Frictionless Digital Payments
The smartphone is mightier than the wallet, the one that holds cash and cards - that's what demonetisation has proved, reports Times of India. For all kinds of needs - buying candy to transferring money - there are more digital options available than paper. It's also time-saving - why stand in bank and ATM queues to get cash when a few seconds of tapping a wallet app on a mobile phone are enough to make a payment? There is an alphabet soup of options available, leaving many confused about the best way to pay. Should it be net banking, credit cards, UPI, NEFT, RTGS, IMPS, USSD, Aadhaar-linked BHIM or a combination of them?
So far, people have grabbed whatever is easily available to pay for coffee, bills, movie tickets, cab rides and just about anything, and here, m-wallet Paytm has scored over others. "In the near term, wallets will do well as they are more popular," said Niren Shah, MD of Norwest Venture Partners, an investor in technology and financial services startups.
However, as alternatives to cash payments evolve, users comfortable with mobile wallets today could shift to an easier digital platform. "Frictionless payments is the future," said R Venkatachalam, managing director for India and South Asia at FIS Global, a global provider of financial services technology. "That is, any payment mechanism which is effortless, without requiring users to remember too many passwords, PINs etc, perhaps biometrics-enabled." There's more to providing a smooth digital payment experience than aspects such as security and ability to attract customers who are used to transacting in cash and are reluctant to change. "Three things are important for any payment option - access, interoperability and financial sustainability of the operator," said Anant Bhagwati, partner, Bain & Company. "In the long term, systems like UPI stand a better chance as they enable direct transfer from bank accounts to pay," said Shah of Norwest.
Wallets Face a Wall: The winner for access to your bank account will be the one that offers the least hurdles to complete a payment. Mobile wallets are popular today - Paytm alone has 173 million users - but they have limitations. For one, they are not interoperable. Transferring money requires sender and receiver to have the same company's account - it's Paytm to Paytm, MobiKwik to MobiKwik and Freecharge to Freecharge. Besides, the money transferred to a wallet does not earn interest. Small merchants such as owners of corner shops and neighbourhood kirana stores can't draw more than Rs 25,000 a month from a digital wallet, which affects cash flow. Even the founders of some mobile wallet companies are not so optimistic about their future if challenges like interoperability persist. "That's why we don't call it a Paytm wallet - it's a Paytm account that people have with us," said Vijay Shekhar Sharma, founder of Paytm. The account could be a digital wallet, UPI or anything else that is permitted, he said. "The fight is about owning consumers and merchants - protocols can change," Sharma said.
At present, wallet companies are not allowed to enable users to access UPI, which enables funds to be transferred from one bank account to another. By the end of 2017, it's quite possible that people could be ditching their digital wallets and opting for UPI or even voice commands to digital avatars to complete payments. "Wallets need to mature, evolve into something else and be interoperable to be relevant," said Bipin Preet Singh, founder of MobiKwik, a wallet company with 45 million users. "The future is about interoperable payment systems." The Ratan Watal committee constituted to recommend measures to encourage digital payments favours interoperability and other changes. However, banks are reluctant to implement "futuristic" suggestions, citing security issues and money laundering possibilities. "Banking is a very regulated sector," said the founder of a wallet company on condition of anonymity. "Traditional banks don't want too many transactions to be enabled via wallets. If that happens, it will limit their reach compared with venture-funded mobile wallet companies." Apart from lacking interoperability, digital wallets can be used only by smartphone owners.
In India, 27% of the more than 1 billion mobile phone users have smartphones - compared with 70% in China - and the rest use feature phones. Affordability, among other factors, has hindered the faster adoption of smartphones. The digital payment option for feature phones is USSD, or Unstructured Supplementary Service Data, which transmits data over GSM networks and is popular in Kenya, Bangladesh, Cambodia and Zimbabwe with their respective services, mPesa, bKash, Wing and EcoCash. Plastic Lacks Reach; UPI Fills Void If mobile wallets face multiple headwinds, one of the oldest cashless options - credit and debit cards - have limited reach. About 800 million people carry plastic (mostly debit cards, less than 10% are credit cards) and they are generally used to withdraw cash from ATMs.
"Credit cards are a largely urban-use case phenomenon," said Sreedhar Prasad, partner, ecommerce and startups, at KPMG. "Popularity of a payment system depends on merchants' acceptability; that lacked in case of credit cards." Demonetisation saw point-of-sale machine sales go up 200 times, accelerating use of cards. Usage of credit cards climbed 25% and debit cards was more than double of that. The future may be less plastic. Bhagwati explains, "Plastic money use is very niche and slow and is likely to remain so for the next five years. Why carry a card when direct transfer can be done from the mobile?" In many countries, plastic money is losing sheen with emergence of options such as Peer2Peer (P2P) in China and Europe, a fund transfer protocol that's as simple as sending a WhatsApp message. Regulations in India forbid P2P transactions.
Among the options available today, Unified Payments Interface (UPI), introduced by the Reserve Bank via the National Payments Corporation of India in 2016, looks best suited to enable frictionless transfer of money. It may boil down to a toss-up between mobile wallets and UPI. Mobile wallets have been around for more than five years and have the first-mover advantage. However, using them is a two-step process: Paying for an Uber ride requires money to be transferred first to the mobile wallet or account and then to Uber. UPI not only allows funds to be sent from one account directly to another, it is also interoperable. "UPI is the most elegant solution for anyone with a bank account," said Bhagwati. "Money is transferred directly from an account to complete a payment, unlike wallets, where it has to be transferred to a wallet company to be used." "Survivors will be those who provide merchant and user protection. Trusted payment partner is important," said Megha Tyagi, director, large merchant business, PayPal India, the operator of a global online payment system. There's more. BHIM app, launched by the government last week, also transfers money directly between accounts and is linked to the Aadhaar number, which will help to authenticate users through stored biometric records.
Today, digital wallets are popular. Tomorrow, direct payment systems will score over intermediaries such as mobile wallet and plastic money companies.