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[1] 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.

 

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The reasons for UPI’s success

A key reason for the success of UPI is that it meets five key consumer needs for payments: convenience, security, real-time settlement, cost-effectiveness and accessibility:

• Convenience: UPI enables consumers to send and receive payments conveniently 24/7 via an easy-to-use app on their mobile phone. 
• Security: UPI uses processes similar to 2-factor authentication to ensure the security of payments, and it also provides the recipients of payments with the assurance that payment is final.
• Real time: UPI provides both real time information and immediate settlement of funds. With credit cards, on the other hand, settlement of the payment to the merchant can take 1-2 days or longer. 
• Cost-effectiveness: Merchant charges for UPI are lower than the charges for debit cards and credit cards, which is likely to boost preference for UPI by merchants and other payers.
• Accessibility: Since UPI connects all bank accounts in India, it offers an advantage over credit cards and even debit cards in the country. 

 
The net result is that UPI has all the ingredients required for successful adoption by small merchants, large corporates and consumers. Even if credit card or mobile wallet players improve the features of their own products, the convenience and ubiquity of UPI mean that it will likely grow into the preferred payment method and play a key role in reducing cash transactions in India.

Demonetisation drives faster adoption of UPI in India

While the benefits and convenience of UPI have been leading to increasing adoption of digital payments, the demonetisation initiative that the government launched in November 2016 has been a catalyst in propelling the shift towards cashless transactions even faster.

Demonetisation started on 8 November 2016, when the government announced that all currency notes in denominations of 500 and 1,000 Rupees would cease to be legal tender. These notes, the highest and most popular currency denominations in India, accounted for 86% of the value of currency in circulation.[2] The government justified demonetisation by explaining that it would help to reduce corruption, known as ‘black money’, and would also reduce the use of cash for terrorist financing.

While the demonetisation initiative created inconvenience for large swathes of the population and reduced spending in the short term, which led to a forecast reduction in GDP, it also boosted both India’s economic prospects and the goal of financial inclusion for the longer term. Demonetisation has also turned out to be a key step in shifting India towards faster implementation of a digital and less-cash economy. 

Without demonetisation, Indian banks could well have taken more than a decade to make a significant dent in increasing the usage of digital payments by consumers or merchants. With demonetisation, however, everyone from roadside hawkers and drivers to retailing giants and e-Commerce firms started or increased their acceptance of electronic payments. Adoption of cards and e-wallets by consumers, from labourers to the wealthy, also increased tremendously.

The lack of physical cash has led to a tremendous surge in the volume of electronic transactions. Within 15 hours of the announcement, for example, reload volumes on Ola’s e-wallet alone increased by 15 times. The Paytm platform similarly saw a 435% increase in overall traffic over the first two days following demonetisation, as well as 1,000% growth in money added to its wallets and 400% growth in the transaction value of offline payments. Cash-on-delivery transactions, which constitute 70% of all e-Commerce sales, are also expected to decrease significantly as consumers and merchants alike switch to electronic payments. Taxi payment aggregators and digital wallet providers are among the many other types of merchants that have seen a surge in new registrations, as people shifted quickly from cash to digital payments[3]. 

While growth in digital transactions was highest in the days immediately after demonetisation, the high level has largely been sustained and is expected to continue to grow over the coming years. 

Implementing UPI

Given the potential of UPI to transform business processes and deliver operational efficiency as well as financial benefits, treasury and finance teams at corporates, large and small, can benefit tremendously by starting and leading the process to leverage UPI. 

While UPI solutions are advantageous for almost any company, they are especially beneficial for corporates that are facing difficulties in collecting payments from customers, particularly in consumer-facing industries. UPI can enable corporates to:

• Collect payments from customers more easily, by sending a request for money to their customers (a ‘pull request’) 
• Do bulk collections from customers, which is especially beneficial in industries with recurring billings such as telecoms and utilities
• Enable 24/7 availability of payments, an advantage compared to the fixed cut-off times in place with most other payment systems
• Provide enhanced security by enabling customers to approve a ‘pull request’ through a single click authentication on their mobile phone.

While UPI does have many benefits, corporates will still need significant time and resources to implement it. To enable faster and easier implementation of UPI, leading banks such as Standard Chartered Bank have launched UPI solutions for their corporate and institutional clients so that they can take full advantage of the benefits of UPI and change the ecosystem of retail payments. By leveraging their investments in technology as well as their experience with commercialisation of payments solutions and deep industry knowledge, leading banks have also been able to design customised solutions for specific industries. 

To simplify the UPI implementation for corporates, banks have developed plug-and-play solutions that seamlessly connect with corporates’ ERP and billing systems. They have also provided a wide range of offerings for corporates that cover multiple use cases and leverage the full capabilities of UPI, so that corporates can deliver a superior user experience to their customers.

The result, even in the early stages of UPI adoption, has been a reduction in cash usage and an increase in efficiency at corporates.

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The future of UPI

The combination of demonetisation and the ubiquity of UPI clearly have the potential to reduce physical cash transactions in the Indian economy even further. Increased adoption of digital payment channels will continue to lead to far greater efficiency and a more robust internal control environment for merchants. At the same time, individual consumers will also benefit from being able to make more payments more easily, cost-effectively and faster.

While the focus for UPI had been peer-to-peer fund transfers, its ability to transform B2C and C2B payments as well as B2B transactions offers tremendous additional potential. A small retailer, for instance, can use UPI to pay a distributor for its supply of merchandise upon receipt of goods. Similarly, a telecoms company can sell airtime to its dealers or other retailers 24/7 and receive UPI payments. UPI will clearly be a game-changer for the B2C, C2B and even B2B payment ecosystem in India.

UPI will also be used increasingly to grow financial inclusion, since smartphone penetration is increasing across all segments of the Indian population and anyone in India can use UPI to make small payments or remit funds.  

Along with the changes by consumers and corporates, the digitisation agenda and post-demonetisation activities by the government of India is also making it imperative for financial institutions to innovate further and make payment process even simpler and easier. 

The innovative UPI solution and the impact of demonetisation have, perhaps to the surprise of many, put India on track to becoming a far-more-digital economy and reducing the usage of cash faster than almost anyone might have expected just a short time ago.