India’s Rush Towards a Cashless Economy
By Ashutosh Kumar, Global Head Banking the Ecosystem, Transaction Banking, Standard Chartered
While most payments in India are still made with cash or cheques, the Reserve Bank of India (RBI) has increasingly been focusing on shifting payments to electronic channels. The initiatives are having an impact, as data from the RBI shows that the volume of cheques as a percentage of total payments dropped from 34% in 2013 to 13% in May 2016. Cash payments have dropped as well.
The shift towards a digital and ‘less-cash’ society has been facilitated by the efforts of the RBI to strengthen the electronic payments infrastructure, including the roll-out of new products such as the Immediate Payment Services (IMPS) and the Unified Payment Interface (UPI).
Digital payments and the e-Commerce wave
To facilitate the usage of digital solutions, banks and payment companies in India have developed a multitude of payment apps, wallets and other digital services which have made digital payments far easier for consumers. One of the key drivers for usage of these digital payments services has been the growth of e-Commerce in India, which has resulted in a social change whereby almost everyone with a smart phone has been exposed to transacting online.
While a recent CII report showed that 60% of consumers still prefer to use cash on delivery for payments for e-Commerce transactions, compared to 30% who prefer cards, the percentage of people who use digital payments is growing. Even though many more people would prefer to move away from cash on delivery, further growth has been constrained because they also want to ensure that they have received the goods before making the payment. The UPI initiative from the government is a key digital payment mechanism which caters to this consumer behaviour and can increase the percentage of digital payments faster.
The Unified Payment Interface (UPI)
The launch of UPI has indeed increased the pace of the shift towards electronic transactions.
UPI, an integrated platform that enables immediate payments, was developed by the National Payments Corporation of India (NPCI). NPCI, an umbrella organisation set up in 2006 at the behest of RBI for all retail payment systems in the country, expects that all banks in India will eventually be required to implement interoperable UPI technology.
UPI allows consumers and companies to transfer funds between different banks immediately with the use of a single identifier, which acts as a virtual address and eliminates the need for them to exchange bank account or card numbers. Consumers can transfer funds to merchants or make peer-to-peer payments instantly using UPI, and they can also use UPI’s real-time collections request function to request payments.
When a consumer makes a new e-Commerce purchase, for example, they can choose UPI as their payment option during checkout. They only need to pay for the merchandise when it is delivered, using the UPI app on their smartphone, which overcomes their concern about whether the merchandise will be delivered if they make payment first. The courier will receive an instant confirmation of the receipt of funds. Moreover, the buyer can still use UPI to make the payment seamlessly from wherever they are, even if they are not at home and the merchandise is received by a family member. The courier will similarly receive instant confirmation of the payment. By increasing convenience and flexibility, UPI has the potential to convert more cash transactions into digital transactions.
UPI has also tackled the issues of data security and confidentiality, which are key concerns for many consumers. Since UPI users’ information is stored as a virtual address, the information is not accessible to the counterparty for a transaction or to hackers who might try to gain access to the UPI database.
Beyond e-Commerce, the government has also started launching new initiatives to leverage UPI to increase the pace of migration towards a cashless society. The government has launched its own UPI app called BHIM (Bharat Interface for Money), for instance, to boost the usage of UPI and encourage people to make electronic payments more frequently.
By making digital payments as convenient and as fast as sending a text message, the government has helped merchants and consumers shift from cash to digital payments for everything from delivery of e-Commerce merchandise and over-the-counter collections to dealer-distributor payments.