payments? Where does this leave the payment networks such as Visa and Mastercard?
- When the transaction fee is re-introduced (and it seems like it sure will be), will the urban sellers go back to their old ways? Or is this an enduring change?
Until next time!
