BCG-Google Digital Payments 2020

Digital Payments 2020 THE MAKING OF A $500 BILLION ECOSYSTEM IN INDIA The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients from the private, public, and not-for- profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 85 offices in 48 countries. For more information, please visit bcg.com. DIGITAL PAYMENTS 2020

THE MAKING OF A $500 BILLION ECOSYSTEM IN INDIA

ALPESH SHAH VIBHA KAUSHIK

PRATEEK ROONGTA ABHISHEK AWADHIYA

CHILMAN JAIN

July 2016 | The Boston Consulting Group CONTENTS

3 EXECUTIVE SUMMARY

6 GLOBAL PAYMENTS GOING DIGITAL Four Seismic Shifts in the Global Landscape Rapid Evolution of Digital Consumer Payments One Size Does Not Fit All A New Strategy for a New World

11 INDIA PAYMENTS ON A SIMILAR DISRUPTION TRAJECTORY Four Mega Trends Transforming India Rise in Adoption of Digital Payments

18 INDIAN CONSUMERS RARING TO RUN UP THE ADOPTION CURVE

30 INDIA DIGITAL PAYMENTS – A $500 BN POT OF GOLD The Future of Digital Payments in India Digitisation of Payments is a Large Opportunity

40 GRABBING THE OPPORTUNITY – THE WINNING AGENDA Ten Point Agenda for Payment Service Providers Call to Action for Banks Asks from Regulators and Industry Bodies

51 FOR FURTHER READING

52 NOTE TO THE READER

2 | Digital Payments 2020 EXECUTIVE SUMMARY

he global payments landscape is evolving at a dizzying pace. TThe last twelve to eighteen months have witnessed heightened activity with four major shifts being observed in the global landscape. Firstly, the ongoing digital and technology revolution, led by the ever-increasing penetration of smartphones and internet on mobile, has revolutionised digital payments. Second, the payments space has witnessed the entry of several non-banking institutions offering payment services and solutions. Third, customers are becoming more demanding and expect instantaneous and one-touch payment solutions. Finally, there have been several progressive changes in the regulatory framework. Over the past few years, the payment landscape in India, too, has mirrored these developments, with digital payments displaying an exponential growth.

While different markets have seen different types of players and solutions becoming successful, some elements of winning models stay common. These include having a compelling value proposition, access to a large customer base, conducive infrastructure, supportive regulations and leveraging next-gen technology.

Primary research brings several interesting insights to the fore and validates India’s readiness to adopt digital payments. Convenience emerges to be as important for continual usage as deals, discounts and cash-backs. Consumers seem open to using digital payment instruments for newer use-cases, gravitating towards offline points of sale such as organised retail, food and entertainment. Even so, the habit to use cash, complexity of digital payment instruments and limited reach pose significant barriers for consumers in adopting digital. Similarly, while 75 percent merchants believe that adopting digital payment methods will help grow their business, complexity and limited adoption hinder mass trial.

We expect the digital payments space to witness significant disruption in the days ahead. While the exact form and shape of disruption will only be unveiled over time, the crystal ball indicates seven trends set to transform the payments landscape in India over the next five years:

•• Technology will make digital payments simpler: Smartphone penetration, ubiquitous connectivity, biometrics, tokenisation, cloud computing and the Internet of Things are a few trends that will shape the way consumers transact in the future.

•• Merchant acceptance network to grow 10X by 2020: Mobile based payment solutions and proprietary payment networks will

The Boston Consulting Group • Google | 3 drive merchant acquisition by offering low-investment solutions that will make economics more attractive for merchants and acquirers, resulting in over 10 million merchant establishments that will accept digital / mobile payments.

•• Payments will drive consumption—and not the other way around: Payments will provide access to customer transaction data, enabling payment service providers (PSPs) to offer relevant deals, offers and coupons to consumers, thereby influencing their consumption decisions.

•• Consolidation will drive ubiquity: Customers prefer fewer, ubiquitous payment solutions. Niche or limited use solutions will be forced to merge to offer near universal solutions.

•• Modified UPI will be a game changer: Unified Payments Inter- face (UPI) provides a great platform for seamless interoperability of PSPs. Modified to overcome current challenges, it can drive large scale adoption of digital payments.

•• Digital identity to accelerate customer acquisition: Using Aadhar for online authentication and confirmation of KYC data will boost growth of digital payment systems.

•• Cash to non-cash ratio will invert over the next ten years: Digitisation of cash will accelerate over the next few years. Non- cash payment transactions, which today constitute 22 percent of all consumer payments, will overtake cash transactions by 2023. Digital payments instruments will drive the growth in non-cash payments.

Digitisation of payments presents a large opportunity in the Indian context. It is estimated that the total payments conducted via digital payment instruments will be in the range of USD 500 billion by 2020, which is approximately 10X of current levels. Person to merchant (P2M) transactions driven by digital payments at physical point of sale, followed by business to business (B2B) and peer to peer (P2P) transactions are expected to be major contributors of growth.

While Indian players have tried various business models to monetise the payments opportunity, few have attained scale or profitability. The primary focus hitherto has been on customer acquisition and monetisation models are yet to be fully evolved. We outline a ten- point agenda to accelerate the evolution of a successful and economically viable payments play in India:

•• Address true customer need: It is critical for PSPs to look for a way to solve payment problems that customers face every day, instead of just offering a solution looking for a problem.

•• “Build for the base” with convenient, intuitive, easy to use and safe products: It is imperative to build solutions that are “as easy as cash” to use, enable fast transactions, and yet provide adequate protection to customers’ money.

4 | Digital Payments 2020 •• Optimise the network effect by building a ubiquitous network: The big push for digital payments in India will come from merchant payments. Hence, to drive ubiquity, it is imperative to build a large merchant acceptance network—a combination of both digitally enabled as well as offline merchants.

•• Partner, Partner, Partner: Given the tight economic model of payments businesses, PSPs will need to extensively partner in order to lower customer acquisition costs, offer a broad spectrum of solutions and get access to a large distribution network.

•• Reduce entry barriers for customers—charge merchants and not customers: PSPs need to find the right pricing model to drive adoption, wherein transaction charge is either levied on merchants (like discounting rate) or when money leaves the digital ecosystem.

•• Mine customer data to build additional revenue streams: PSPs can carry out analytics on large volumes of transaction data to offer the most relevant products / services / discounts to the right consumer at the right time and drive higher consumption.

•• Look beyond payments—broaden financial services to consumption needs: PSPs have an opportunity to expand their customer relationship by offering a full suite of financial services, and even other consumption based products, in order to optimally monetise the relationship.

•• Develop an ecosystem to accommodate customer needs: PSPs can develop vertical or ecosystem based offerings that provide an end-to-end payments solution to customers in these ecosystems.

•• Exploit next generation technologies to build low cost and scalable solutions: Technology will be critical not only to deliver solutions that are convenient, simple and secure, but also to ensure that the costs of customer acquisition, on-boarding and transactions are minimal.

•• Scale, Scale, Scale: Attaining scale is critical to make the business model of payments business viable. PSPs that make bold moves and build scale have a good opportunity to build a profitable and valuable business.

Finally, in a market like India, where regulations are still evolving, it is imperative that the Government and regulators take a long-term view to building a sustainable digital payments market. Regulators need to emphasise awareness on cost of cash and incentivise the use of non- cash instruments, while the Government needs to shape policy that simplifies KYC requirements, making digital payment transactions more user friendly. Government investments in building merchant acceptance networks, setting up common payments infrastructure and developing a proper framework for grievance redressal are also essential.

The Boston Consulting Group • Google | 5 GLOBAL PAYMENTS GOING DIGITAL

he global payments landscape has The ongoing digital / technology Tseen some dramatic changes and revolution disruptions in recent years, especially with The use of mobile internet is growing sharply. 2015-2016 being considered a watershed The number of users accessing internet ser- period in the payments industry. Led by the vices on mobile is expected to reach 3 billion evolution of digital technologies, payments by 2020, covering 65 percent of the world’s are no longer the forte of banks. Evolving adult population as compared to approxi- customer behaviours, needs and preferences mately 1.9 billion in 2015. have led to new participants entering the arena at an exponential pace. Non-bank By then, it is expected that about 80 percent institutions are capturing the limelight and of all internet users will be accessing the in- setting new consumer expectations (for ternet through mobile handsets and 58 per- example, one click payments), causing a shift cent of such users will be using smartphones. in the value chain. The cumulative effect of Given that smartphone devices are equipped all the above factors has a direct impact on with powerful processors, substantial memo- the competitive advantage and value ry, high-resolution cameras, barcode scanning, proposition of banks. GPS geocoding, NFC-based technologies, social networks and platforms for deals and offers, they now are potent commerce-enablers. Four Seismic Shifts in the Global Landscape The evolution of smartphones is enabling Globally, the digital payments space is being new payment capabilities. This has revolu- driven by four mega-trends that are expected tionised digital payments coupled with inno- to dramatically impact the future of this in- vations in payment access and security tech- dustry. nologies such as tokenisation of card details for reducing fraud, biometric-enabled •• The ongoing digital / technology multi-factor authentication, EMV standards revolution for user authentication, NFC-capable readers at merchant stores, hardware-based secure el- •• Entry of non traditional players ement approaches etc.

•• More demanding customer expectations Entry of non traditional players The payments landscape is now seeing •• “Enabling” regulations heightened activity across multiple player

6 | Digital Payments 2020 categories, ranging from device manufactur- card-on-file is a success study, whereas PayP- ers (Apple, Samsung), tech firms (Google, al and Alipay dominate the online wallet eBay, Alibaba), retailers (Starbucks, space. With iDeal being a preferred model Walmart), telecom companies (Vodafone, for online bank payments, Zoomit in Bel- Orange) and startups (Square, Transfer- gium and BPAY in Australia offer bill pay- Wise). More disruption is expected as the ments and still others such as mPESA and number of FinTech startups has doubled to Facebook offer P2P payments. 1,000 in approximately 5 years with funding growing 6X to reach USD 11 billion in 2015 More demanding customer (Refer Exhibit 1.1). expectations The advent of non-bank tech and retail play- Payment FinTechs span a broad landscape in- ers in the payments arena has exposed cus- cluding wallets, integrated POS systems, P2P tomers to a superior end-to-end customer ex- payments and cross-border transfers, and have perience. Customers’ expectations from attracted the largest share (35 percent) of the payment solutions have changed with many overall FinTech funding. Some startups Some features such as biometric authentication startups such as Ant Financial Services Group from Apple Pay and integrated rewards from (China), First Data, Stripe and Mozido (USA) Starbucks, possibly becoming the new normal. and One97 Communications (India), have grown to over USD 1 billion in valuation. The consumer of today, and even more so, to- morrow, expects the best experience that Recent case studies have lent evidence to the companies can deliver, even in financial ser- fact that digital payment companies domi- vices. There is a growing need for an intuitive nate in specific-use cases. In proximity pay- and frictionless user interface and design as ments, we see Starbucks offering in-app pay- provided already by players, along with the ments and Apple Pay offering mobile optimum use of smartphones and apps to de- wallets. For in-browser payments, Amazon’s liver on evolving customer needs, both en-

EXHIBIT 1.1 | Number of FinTechs Tripled and Funding Grew 7x Over Last 10 Years

2005 2010 2015 Total companies: ~649 1167 2x ~1855 Total funding: $3 bn $5 bn 4x $20 bn

Emergence of Emergence of lending platforms cryptocurrency like peer to peer Early players in credit/debit cards, Emergence of new cluster in payments and Strong growth in security real estate payments: funding transfers, processing, etc.

Payments Lending Security Investments Planning Credit / debit Cards

FinTech Unicorns1 by valuation $ billion 50 45 29

5 4 2 0 Ant Financial First Data Stripe One97 Mozido Services Group

Sources: Quid, BCG analysis, CB Insights, Finovate March 2016. Quid, BCG / Expand / BCG Digital Venture / B Capital analysis. Note: 980 companies related to retail banking were discovered with Quid and allowed to cluster based on similar products, technology, customers etc. Quid database includes companies who have received equity investment since 2011. Publically available information on product, business, funding etc. is then collected for the company lifetime. 1Unicorns are startups with valuations >$1 billion.

The Boston Consulting Group • Google | 7 hancing and increasing customer interactions first few years of the century to “mobile multi and building relationships. channel, open and fragmented models” as we speak (and over next few years) to the “Inter- “Enabling” regulations net of Things (IoT), multi device, social mod- Regulations play a critical role in determining els” by 2020 and beyond (Refer Exhibit 1.2). the nature and success of payment solutions. With modernisation of the payment infra- Fragmentation will continue and will differ by structure occurring in most countries, pay- channel (POS, e-commerce, m-commerce and ment service providers can take advantage of in-app). Most players will vie for domination real-time systems to offer cutting-edge pay- at the POS which will see significant activity. ment solutions to customers. Beyond 2020, the rise of connected devices For example, the PSD2 (Revised Payment Ser- will fuel strong growth in in-app purchases. vices Directive) in Europe, exposes established Mobile applications will become increasingly banking and payment institutions to increased sophisticated and consumers will be transact- attacks that get at the core of their primary ing via a myriad of new devices (such as customer relationships such as accounts and smart watches and connected cars). These dy- payments. The directive is expected to create namics, moreover, will spur new value propo- an open environment conducive to greater sitions that, in turn, will alter the competitive customer choice and price transparency. landscape.

In emerging markets, where cash still domi- Digital payments nearly 20 percent of nates, governments have been promoting retail transaction value by 2020 electronic payments. United Arab Emirates The total value of global retail payments has implemented a program aimed at achiev- transactions was estimated at USD 16 trillion ing a cashless economy which includes the in 2015. This is estimated to increase to USD mandatory use of payroll cards for wages, the 21 trillion by 2020. The estimation com- establishment of an electronic payment gate- prised consumer to merchant transactions way for government payments etc. In China, across retail verticals such as food and gro- the Central Bank and the China Banking Reg- cery, apparel, consumer durables etc. Digital ulatory Authority are encouraging the devel- payments contributed to 8 percent of the opment of digital payment platforms while overall global retail payments market in strengthening regulations, anti-money laun- 2015 and the same is projected to increase to dering initiatives and payment account cate- 18-24 percent by 2020. gory management practices. In-app payments and proximity transactions are expected to be key catalysts driving Rapid Evolution of Digital growth in the days ahead. Assuming a mo- Consumer Payments mentum scenario, where digitisation contin- We are poised at the beginning of a new era in ues at projected pace, a growth of 18 percent payments that is set to welcome innovative is likely, with market size scaling USD 3.7 tril- solutions such as third-party wallets, token that lion. However, in a breakout scenario, given a will replace traditional credentials, and the use possible disruption by convenience, security of biometrics as an authentication and authori- and Internet of Things, the growth rate is ex- sation tool. Ubiquitous connectivity, biometrics, pected to be 24 percent, prizing the market tokenisation, cloud computing, and the Inter- opportunity at USD 5.1 trillion. net of Things are just a few of the digital trends that will affect the way consumers transact and interact with their payment partners. One Size Does Not Fit All Different markets have seen different types Digital consumer payments are evolving rap- of players and solutions becoming successful. idly—from the traditional cash / card / While there appears to be no singular success cheque model at the turn of the century to model seen so far, some common elements of “online single channel closed models” in the a winning model can be identified, including:

8 | Digital Payments 2020 EXHIBIT 1.2 | Evolution of Consumer Digital Payments

Multi-devices, Broad social

Connected appliances Internet of things Multi-channel, open, Beacons fragmented in-store

3rd party wallets Connected Apple Pay Samsung Pay cars scope Android Pay Social amazondash Single channel PayPal Pte. Ltd. payments Mobile closed Merchant Faster Multi-purpose Facebook, Inc. wallets payments Ecosystem Ecosystem Uber Technologies Inc. Neiman Marcus Tata Starbucks Ltd. Improved authentication Visa Inc. Secure credentials Amazon.com, Inc. PayPal Pte. Ltd. Advanced Online MasterPass™ by Token cloud Narrow MasterCard® computing

2000–2014 2015–2019 2020+

Time horizon: Mainstream adoption

Sources: BCG experience and research.

•• Compelling value proposition (rather tance, has enabled PayPal to gain significant than just a cool technology)—for traction. Launched by eBay, PayPal has aided example, Starbucks in-app payment peer to peer payments online, processing around USD 280 billion payments with reve- •• Access to a large captive customer nues of USD 9.3 billion in 2015. However, the base—for example, eBay for PayPal, solution is largely restricted to online pay- Alibaba for Alipay ments rather than proximity payment, leav- ing the POS field vacant for other players to •• Conducive infrastructure—for example, come in. NFC-enabled phones in USA for Apple Pay or a consortium of banks as is the Apple Pay, from device manufacturer behe- case for iDeal in Netherlands moth Apple, has made POS payments convenient and quick for consumers. As a multipur- •• Supportive regulations—for example, pose wallet, it offers a convenient digital M-PESA in Kenya interface for existing cards and potential links for coupon use. Apple Pay is based on NFC •• Leveraging NextGen technology—for technology and depends on customers having example, tokenisation for security, biomet- NFC-enabled smart phones. rics for authentication by Apple Pay One of the most successful in-app payment •• Bundling payments and loyalty—for wallet centered on loyalty, is currently offered example, Starbucks rewards loyal custom- by Starbucks. Customers earn rewards for cof- ers through its payment app fee consumption and avail of promotional offers on making mobile payments. Starbucks USA has been able to process 6 million transac- The issues faced by small e-merchants acquir- tions per month, offering high value to cus- ing accounts that permitted credit card accep- tomers and having little need for payments

The Boston Consulting Group • Google | 9 ecosystem coordination. As of 2015, 21 per- Alibaba and Tencent, are rapidly expanding cent of all Starbucks transactions in the US their financial-services portfolio to offer have occurred through this mobile app. loans, insurance and wealth management as part of their future growth strategy. Europe In Netherlands, a group of Dutch banks have Africa come together to offer a platform that facili- Safaricom’s M-PESA serves the unbanked / tates inter-bank transfers for payments. The under-banked customers in emerging markets solution known as iDeal, has enabled bank (20-25 million customers in Kenya or over 60- account based payments for e-commerce and 70 percent of adult population). Promoted as m-commerce transactions. Launched prior to a safer way to transact than carrying cash the advent of PayPal, iDeal now enables 60 which posed a security risk, M-PESA is a mo- percent of online payments in Netherlands. bile money account designed to work on ba- This collaboration between banks has em- sic feature phones. powered a country-specific solution to assist online payments, impeding other payment Given high mobile penetration, Safaricom has players such as PayPal from making inroads. invested significantly in ATL / BTL activities to build consumer trust and rolled out a sup- China porting M-PESA agent network. M-PESA’s im- In 2004, Alibaba, China’s largest e-commerce mense success in Kenya can be attributed to player, created Alipay as an escrow based its robust design / strategy as well as a benev- payment system to facilitate online payments. olent regulatory environment. Safaricom has Alipay helped unleash massive growth in been allowed to operate M-PESA as a pay- e-commerce by overcoming major barriers ment system outside the provisions of bank- such as lack of trust between buyers and sell- ing law by the Central Bank of Kenya. It was a ers, low credit card penetration etc. With 270 strong incumbent with nearly 80 percent mar- million active users, Alipay is believed to ket share and there existed a strong urban ru- have processed more than USD 500 billion in ral remittance demand in Kenya. With approx- digital payments in 2015, helping Alibaba imately 25 percent of Kenya GDP wired capture 50 percent of all online transactions through this mobile money platform in 2015, in the country. it is difficult to replicate the M-PESA Kenya model in a different environment. Alipay has become a way of life with cool features such as ‘ask your boyfriend to pay for shopping’, ‘crowd fund a movie’, etc. Alipay’s A New Strategy for a New World functionality has also been extended to bill With exciting times ahead for the payments payments, flight bookings and even to POS space, all current and future participants will payments. It also supports offline payments have to develop a digitally driven strategy at public transport, vending machines, conve- flexible enough to respond dynamically to all nience stores and more. key elements of evolution. Be it banks, telcos, device manufacturers, retailers, tech compa- WeChat Pay, launched as a peer to peer pay- nies, startups or others, winning models will ment solution by Tencent, another technolo- need to address real customer needs. gy firm, tasted quick success, given its integration with WeChat, a messenger app. It allows A clear value proposition, enabled by next users to make purchases without having to generation technologies, supported by deep close their chat messenger. WeChat Pay has customer engagement and scaled up through experienced aggressive growth in the last strong partnerships, is what this industry will three years and has close to 700 million ac- look like in the times to come. tive users as of March 2016.

In China, non-bank entrants into the payments arena pose a significant threat to in- cumbents. Major e-commerce players such as

10 | Digital Payments 2020 INDIA PAYMENTS ON A SIMILAR DISRUPTION TRAJECTORY

ver the past few years, the payment India going digital Olandscape in India has mirrored develop- India is rapidly evolving into a digital behe- ments occurring in the global payments moth. Rising smartphone penetration and in- arena, albeit with a time lag. Although the ternet access have ensured that Indian con- digitisation of payments in India is a recent sumers stay constantly connected (Refer phenomenon, the trend has displayed an Exhibit 2.1). This is also reflected in the exponential growth in the sub-continent, growth of digital banking transactions. with rapid growth being witnessed in digital payment transactions. •• Mobile trajectory: India currently ranks #2 in the world with over 1 billion mobile India now represents one of the largest mar- subscriptions. Of this, approximately 240 ket opportunities for payments. With a popu- million consumers use smartphones and lation of over 1.25 billion eager to partake in this base is projected to increase to over rapidly evolving advancements in technology, 520 million by 2020. India, as well as “Bharat”, is poised to make the most of digital developments transform- •• The internet network: With increased ing the payments space. 3G and 4G penetration even in the remotest parts of the country, the Inter- net network in India is rapidly expand- Four Mega Trends Transforming ing. The National Optical Fibre Network India (NOFN) initiative by Digital India is set The growth of the Indian digital payments to provide broadband connectivity to space is expected to be driven by four trends cover 250,000 Gram Panchayats across that are also likely to impact how this indus- rural India. While 70 percent of rural try looks in the future. users currently access the Internet from their mobile handsets, the initiative is •• India going digital expected to increase the adoption of data enabled devices in these areas. With •• “Favorable” regulatory environment these developments in place, we expect around 90 percent of all devices to be •• Emergence of NextGen payment service internet enabled by 2017 and the num- providers ber of internet users to double to nearly 650 million by 2020 from the erstwhile •• Enhanced customer experience 300 million in 2015.

The Boston Consulting Group • Google | 11 •• Banking on digital growth: Over the last •• Exemption from Two-Factor Authenti- few years, digital transactions have shown cation (2FA): The RBI currently mandates steady growth of 50 percent Y-o-Y, fol- the inclusion of a two-factor authentica- lowed by ATM transactions growing at 15 tion (2FA) for transactions made with percent. Not surprisingly, branch-based Indian debit / credit cards, irrespective of transactions have reduced by almost 7 transaction value. While this requirement percent in FY15 as compared to FY14 is necessary for consumer security, it also (Refer Exhibit 2.2). tends to be cumbersome, resulting in a payment process with a lot of friction, “Favorable” regulatory environment significant number of failed transactions A lot is changing in the payments world. The and transactional drop-offs. A mobile Government and concerned regulators have wallet in comparison requires a customer recognised this and have constantly kept pace to undergo the 2FA process only while with the rapidly changing environment vis-à- loading funds from other bank instru- vis technology and customer expectations. ments. Additionally, such wallets have However, this is still the beginning and lots limits on the value of transactions and more needs to be done in this space to make tend to reduce exposure to frauds as they it conducive for payments businesses to do not divulge any details of the custom- succeed in the country. er’s savings account directly.

Highlighted below are few of the key •• Aadhar making KYC easier: The advent regulatory steps that are currently enabling of Aadhar as a national identity instru- digital payments in India. ment has made the KYC process extreme- •• KYC relaxation for small transactions: ly easy. By linking a customer’s mobile As per current RBI guidelines, there is no number electronically to his / her Aadhar requirement for customers to undergo a account, the process is now much simpler KYC process for transactions up to INR and hassle free. The Jan Dhan Initiative 10,000 per month on prepaid instruments. has seen over 270 million accounts being This guideline makes it convenient for opened. This has brought millions under customers to just download the wallet of the ambit of financial inclusion and has choice and use the same for transactions made biometric authentication a reality. without the need for documentation, photographs etc. that are usually required •• Unified Payments Interface (UPI): The to avail traditional banking services. Unified Payments Interface launched by

12 | Digital Payments 2020

Number of transactions (billions) Indian Banking industry

NPCI is an integrated open architecture •• Bharat Bill Payment System (BBPS): Bill set-up that could fundamentally change payments form a major component of the way customers manage payments. retail payment transactions. Cash and The UPI set-up proposes to stitch all cheque payments continue to be predomi- services from Immediate Payment nant; particularly at the billers’ own Service (IMPS), Automated Clearing collection points. Existing systems do not House (ACH) to RuPay into one common fully address the needs of the consumers platform. This would allow for seamless due to the lack of interoperability as well interoperability and the potential as the lack of access to electronic pay- unlocking of multiple solutions. The ments. Owned and operated by NPCI, inherent open architecture will provide BBPS is envisioned as an ‘Integrated Bill access to all payment service providers Payment System’ that is interoperable, (PSPs), be it banks, FinTechs, payment accessible; cost effective and allowing banks etc. It is also expected to provide multiple payment modes. users with the flexibility of accessing bank accounts through any PSP that is Emergence of nextgen payment ser- connected to the UPI set-up. Moreover, vice providers customers will be able to choose a virtual India has witnessed significant payments ac- address in any format (mobile number, tivity in the last 3-4 years. The competitive Aadhar ID, email ids etc.). This is expect- digital payment landscape in India now spans ed to improve user experience and telcos, banks, wallet companies, e-commerce / enable PSPs to provide easy and simple tech firms and, in the near future, payment payment solutions. It is also expected to banks (Refer Exhibit 2.3). enable multiple use cases on the UPI platform—including peer to peer pay- Bank-led: In the past, banks have largely of- ments, person to merchant payments and fered mobile banking apps with integrated business to business payments. bill payment solutions. However, customer

The Boston Consulting Group • Google | 13 experiences with mobile wallets have proved recharges and remittances. Idea Money from to be far more seamless and quick, leading Idea Cellular, mRUPEE by TATA and Jio- to customers preferring wallets for mobile Money by Reliance are other telco-led pay- recharge and bill payments. Thus, banks ment solutions, launched to help consumers have now started offering their own mobile conduct a variety of financial transactions wallets in addition to the mobile banking conveniently. apps. Few examples include Pockets by ICI- CI Bank, Lime by Axis Bank, PayZapp by Prepaid wallets: In 2009-10, the RBI had is- HDFC Bank, SBI Buddy by SBI and Ziggit by sued 26 prepaid payment instrument licens- IDFC Bank. While most of these apps do not es (PPI). PPI issuers could now issue semi- require a bank account for their use, some of closed wallets that enabled payments these do allow existing bank customers to without 2F Authentication. As a result, two log in using their internet / mobile banking types of PPIs emerged: credentials. Given that banks already have an existing captive base of consumers, they •• Mobile wallets: These are app-based can monetise faster as compared to indepen- stored value accounts, funded through dent mWallet firms that will need to spend credit / debit cards or via netbanking. on customer acquisition. Paytm, MobiKwik, Freecharge and Citrus Pay are some well-known mobile wallet Telco-led: Large telcos such as Airtel and examples. These wallets are primarily Vodafone launched mobile payments solu- used for mobile recharges and bill tions, Airtel Money and Vodafone M-Pesa re- payments. spectively, targeted at their own customer base. The solutions were initially USSD- Backed by VC funding, these companies based to ensure even non digital-savvy cus- spent heavily on customer acquisition tomers find it easy to use. The primary use through marketing initiatives. Soon enough, cases for these solutions were largely mobile they diversified existing business models to

14 | Digital Payments 2020 monetise on the customer base through ex- Correspondent (BC) to another bank and pansion of services. These included tie-ups distribution of mutual funds, insurance with radio cabs (Paytm-Uber, Meru-Citrus services etc. These banks cannot under- Pay), offline use-cases such as POS payment take any lending activities or issue credit (Paytm-More tie up), payment at fuel sta- cards, accept NRI deposits or become a tions and educational institutions etc. “virtual” bank.

In order to reach unbanked or under-banked However, the economic model for payment customers, wallet companies have now en- banks is challenging, given that they cannot abled cash funding of wallets through inno- earn lending revenues or high rates of vative solutions such as MobiKwik’s cash interest on floats due to requirement of pickup service and Paytm’s tie-up with ICICI investing customer deposits in government for cash loading at ICICI branches. securities. A few of the licensees such as Cholamandalam, Uninor and Mahindra •• Prepaid cards: Companies such as Finance have already returned their in- Oxigen, Itz Cash, Suvidhaa and GI Tech principle approval to RBI. offer solutions with an agent-assisted offering to consumers who are not digitally savvy. Primary usage in such Payment banks are well cases have been remittances and railway ticket booking. placed to capitalise on the

Some of the PPI’s were acquired by tech payments opportunity. firms (e-commerce, radio cabs, entertainment booking) to offer in-house wallet solutions. For example, Snapdeal acquired Enhanced customer experience Freecharge, Flipkart acquired FxMart to of- Indian customers are now used to a superior fer Flipkart money and Amazon acquired experience owing to the popularity of e-com- Emvantage. While Ola offers Ola Money, merce, and are demanding a similar experi- Bookmyshow too has its own wallet app to ence from their financial services providers service customers. With growing popularity as well. This includes seamless access to of such wallets, several other companies bank accounts and payments, coupled with have now applied for such licenses with the rewards, loyalty and offers. total number of PPI licenses growing to 46 licenses in 2016. •• Superior & seamless customer experience: In the recent past, we saw India •• Payment banks: Keeping with RBI’s being swept by the online shopping wave stated objective of driving financial given the arrival of e-commerce entrants inclusion and enabling high-volume such as Flipkart, Amazon, Snapdeal, etc. low-value transactions thereby reducing The convenience and ease of buying the dependence on cash, RBI provided almost anything and everything online in-principal approval to eleven entities to while sitting at home proved to be too set-up payment banks in 2015. These good to resist. It is expected that the entities include telecom players (Airtel, popularity of online payments will soon Vodafone, Uninor, Idea, Reliance Jio), mirror the popularity of shopping online. tech-centric payment players (Paytm), This has been corroborated by the trends next-billion focused players (NSDL, Fino, wherein the youth now prefer to use Ola / India Post) and NBFCs (Mahindra Uber rides instead of conventional cabs to Finance, Cholamandalam). The scope of avoid hassles of paying the exact amount activities of a payments bank includes by cash. Paytm’s association with Uber acceptance of demand deposits up to INR and Ola Money by Ola have perpetrated one lac per customer, issuance of ATM / the “get in-get out” phenomenon in the debit cards, offering payment and taxi industry. Thus, payments are now a remittance services, acting as a Business background activity while the focus stays

The Boston Consulting Group • Google | 15 on making user experience seamless. In regular discounts on products, offered the bill payment industry, for instance, either as credit to the wallet or as discount payments on mobile banking apps involve coupons at partner-merchant outlets. These multiple steps i.e. logging into the app, offers tend to encourage customer usage of registering the biller, initiating the pay- wallets as a primary mode of payment. ment, two factor authentication and then final payment. In comparison, in the case of wallets, the customer has to just enter Rise in Adoption of Digital her mobile number followed by one-touch Payments payment. In addition, internet and mobile India truly seems to be going digital and this banking applications have multiple is validated by the exponential growth of its security guidelines of logging out after digital marketplace. The volume of mobile inactivity etc. resulting in a sub-par banking transactions in 2012-13 was similar customer experience. to that of mWallet and Prepaid Payment In- struments (PPI) transactions combined (Refer •• Attracting customers with offers and Exhibit 2.4). discounts: Since the concept of mobile wallets is still new in India, companies offer substantial deals, discounts and offers to Prepaid instruments trans- woo customers and increase awareness. For example, in 2015, Paytm offered INR 8,000 actions almost 2X of mobile as discount on iPhones and iPads, while in 2016, Freecharge offered significant banking transactions. cash-backs on minimum bill payments. Ola and Uber offer regular cash-backs of up to 50 percent of previous-ride bill value. Within the next 4-year span, PPI (mWallet Paytm and MobiKwik are known for their and prepaid card) transactions have grown

Number of transactions (million) Number of transactions (million)

16 | Digital Payments 2020 much more rapidly to become almost double In the last six years ( July 2010 to Jun 2016), if of mobile banking transactions in the same we look at the growth in internet search que- period. In the year 2015-16, around 747 mil- ries, we’ll see that queries containing the word lion transactions occurred through mWallet “pay” grew by 18X since July 2010. This has and prepaid cards combined, whereas only been taken as a surrogate for the demand for 390 million transactions happened through online payments. Queries regarding remitting, mobile banking. This being said, the majority transferring or sending money grew by 5X in of transactions through mWallet are smaller last 6 years, whereas queries for mobile wallet with an average ticket size of INR 620, while brands also grew by 5X since July 2010. Search mobile banking transactions are on an aver- queries for “pay / wallet / money transfer” age INR 10,400 per transaction, notching up a grew much faster in the last year, at 3X rate, as gross annual transaction value of INR 4,000 compared to search queries for industries like billion. mWallet is largely preferred for micro e-commerce, credit cards and insurance. transactions while high value transactions take place through mobile banking. The digital payment market in India is still nascent despite concentrated activity over the In terms of how many people use wallets ver- past 2-3 years. The landscape is dynamic and sus how many actively transact through online is rapidly evolving given changing use cases, banking, the number of unique active wallet customer propositions and business models. users (80-85 million) has already surpassed that of online banking users (60 million). Supported by a favorable regulatory environment and coupled with a young demography eager to try and test new digital technologies, Wallet users already more the Indian payment industry is bound to grow multi-fold in the coming decade. than mobile banking users and triple the number of credit card users.

This contribution comes from those users who do not use net banking but fund their wallets through credit cards, debit cards or cash. The number of wallet users is already 3X the number of credit cards issued in the country (24 million in 2015-16).

The Boston Consulting Group • Google | 17 INDIAN CONSUMERS RARING TO RUN UP THE ADOPTION CURVE

igital payments in India are not cards for ATM transactions and cash with- Dlimited to being an urban and affluent drawals. This segment also includes users phenomenon. Trends show that future who are paid or funded in cash—ranging adoption and growth of such services will be from workers to ‘dependents’ in high-income driven by the next set of low income users. households, such as students and house- Currently, users of digital payments lie wives, who need their cash transactions to across a wide spectrum of income, consump- be digitised. Lastly, growth in this space is tion profiles, attitudes, pain points and set to come from migrants and the next bil- motivations. While some of these needs lion users, who are yet to be financially in- have been addressed with current proposi- cluded. Thus, the potential implications of tions, the rest present a huge opportunity to digital payments in this segment are pro- include masses into the envelope of digital found and wide-ranging. payments users. In order to better comprehend preferences, Multiple-need profiles and user archetypes behavior and pain points of these varied lie within and across demographic segments. user segments towards digital payments, For example, digitally and financially savvy BCG in association with Google, undertook a users primarily need a digital payments survey conducted by Nielsen aimed at un- solution to simplify their payments. Such us- derstanding what it will take to build a suc- ers form a majority of the current digital cessful payments play in India. The survey wallet user base and usually have payments spanned 9 cities (metros and non-metros) instruments like credit / debit cards and cer- and covered approximately 2,500 consumers tain online banking experience. This seg- and 920 merchants, who were aware of digi- ment is primarily driven by convenience tal payments. Insights from this research, (lack of 2FA, for example, Uber payments) combined with industry interviews and and the appeal of bringing physical-use cas- knowledge from our existing client work es like bill payments online. have helped outline a set of initiatives that payments players should undertake in order In addition, digital payments also cater to to successfully unlock the potential of the the segment of digitally unbanked users who Indian digital payments space. mainly need digitisation of their money. This potentially large user base, while paid digi- The primary research brought several tally, does not use any form of digital bank- interesting and crucial insights to the fore. ing. They instead prefer to use their debit Contrary to popular belief, convenience

18 | Digital Payments 2020 emerged to be as important if not more for Users of digital payment instruments continual usage of digital payments vis-à-vis prefer these to other non-cash price sensitivity or huge discounts and cash- modes backs. Consumers seem open to using digital Primary research indicates that 65 percent payment instruments for new use-cases of customers aware of digital payments in- gravitating towards offline points of sale struments move to the trial stage. 81 percent such as organised retail, food and of users of a digital payment instrument pre- entertainment. fer it to any other non-cash payment method such as credit / debit cards or net-bank- Even so, the habit to use cash, complexity of ing, indicating high stickiness. Metros lead digital payment instruments and limited this transition, valuing the immediacy and reach pose significant barriers for consum- 24X7 access that digital payments bring. ers in adopting digital. Similarly, while 75 percent merchants believe that adopting digital payment methods will help grow their 81 percent of users of a digi- business, complexity and limited pull hinder mass trial. tal payment instrument prefer it to any other non-cash Key Insights from the Consumer payment method Research that Indicate India’s Digital Payments Readiness 1. Users of digital payment instruments Convenience is as important as prefer these to other non-cash modes offers in driving digital adoption Despite the recent push on cash-backs and 2. Convenience is as important as offers in offers, convenience is as important as ‘of- driving digital adoption fers’ in driving digital payments adoption. Convenience encompasses not only ‘one 3. Prepaid mobile recharge and bill click’ payments (the single largest reason for payments remain the most popular adoption) but also ability to recharge / pay use-cases bills anytime anywhere through mobile phone, convenience of not carrying cash and 4. Point of sale to form the largest use-case also no hassle of change (Refer Exhibit 3.1). for digital payments in future Even as consumers see value in digital pay- 5. High frequency use cases driving usage ments beyond rewards; discount pricing, of digital payments cash-backs and coupons have played a key role in breaking consumer inertia by incen- 6. Habit to use cash, complexity and tivising non-cash payments. Going forward, perceived lack of value proposition key such rewards can be used not just as an op- barriers to adoption portunity to catalyse adoption, but also to define and build customer loyalty. Creative 7. Security, identity theft and fraud are not use of incentive programs along with com- big barriers in India pelling product proposition can help drive mass adoption and continual engagement. 8. 3 out of 4 merchants believe digital will grow big, accelerating future sales By leveraging rich transaction data and analytics, rewards can be personalised beyond 9. No clear benefits over other methods, blanket cash-backs, to co-market with mer- proclivity towards cash and complexity chants and to create loyalty programs. The are key barriers for merchant trials creative use of such incentive programs can also help in driving and sustaining mass 10. Building a transaction ecosystem for adoption and engagement, in association merchants is critical with other product propositions.

The Boston Consulting Group • Google | 19 EXHIBIT 3.1 | Reason for Using Digital Payments

66 62 60 57 51 48 48 50 43 40 38 32 31

21 20

0 One Click Offers Pay anytime Easy to track Convenience of No hassle Payments anywhere small expenses not carrying cash of change

Metro Non Metro Convenience factors

Sources: Google–BCG market study based on Nielsen consumer survey of 1,516 consumers, 2016. Note: Figures in (%), Sample–Trialists. Question: On the card are some reasons why people started using digital payments. Please select all those that apply to you.

Prepaid mobile recharge and bill pay- •• E-commerce and travel booking: ments remain the most popular Cash-on-Delivery is a necessary evil and has use-cases dominated Indian e-commerce payments, in The digital payments landscape in India start- face of insufficient consumer trust and ed almost solely on the single use case of pre- inadequate penetration of credit cards or paid mobile recharges and this is echoed in our digitally active banking services. Most research as well. Consumers are also using digi- e-commerce players accept payments in tal payments for bill payments (mobile and cash, despite delayed payment receipts, utility bills), e-commerce payments and travel logistical problems, higher supply chain booking (Refer Exhibit 3.2). costs, less control and high pilferage in cash handling. Of late, e-commerce websites have •• Bill pay shows large potential of tectonic integrated with wallet players for seamless shifts to digital payments: Bill payments payments, and are beginning to see traction. remain the most inconvenient of use-cases Even online travel booking sites have to fall under the scope of digital payments. started offering digital payments. However, Around 30 billion bills worth USD 103 20 percent of online purchase transactions billion are generated every year, of which, fail at checkout owing to customer aban- 70 percent are paid in cash. Bill payment is donment, patchy networks and glitches in currently not interoperable and digital digital payment. Improved products that payments players have had to sign up with ease final conversion display a high poten- individual utility providers to facilitate tial in targeting online merchants. payments. The top 10 electricity companies have just 2,000 cash collections centers in •• Remittance / fund transfer: Peer to peer India. However, with launch of the Bharat transfers or remittances will continue to be Bill Pay System, a large inflection is expect- an important use-case for digital payment ed as massive amounts of bill payments instruments. Digital payment instruments will get digitised. like wallets and assisted payment service

20 | Digital Payments 2020 EXHIBIT 3.2 | Use Cases of Digital Payments

% respondents

Use cases

Sources: – Note: – Question:

providers (Itz Cash, Oxigen, Suvidhaa etc.) According to the study on potential use-cases, help urban migrants send money home consumers have shown high willingness to without the need for queues etc. as com- adopt digital payment instruments for offline / pared to banks. Thus, the adoption of physical payments, with food and entertain- digital payment instruments for fund ment and organised retail forming the top 2 po- transfers is expected to grow exponentially. tential use-cases (Refer Exhibit 3.3). Profession- al services, transport and unorgainsed retail are Currently there is limited usage of digital pay- other potential use-cases for digital payments. ment instruments when it comes to physical point of sale payments. This is because of limited reach and acceptance of such instruments Consumers would like to use at merchant outlets. However, this is likely to gain traction and become an important use- digital payments for physical case for digital payments in the days ahead. point of sale purchases in Point of sale to form the largest use- future case for digital payments in future The digital payments landscape in India has long been in search of a “killer” use-case in As use-cases expand, the focus needs to be on its chase for ubiquity of acceptance. Until being universal and providing services across now, digital payment instruments and wallets multiple use-cases in order to earn maximum have been popular for online transactions. revenue per customer. However, the real growth in the usage of digital payments is expected to come from usage High frequency use cases driving us- at physical points of sale. Point of sale P2M age of digital payments payments will form one of the largest use-cas- Consumers have hitherto been used to pay- es for digital payments. ing in cash. For digital payment instruments

The Boston Consulting Group • Google | 21 EXHIBIT 3.3 | Consumers Open to Trying Digital Payments for Large Format POS Purchases in Future

Sources: – Note: – Question:

EXHIBIT 3.4 | Digital Payments: 3 Use Cases Per User; Used 8 Times Per Month

No. of "use cases" per user Frequency of using

Sources: – Note: – Question:

22 | Digital Payments 2020 to achieve adoption and scale, they need to Habit to use cash, complexity and almost become a habit. Hence, frequency of perceived lack of value proposition key using the instrument becomes very import- barriers to adoption ant. Much like cash, a digital payments in- While consumers have exhibited an enthusi- strument should be usable for multiple, high astic response towards digital payments, they frequency everyday transactions. These may have also voiced several concerns that act as by very nature be small in amount. For ex- impediments preventing their shift to and be- ample, online mobile recharge has been a lief in digital payment methods. predominant use case for digital payment instruments —small in value (so the new, un- •• Habit to use cash: A large percentage of evolved consumer could trust), frequent (95 the Indian population is still habituated to percent of telecom users have prepaid con- cash even when making online purchases nections which they recharge 2-3 times a with 68 percent of the surveyed consum- month), and a commodity product (no quali- ers admitting to using cash as a means of ty variations with location of purchase). payment (Refer Exhibit 3.5). This has led Quite a few digital payment instruments got all leading national and international initial traction through online mobile re- players in the e-commerce arena to charge. Since then, the list of use cases of include cash on delivery as an option to digital wallets has expanded to cover other suit Indian consumers. Consumers also frequent payment transactions like utility feel that spending money in cash aids in bills, e-commerce and local transportation. budget management and keeps spending patterns in check. Although they acknowl- An average user of digital payment instru- edge that handling cash is inconvenient, ment today uses the instrument across stays they are satisfied with the way it works three different use cases, and typically uses and are not enthusiastic about changing the instrument 7-8 times in a month (Refer how they handle money very easily as it is Exhibit 3.4). so ingrained in their day-to-day life.

EXHIBIT 3.5 | Key Barriers for Adoption

Digital payments: Barriers to trying

Sources: – Note: – Question:

The Boston Consulting Group • Google | 23 •• Complexity of usage: Product complexity Inconvenience, low reach and possibility of is considered to be one of the biggest making mistake arresting usage reasons behind non-usage of digital Consumers who have tried using digital pay- payments. 1 in every 2 non-users do not ments but have now shifted to other modes use digital payments because they find it such as cash, card, online banking etc., say that ‘too complicated’ to understand. (Refer inconvenience of remembering login creden- Exhibit 3.5). In fact, 1 in 3 non-users admit tials, insufficient acceptance, possibility of a to not knowing how to use the product technical or human mistake during a transac- while 1 in 5 think it to be too complicated tion and frequently running out of balance are to try. As digital payments target heteroge- the top reasons for lapsing (Refer Exhibit 3.6). neous user and merchant segments across the value chain product design needs to To win back churned consumers payment ser- ensure that the solution is built for the vice providers need to address critical pain base and communicated appropriately. points. For example, introducing biometric au- This is critical for universal acceptance. In thentication would eliminate the need of mul- comparison, cash is still the most preferred tiple user names and passwords. Furthermore, instrument of payment, simply because of acquisition and integration of merchants under its absolute ease of understanding even the system would increase the use cases and though it is not the most convenient thereby increase acceptance of digital pay- option. Payment innovations have to ments. High frequency transactions must be ensure increasing simplicity of the prod- brought under the ambit of digital payments to uct. A large range of value propositions, urge consumers’ movement in that direction. standards and technologies are likely Auto-sweep features can aid in addressing low creating confusion and excluding unev- account balances and the maintenance of req- olved users, unless they are communicated uisite minimum balances in the digital pay- clearly and built for the base. ment account.

•• A Perceived lack of compelling value Security, identity theft and fraud are proposition: About half of the users who not big barriers in India had never tried a digital payment instru- Primary research data indicates that fraud and ment, said that the reason they haven’t hidden fees do not emerge as top reasons hin- used it is because they could not fully dering digital payment instruments. In fact, 2 comprehend the benefits or value. It is in 3 consumers who have never used any digi- evidenced in the fact that they have not tal payments instrument, have no fear of fraud heard a lot of people use or talk about / hidden charges (Refer Exhibit 3.5). Even for digital payments. This does not give them a those customers who tried and quit, the likeli- very strong motivation to alter behavior or hood of fraud, identity theft and hidden adopt digital payments. charges did not feature as prominent pain points (Refer Exhibit 3.6). For non-users, the chief barriers to trial are habit of using cash, complexity, and lack of a compelling value proposition offered by a digi- Unlike global markets, se- tal payment method. In order to acquire customers onto a digital payment instrument, cer- curity, privacy and fraud are tain key points need to be addressed by the payment service providers. The offering can be not top of mind concerns made more appealing through incentives and offers to enable adoption. In addition, the user interface needs to be intuitive and simple to 3 out of 4 merchants believe digital ensure a seamless customer experience. To will grow big, accelerating future drive mass adoption by consumers, expanding sales merchant acceptance is critical. Providers can According to 84 percent merchants partici- also look to educate customers and communi- pating in the survey, the most important cate the benefits clearly. driver for digital payment usage amongst

24 | Digital Payments 2020 EXHIBIT 3.6 | Reason for Stopping Usage of Digital Payments

% of respondents

Sources: – Note: – Question: merchants, who are aware of digital pay- No clear benefits, proclivity towards ments, is convenience over cash. The re- cash and complexity are key barriers search also highlights the fact that most mer- for merchant trials chants struggle with small change, with 87 percent merchants who have never tried some literally paying money to obtain the digital payments state that digital payment requisite change to manage their day. Mer- instruments do not offer significant advan- chants value the avoidance of this struggle tages / value benefits over existing methods for change, the convenience of not having to such as cards. They are used to dealing in store and manage cash, and the added bene- cards and believe that other methods profit of being able to account for and track vide better incentives and given many other transactions. options, there does not exist a catalyst to drive adoption of digital payments (Refer Exhibit 3.8). 75 percent of merchants Transactional speed is critical while compet- believe that using digital ing with cash. Even though time saved in managing large bills in cash, finding change, payments would accelerate or engaging in daily cash counts and bank future sales. trips is acknowledged, the loss of time in peak hours due to time consuming transactions and falling quality of customer experi- The possibility of additional sales is another ence given delays in accepting digital pay- primary motivation that draws merchants to ments are perceived to be serious challenges. digital payments. 75 percent of merchants be- 78 percent merchants prefer cash. lieve that the acceptance of digital payment instruments would accelerate future sales The complexity of use presents a problem (Refer Exhibit 3.7). for merchants—some merchants who don’t

The Boston Consulting Group • Google | 25 EXHIBIT 3.7 | Trigger for Digital Payment Usage for Merchants

Digital payments: Triggers of usage

Convenience 24X7 access Increase sales Competitive Marketing Customers over cash (84%) (77%) (75%) advantage (37%) (23%) use it (14%)

Sources: – Note: – Question:

EXHIBIT 3.8 | Key Barriers for Merchant Trials

Digital payments: Barriers of usage

Sources: – Note: – Question:

26 | Digital Payments 2020 accept payments by wallets, are unclear of Education, in-store demonstration or work- how it works or find it very complicated. shops etc. would be crucial in on-boarding of They also feel that there is not enough pull merchants. Providing resources to merchants from customers as not many customers cur- in seeking assistance and information on rently ask to pay using digital payment in- platform usage or queries would encourage struments. merchants to invest in a good internet network, leading to seamless transaction speed and quality. It will help in retaining higher Proclivity towards cash, number of merchants in the digital system. complexity and perceived Building a transaction ecosystem for merchants is critical lack of value proposition are Cash is deeply embedded in the ecosystem barriers for trials that small merchants operate in. Customers rarely ask to pay digitally and the upstream supply chain also demands payments in cash. A real problem that is also presented by digi- To ensure universal acceptance is built, digital payments is the perception of inferior tal payments players need to ensure a gradu- technology and poor supporting infrastruc- al transition into customers and merchant ture. 48 percent merchants do not want to transaction ecosystems (Refer Exhibit 3.9). try digital payments as they are wary of technical issues during the transaction lead- •• Linear adoption: Increase awareness and ing to them being stuck between the pay- presence and offer better support. ment service provider and customer. Mer- chants would also prefer having a physical The digital payments instrument must access point for managing disputes or for generate merchant demand by driving tri- query resolution. als and adoption, as well as through a sim-

EXHIBIT 3.9 | Merchant’s Ideal Digital Payment Instrument

• Establishing the • — transaction ecosystem •

• Address gaps / pain • — points • —

Disruptive potential

Incremental • Increase awareness and • Linear presence and better services

Sources: –

The Boston Consulting Group • Google | 27 ple and convenient merchant acquisition chants have shown great interest in value process. Both the on-boarding and the fee added services such as integrating with pay- structure need to be kept highly simple, ments platform to provide customer features, especially for the unorganised retailer. like order ahead, pre book etc.—providing Further, payment service providers must value both to customers and merchants. ensure requisite support is provided in the form of call center / agent support, toll The digital payment offering of the future free numbers, and transparent processes needs to combine the simplicity and univer- (for example in case of disputes, refunds sality of cash, with the security and conve- etc.). This will provide the required confi- nience offered by digital payments. Intuitive dence to merchants to come on to the dig- consumer interface with option of vernacular ital payments platform. languages and biometric authentication will drive mass adoption while complimenting it •• Incremental adoption: Address need with greater coverage and acceptance at gaps and pain points. physical point of sale will lead to its sus- tained usage. The payments players would In order to drive merchant adoption of also need to ensure that unlike the present digital payments, it is imperative for pay- wallet, a completely fungible and interopera- ment service providers to improve the ble system is created between the digital pay- products offered—with easier processes, ment instrument and the customer’s bank reporting, reconciliation etc. Digital pay- accounts. Not just would this provide added ments should be faster—for example, convenience to customers but would also touch based. Merchants are worried lead to systematic tracking of money flows, about long queues if that transaction better planning and even limits and alerts on takes time to complete. This has to be giv- money movement. In terms of monetary en disproportionate importance to drive benefits, the amount stored in current wal- large scale offtake. Further, digital pay- lets does not earn any interest whereas mak- ments players will need to develop more ing wallets interoperable and fungible with use-cases where digital clearly beats cash, bank accounts will make wallets a potential to ensure momentum of changed user candidate for earning interest income. Not habits to carry through in situations just this, instead of paying a fee for cashing where benefits of digital payments are out to bank account, merchants can utilise not that differentiated. the data and insights from usage pattern to market customised offerings and grow their •• Disruptive potential: Establishing the business (Refer Exhibit 3.10). transaction ecosystem. In summary, digital payments in India is in a The acceptance of money in digital pay- unique position—given the nature of the ments for merchants is directly linked to product, ubiquity of acceptance is a must, their ability to pay their distributors and and hence mass appeal which can harness vendors through the same instrument. Es- the power of network effect and push the tablishing this transaction ecosystem help- product universally is a pre-condition to suc- ing merchants manage their inbound and cess. At the same time, there is intense het- outbound transactions will be critical to erogeneity of the user, use cases, motivations, drive universal acceptance. attitudes and barriers towards digital payments. The right product thus has to cater to Finally, while cost savings and convenience both these seemingly conflicting needs—have will establish value with merchants, globally mass appeal, and yet be able to cater to all the single most important reason which has these varying needs in a customised manner. driven traction with merchants is getting more sales, through co-marketing campaigns, rewards or incentives programs and leveraging the network and data of the payments player. Further, in primary research mer-

28 | Digital Payments 2020 EXHIBIT 3.10 | The Future Digital Payment Instrument Needs to Offer Similar Functionality as Cash

Digital payments – Usage Cash Digital payments – opportunity current offering

Simplicity • Universally • Too complicated • Needs to be intuitive recognized • Include product variants in local • No language languages • Technology like biometrics for KYC and authentication Universality/ • Accepted • Limited reach – 50% • Cover both physical POS and online Reach everywhere users lapse due to this • Mass linkage of use-cases

Fungibility and • Completely • Limited cash-in and cash- • Interoperability amongst digital Access fungible out points instruments and bank accounts • Shared infrastructure for fungibility and access

Speed • Cash is fast • Time consuming, • Use of technology like tap and go (NFC, especially at point of sale QR codes) • Improving infrastructure connectivity

Ease of trial and • No onboarding • Merchant onboarding for • Easy documentation, quick and hassle- onboarding required education and free KYC processes will incentivize documentation onboarding

Cost • Perception of little • Merchants pay fee to • Communication of cost of cash cost—Cost of cash cash out / transfer money • Payments Bank linked wallet will provide is implicit, not to their banks interest on wallet balance realized • In PPIs—consumer losses • VAS for merchants—data, insights, interest and ready cash marketing and feature benefits to grow sales and save costs

Tax • Tax management • Systemic / policy change • Systemic / policy change required opportunity required

Managing • Perception of • While considered an • Better customized interfaces to enable expenses control—helps impulse buy, does users and merchants to see spend manage costs provide a record of amounts, categories and options to plan expenses better, put ceiling or alerts, etc.

Convenience • Managing cash • Primary usage driver for • Integrating user interaction, consumption, and ensuring ready both consumers (66%) payment change is a hassle and merchants (84%) • Use of geo-tracking, consumer analytics already • Link with merchant platforms to provide pre-order type facilities to ease buying and payments Customization • Not Applicable • Communication and offer • Technology addresses personal needs based • Enhanced financial products basis consumer data

Security and • Risky to carry • Trust not a barrier • Improve technology to increase trust risk • Call center, agents for grievance redressal • Consumer education

Source: BCG-Google analysis.

The Boston Consulting Group • Google | 29 INDIA DIGITAL PAYMENTS – A $500 BN POT OF GOLD

ncreasing smart phone penetration, Technology will make digital Igreater access to the Internet, rise in payments simpler consumption and the rapid development of Widespread adoption of digital payments will payments infrastructure is set to drive the require such transactions to be just as conve- penetration of digital payments in India. We nient and safe, if not more, as cash. This is expect the digital payments space to witness only possible with new solutions being devel- significant disruption in the days ahead. oped to make digital payments easier for customers as well as merchants. Smartphones are expected to displace cards, ATMs and POS The Future of Digital Payments as an issuing and acquiring device. Ubiqui- in India tous connectivity, biometrics, tokenisation, While the exact form and shape of disruption cloud computing and the Internet of Things will only be unveiled over time, the crystal ball are just a few of the trends that will affect the indicates seven trends set to transform the pay- way consumers transact and interact with ments landscape over the next five years: payment service providers in the future.

1. Technology will make digital payments Some payment innovations that could be rel- simpler evant in the Indian context are:

2. Merchant acceptance network to grow •• Contact-less payments: Near-Field 10X by 2020 Communication (NFC) has not been very successful in the Indian context on 3. Payments will drive consumption— account of the high costs associated with and not the other way around embedding it in smartphones as well as merchant terminals. However, other forms 4. Consolidation will drive ubiquity of contact-less payments that have worked in emerging markets like China may be 5. Modified UPI will be a game changer more appropriate. For example, the use of QR code technology can make point-of- 6. Digital identity will accelerate customer sale mobile payments convenient. Cus- acquisition tomers will just need to flash the mobile app with the QR code at check-out, which 7. Cash to non-cash ratio will invert over the can be read by the cashier and according- next ten years ly the amount can be debited from the

30 | Digital Payments 2020 customer’s wallet / account. Customers feature to the phone is less than INR 500 authorise the transaction using a simple and costs are expected to further de- 4-digit pin or biometric scanners. crease. In the future, a significant proportion of phones could be iris enabled, •• Reduced dependence on mobile making online authentication simpler. internet: Even though penetration and usage of the internet on mobiles is In summary, while the exact uptake and pen- continuously increasing, mobile data etration of different technologies is unclear, it networks in the country are still unreli- is obvious that technology will be a key dis- able and expensive for certain customer ruptor and further developments will make segments. Technologies that require only digital payments simpler, more convenient one of the two transacting parties to have and easier to use. access to mobile data can significantly drive up transaction success rates and Merchant acceptance network to further adoption of mobile payments. grow 10X by 2020 The merchant acceptance network for cards •• Internet of Things: We expect that the in India has by and large been stagnant for Internet of Things will fuel online transac- the last several years. With approximately tions in the next few years. Automation one million POS terminals accepting card and connectivity of gadgets and devices payments at an estimated 700,000-800,000 will become seamless. Customers will be merchant outlets, it is one of the most under- able to initiate a purchase and / or penetrated in the world (Refer exhibit 4.1). payment from any electronic gadget at The potential of this segment is estimated to their home or office. For example, con- be nearly 15 million establishments including sumers could use an internet connected unorganised retail and small “mom and pop” refrigerator at home to order groceries stores. and pay for it real-time using a digital payments instrument. One of the key reasons for this low penetration has been the high cost of “terminalising” •• Block chain: Technologies like block merchants. Despite the cost of EDC machines chain could be used to create digital coming down significantly over the last sever- currency (like bitcoin) making peer-to- al years, a certain minimum threshold of peer digital payments seamless and transactions is still required to recover cost of secure. deployment and maintenance. Further, the current economics of the merchant acquisi- •• Voice based payments: Banks and tion business make it unviable for acquirers. payments service providers could offer solutions that enable customers to log in We believe that mobile based payment solu- and pay through voice-based authentica- tions will significantly drive merchant acqui- tion. This would mean that customers no sition. The use of technology will create solu- longer need to enter a PIN or a password tions that require nil or minimal additional while shopping as the app can compare investment on point-of-sale hardware. Use of stored voice recordings to verify each proprietary or mobile based payment net- transaction through a simple voice phrase. works is expected to make economics more This will allow aged and illiterate users to attractive for both merchants and acquirers. easily access such services and drive Primary research indicates that merchants acceptance / penetration further. believe accepting digital payments could help boost their sales, and are open to accepting •• Biometric / Iris authentication through payments through mobile provided fast and mobiles: NTT Docomo has launched convenient solutions are available. smartphones with iris recognition capability. This makes transaction facility on the Offline is an indispensable channel to attain phone accessible only to the primary user scale of digital payments. It also provides ex- of the device. The cost of adding this tensive richness of consumer profiles by be-

The Boston Consulting Group • Google | 31 EXHIBIT 4.1 | POS Terminal Penetration Across Countries

No. of terminals per '000 debit card1 40

20 33.2 26.9 10 21.4 20.3 14.8 13.1 12.5 7.2 6.1 2.0 0 Australia Turkey France United Brazil United China Germany Russia India2 Kingdom States

Source: Euromonitor 2015, BCG Payments Model 2015. 1Data is for year 2015. 2Includes debit cards issued under Pradhan Mantri Jan-Dhan Yojana (PMJDY).

ing able to merge offline and online be- ments by 2020. This will be a key factor in haviour. An offline strategy should involve driving the penetration of digital payments in analysis of customer lifecycles for use-cases the country. This 10 million is expected to to identify points of value addition for cus- come from the current 15 million universe, tomers and merchants. We believe that of- plus the potential use with “mobile mer- fline should, and will be a priority, for all pay- chants”, for example, newspaper vendors, ment service providers. milkmen, cable TV providers, insurance agents etc. Take the example of China. Both Alipay and Tencent are leveraging offline, albeit in different manners, basis their strengths. Alipay Merchant acceptance net- is using its massive scale to challenge Union Pay (credit and debit cards) by signing up work likely to grow 10X over more Points of Sale (POS), partnering with large retailers (7-Eleven, In Time Retail), us- next 5 years ing strong promotional schemes (offering discounts offline of up to 50 percent at restaurants and supermarkets) and offering Payments will drive consumption— international shopping offers to high-end and not the other way round customers. WeChat (Tencent’s instant mes- Digital payments will enable payment service saging service) on the other hand, is using its providers to get access to customer transac- chat platform to deeply integrate with user tion data, and will soon become a ubiquitous behaviour. Peer-to-Peer (P2P) transfers are ecosystem comprising marketing, transactions encouraged through WeChat messenger, and payments. Customer will be offered digi- adding value to merchants with WeChat ser- tised valuables such as offers, coupons, loyal- vice accounts. Merchants can also engage ty points, rewards, etc. from multiple brands with customers on WeChat, for food orders, while enabling payment transactions through store location services, reservations, custom- the use of data and analytics. It will work par- er service etc. allel to merchants’ apps complementing them and engaging with users, thereby providing a In light of all of the above point, we estimate seamless shopping experience and giving that 10 million plus merchant establishments merchants a presence on customer’s mobile will accept digital and mobile based pay- device. Digital payments will pivot into an ex-

32 | Digital Payments 2020 perience influencing consumption going be- UPI is currently in very early stages, and yond payments. hence, a few challenges are yet to be overcome. Firstly, NPCI needs to ensure the inte- Consolidation will drive ubiquity gration of leading banks, PPIs and other fi- The last few years have witnessed the entry nancial institutions on this platform. This is of several participants in the payments space, expected to be difficult and time consuming. with many of these being non-bank entities Secondly, providing a seamless and consistent such as PPI’s, telcos etc. Some of these play- experience to customers across mobile bank- ers have focused on providing niche or limiting platforms of varied banks will not be ed solutions. Most of these players have been easy. Finally, ensuring that all users are able subscale and have not been able to acquire to generate UPI virtual IDs on their own, will critical mass with some even shutting down be significant to the success of this initiative, operations. especially for merchant transactions.

Primary research indicates that customers Despite these challenges, UPI holds the prom- prefer ubiquitous solutions to using different ise of being a game changer for the digital payment instruments for different use-cases. payments world. If suitably modified to over- Smartphones shipped to India are often come challenges, it can drive large scale stripped down versions, and have less memo- adoption of digital payments in the country, ry, limiting the number of apps that can be in times to come. downloaded and stored therein. Given all this, customers would prefer to have fewer Digital identity will accelerate wallets / apps with multiple uses than several customer acquisition single-use apps. Using Aadhar, for online authentication and confirmation of KYC data, will boost growth This will drive consolidation in the payments of digital payment systems. Payment service industry. Niche or single use case solutions / providers will be able to acquire customers apps will get acquired by larger players, in digitally, significantly bringing down custom- the quest to develop universal and ubiquitous er acquisition costs and improving economics solutions. This is also likely to increase of the digital payments business. This will throughput or velocity of transactions hap- also transform customer experience as cus- pening through digital payment instruments. tomers will be seamlessly on-boarded on to the digital payments platforms. Modified unified payments interface (upi) will be a game changer Cash to non-cash ratio will invert NPCI’s Unified Payments Interface is aimed over the next ten years at enabling interoperability between finan- Traditionally, India has been a cash economy. cial instruments using a mobile interface. As Cash lends itself to certain characteristics of outlined earlier, UPI is an open architecture universal acceptance, with no language barrier, system, wherein any payment service provid- simplicity of use and speed of payment due to er connected to UPI will be able to provide which Indian customers have largely preferred payment and payment management solu- dealing in cash. Currency in circulation in India tions to users registered on UPI. This would accounts for 18 percent of the GDP versus 3.5- enable multiple use-cases on the UPI plat- 8.0 percent in mature markets such as UK, form—including peer to peer payments, per- USA etc. India lags behind mature markets as son-to-merchant payments and busi- well as key emerging markets such as Brazil ness-to-business payments. Furthermore, and China in the move towards a cashless users will not have to remember cumber- economy. In 2015, cash contributed to just 20- some details like MMID numbers, branch 25 percent of overall consumer payments in IFSC codes etc. to make payments with only developed nations, for example, US, UK, the UPI ID sufficing to carry out transac- France and Germany as compared to 78 per- tions. UPI will also have a two-factor authen- cent in India. Of the remaining 22 percent, 13 tication process to ensure security of finan- percent comprises digital (including NEFT, cial transactions. RTGS, internet banking and mobile banking), 7

The Boston Consulting Group • Google | 33 percent are cards, and 2 percent are paper macroeconomic and demographic factors in (cheques) (Refer Exhibit 4.2). India, along with the new developments expected in the digital payments space. While India has traditionally been a cash-centric economy, the contribution of cash for transactions has seen a decline at a rapid rate. Proportion of non-cash In 2015, 78 percent of all consumer payments were made in cash, down from 89 percent in transactions will overtake 2010 and 92 percent in 2005 respectively. Over a 5-year period from 2005-2010, the rate of de- cash transactions by 2023 cline in cash contribution was 0.8 percent whereas from 2010-2015, this same metric was at 2.6 percent, indicating a rapid increase in The non-cash contribution for payment trans- adoption of non-cash instruments such as actions is estimated to increase from 22 per- cards and digital payments (electronic / ECH cent today to 40 percent by 2020 and 59 per- payments, mobile wallets etc). cent by 2025. Within the pool of non-cash payments, digital payments are expected to “Digitisation of cash” will accelerate over the contribute to an extent of 26 percent by 2020 next five years with non-cash transactions over- and 37 percent by 2025 (Refer Exhibit 4.4). By taking cash by 2023. We expect the trend of 2025, cash contribution in India is expected to increasing penetration of non-cash payments match current cash levels of emerging markets to continue at a faster pace (Refer Exhibit 4.3) at 40-45 percent. The increase in the contribution of non-cash payments would, inter alia, be significantly and Alternate digital payments instruments will substantially aided by the penetration of drive the growth in non-cash payments. digital payment instruments. This “digitisation Alternate digital payments have grown of cash” would be supported by several exponentially in the past few years. Stored

EXHIBIT 4.2 | Payment Instrument Mix for Countries (2015)

% 100 7% 18% 25% 25% 28% 13% 80 42% 39% 2% 53% 49% 59% 5% 3% 10% 60 27% 57% 13% 21% 2% 15% 4% 40 78% 14% 69% 16% 13% 60% 37% 2% 1% 47% 20 44% 1% 22% 24% 24% 25% 9% 0 Australia France US Germany UK Brazil China Turkey Russia India

Developed Emerging markets markets

Card Digital1 Other paper Cash

Sources: BCG Global Payments Model 2015, Reserve Bank of Australia Annual Report 2014, Euromonitor Passport, 2015 1Digital includes electronic payments direct/ACH, mobile based payments etc.

34 | Digital Payments 2020 EXHIBIT 4.3 | Value of Consumer Payments — % Cash vs. Non–Cash (Paper, Card and Digital)

100 92% 89% 78% 80 60% 59% 60 40% 41% 40 22% 2023 20 8% 11%

0 2005 2010 2015 2020e 2025e Cash: 5 year 0.8% 2.5% 5.0% 7.5% CAGR

Non cash Cash Sources: BCG analysis, Euromonitor Passport, 2015. value instruments like mobile wallets (Paytm, from bank accounts or even by debit or credit MobiKwik, Freecharge), store credits, prepaid cards. The prepaid amount can then be used and gift cards etc. have made payments as per customer requirement. through internet devices convenient and easy. These instruments can be recharged with Digital payment instruments can also store required value through cash, money transfers information such as the credentials of an ex-

100 2% 1% 3% 7% 5% 5% 12% 3% 21% 13% 2% 26%

1% 37%

50 92% 89% 1% 78%

60%

41%

0 2005 2010 2015 2020 2025

Card Digital Other paper Cash

BCG Analysis, Euromonitor Passport, 2015. 1Digital includes electronic payments direct/ ACH, mobile based payments etc.

The Boston Consulting Group • Google | 35 isting payments instrument, making the pay- to about 16 billion transactions per month ment process at the point of purchase sim- (nearly 530 million transactions per day). pler. NPCI’s Unified Payments Interface P2M transactions include food and grocery (UPI) is also expected to support interopera- payments—both organised and unorganised, bility in stored information as well as stored bill payments, mobile recharges, unorganised value instruments. transport, organised transport (radio cabs, air and train travel), e-commerce, modern trade, entertainment etc. Digitisation of Payments is a Large Opportunity User Base: If we look at the number of users The large spectrum of payment use-cases in In- in the digital payments instrument segment, dia can be illustrated using two axes, one being estimates indicate that customer base is set to the source or origin of payment transactions, increase from 60-80 million users currently to and the other being the destination of the 300 million by 2020. Digital payments users transaction. We have considered three types of will comprise 50 percent of all internet users entities—individuals (or Persons), business en- by 2020. While multiple heterogeneous cus- tities (or Merchants) and the Government and tomer segments such as urban affluent, mass correspondingly classified payment use-cases aspirers, migrants and rural next billion exist into nine categories (Refer Exhibit 4.5). today; the top 100 million internet users will drive more than 70 percent of value of trans- Large size of prize in India actions through digital payments instruments. Volume: It is our estimate that approximately 30 billion payment transactions happen in In- Value: Digital payments instruments can be dia every month across these use-cases. This used across the full spectrum of payments translates into almost 1 billion transactions use-cases. We estimate the total payments per day. Of these, “person-to-merchant” or on digital payments instruments to be in the P2M transactions are the largest, contributing range of USD 500 billion by 2020, up from

• • — – • • • – – • • • – – • – • –

• • • • – • • – • • •

• • • • • • •

36 | Digital Payments 2020 current estimates of approximately USD 40- instruments. The universe for these pay- 50 billion. The largest contributors to this ments is very large and even with moderate growth would be P2M (USD 200 billion), adoption estimates, this would translate to B2B (USD 150 billion) and P2P (USD 45 bil- being the single largest use case for digital lion). On the other hand, we believe that payments. Unorganised retail, rent and pro- G2B and G2G transactions will not utilise al- fessional service payments (payments to doc- ternate digital payment methods significant- tors, school fees) and financial services pay- ly (Refer Exhibit 4.6). With a transaction fee ments (insurance premiums etc.) are on these transactions in the range of 0.50- expected to drive the growth in this segment. 0.75 percent (for B2B) and 2 percent (for The remaining contribution in the P2M seg- P2P), the Indian digital payments industry ment will comprise other use cases such as could be worth approximately USD 5 billion bill payments, organised healthcare, restau- in revenues by 2020. rants, modern trade shops, travel and e-commerce (Refer Exhibit 4.7). USD 500 billion will flow through digital payments in Merchant payments will India by 2020 constitute 40 percent of digital payments

Merchant Payments (P2M) will be the largest use-case of digital payments Micro-transactions (small ticket size of INR We estimate Person-to-Merchant (P2M) pay- 100, high frequency transactions) are expect- ments to constitute around 40 percent of to- ed to form 50 percent of the total transaction tal payments done through digital payment value on digital payments instruments within

• • — – • • • – – • • • – – • – • –

• • • • – • • – • • •

• • • • • • •

The Boston Consulting Group • Google | 37

% contribution

Use cases

P2M payments by 2020. A critical criterion for to distributor payments, dealer and vendor digital payments’ success is for them to trans- payments etc. late into customer habits. Frequency of using the instrument, therefore, assumes great sig- The digitisation of supply chain payments nificance. Constraints of memory space in could also play a key role in supporting the smartphones shipped to India cause any app digitisation of P2M payments as retailers that is not frequently used to be deleted. would be more comfortable accepting pay- Therefore, much like cash, a wallet needs to ments from consumers in digital currency. be usable in multiple, high-frequency, every- This would also enable them, in turn, to be day transactions to have relevance and conse- able to pay their suppliers or distributors in a quence as these transactions by nature are similar currency. We thus, expect B2B pay- small in amount. While there is large propen- ments to become the second largest use-case sity for micro transactions to move to digital for digital payments by 2020. payments, a non-prohibitive fee structure will be important to render this into reality. Digital Peer to Peer (P2P) payments to double by 2020 Business to Business (B2B) payments Remittances or Peer to Peer (P2P) payments will gain traction through digital payment instruments have Another potential use-case of digital pay- seen good adoption and growth over the past ments is the exchange of payments between few years. We expect this trend to continue small businesses and SMEs. Currently, these and estimate the penetration of digital pay- payments are largely made in cash or through ments instruments for P2P payments to grow bank cheques. As digital payment instruments from 15 percent currently to 30 percent by gain prominence, we expect payment service 2020. However, primary research indicates providers to create customised solutions that that there are certain challenges to overcome cater to small businesses specifically. These in order to make the digital remittance value could include supply chain payments, retailer proposition stronger.

38 | Digital Payments 2020 A comparative analysis of prevailing modes Payments service providers looking to ac- of money remittances indicates that while quire customers should invest in promoting traditional modes like banks, money orders the product and in educating the customer, and cash constitute top 3 modes, mobile wal- equally. lets are the next preferred method. (Refer Ex- hibit 4.8). Digital payments offer conve- Research also shows that the primary reason nience and 24x7 access to overcome issues for needing such assistance is lack of prod- related to timing, security and restricted us- uct know-how and usage awareness as well age synonymous with traditional methods. as lack of understanding of English—both However, the fee incurred and limits on facets being progressively worse in non-met- transaction amounts remitted via digital in- ros. As digital payment service providers tar- struments act as deterrents to usage. Post of- get users and sellers, the importance of cus- fices, banks and cash remittances were per- tomer education and regional languages is ceived to be cheaper, though less convenient, only set to grow. while digital instruments, private companies and agents are perceived to be similar on In summary, the opportunity for digital pay- charges. ments in India is nascent yet quite sizable with trends being positive over the last two For existing remittance users, pain points in- to three years. The seven key trends identi- clude being habituated to cash, lack of prod- fied, we believe, will disrupt the payments uct clarity and narrow reach leading to churn. space in India making it more digital over In addition, concerns of not being able to ac- the next five years. This will include inver- cess money in case of limited mobile network sion of the cash / non-cash ratio for payment coverage or not being able to transfer money transactions over the next five to seven to bank accounts add to reasons why many years. The erstwhile value of digital pay- customers have never tried a digital payment ment transactions could increase 10X by instrument for money transfers. 2020 from current levels.

% of respondents

Modes of remittance – –

– —

The Boston Consulting Group • Google | 39 GRABBING THE OPPORTUNITY – THE WINNING AGENDA

lobally, we have witnessed the entry tal payments compete with cash, which has Gof several payments players over the past no “visible cost” to the user, creative ways of few years. However, only a few of them have monetisation will be required to make busi- really been successful. There are several nesses viable. success factors that we stand to infer from such successes and failures from addressing We outline a ten point agenda to create a suc- real customer needs or offering compelling cessful and sustainable payments play in India: customer value propositions, to leveraging next generation technology to deeper custom- 1. Address true customer needs er engagement. 2. “Build for the base” with convenient, intuitive, easy to use and safe products Ten Point Agenda for Payment Service Providers 3. Optimise the network effect by building a The past couple of years have witnessed many ubiquitous network new entrants in the Indian payments space— though few have achieved economic scale or 4. Partner, Partner, Partner profitability. Players have experimented with various business models to monetise the pay- 5. Reduce entry barriers for customers: ments opportunity. But the primary focus hith- Charge merchants and not customers erto, has been on customer acquisition, remi- niscent of the land grab models of the Wild 6. Mine customer data to build additional West. Most PSPs are funded by PE money and revenue streams currently focus on driving trials and usage— aided by deals and offers, promotions and ze- 7. Look beyond—from payments to broader ro-fee models. Hence monetisation models are financial services needs to consumption not fully evolved in India. 8. Develop ecosystems to envelop customer The challenge faced by most is how best to needs clearly define an economically viable and sustainable model. Payments service provid- 9. Exploit next generation technologies to ers need to take an end-to-end view of the build low cost and scalable solutions payments opportunity in order to build a sustainable business model. In India, where digi- 10. Scale, Scale, Scale

40 | Digital Payments 2020 Address true customer needs to current payment methods (cash and cards). Often, digital payments instruments have This presents a major cause of concern for been akin to solutions looking for a problem, merchants who are apprehensive that the ac- rather than a way to resolve existing prob- ceptance of these solutions could lead to cus- lems faced by customers on a day-to-day ba- tomer queues at establishments. sis. It is critical for payments service providers to identify pain points for specific user segments and address them. It is imperative to build There is no one customer segment for digital solutions that are as easy to payments. Each segment and user archetype has different payment needs, different pain use as cash points, and different drivers of adoption. Hence, it is imperative that payment service providers must, first of all, be clear about the Finally, convenience should not come at the customer segment(s) that they are targeting. cost of safety or security. Primary research in- Moreover, it is critical to understand the spe- dicates that while trust and security do not cific need-gaps and pain points of such target- pose serious impediments to the adoption of ed customer segment(s) in order to resolve digital payment instruments like mobile wal- them and articulate value propositions to cus- lets, they are still significant factors to reckon tomers accurately. Generic solutions or solu- with. Certain reports indicate that instances tions targeted at wrong customer segments of fraud on mobile wallets are significantly have failed to work. For example, a remittance higher compared to other e-commerce plat- solution pitched to an urban, smart-phone forms. Banks and payment service providers savvy young customer by a leading telco did need to strike the right balance between not gain critical mass, as it was not a relevant ease-of-use and safety of customer funds. solution for the segment being targeted. Optimise the network effect by “Build for the base” with convenient, building a ubiquitous network intuitive, easy to use and safe The digital payments business in India is still products nascent with customers trying out multiple In a country like India that has largely been a wallets and other payments instruments. cash economy, digital payment solutions are However, primary research indicates that cus- in constant competition with cash transac- tomers would like to consolidate transactions tions. Hence, it is imperative to build solu- on as few instruments as possible akin to tions that are as easy as cash to use across all bank accounts. Global experience also high- target user segments. This would entail selec- lights the need for “aggregator wallets”, as tion of the right form factor, interface and customers want universal solutions. user experience. We have seen some complex USSD based payment solutions that did not Ubiquitous payments comprise three key ele- really succeed, as most customers found them ments—a) a broad set of use-cases, b) wide- too complicated to use. spread merchant acceptance network, c) large number of cash-in, cash-out points. Global experience indicates that pull-based solutions, where merchants “pull” the trans- Customers have varied use-cases, ranging action from customers, are more likely to be from daily routine spends (for example, food, accepted than “push” based solutions that re- travel, groceries etc.), monthly utility pay- quire the customer to key in large strings of ments, some annual spends to ad hoc trans- data on to their mobile phones. actions. Payment instruments that cater to varied use-cases or a large proportion of cus- From the merchants’ perspective too, digital tomer transactions are more likely to win. payments solutions should be designed such that the time taken to complete a transaction The big push for digital payments in India does not significantly increase as compared will come from merchant payments. Per-

The Boston Consulting Group • Google | 41 son-to-Merchant (P2M) payments will be the customers at a relatively lower acquisition largest transaction pool by 2020. Hence, to cost. For example, a new payments service drive ubiquity, it is imperative to build a large provider may forge a partnership with an merchant acceptance network. Customers e-commerce player, an organised retailer, tend to prefer payment instruments that are or an organised transport service provider accepted at a large number of outlets—both (including public transport utilities like a online and offline. Therefore, on-boarding of metro or monorail network) to provide a merchants is as critical for payment service payments solution on their platform. This providers as acquisition and on-boarding of would give the PSPs access to an existing customers. This would necessitate an organi- customer base. Payment service providers, sation to acquire and on-board merchants, as including banks can partner with corpo- well as to service them. rates and merchants to create customised payment solutions for specific use cases. Prima facie, primary research indicates that merchants have specifically talked about the •• Offering a broad spectrum of solutions: need for handholding as well as support, for Independent payment service providers example, through a call centre. As highlighted will need to partner with banks, asset earlier, technology is expected to reduce costs management companies, insurance of merchant acquisition and servicing, as ded- companies and retailers to name a few, in icated EDC machines or POS terminals may order to offer the full spectrum of pay- no longer be required. ments, savings, investment and protection solutions to acquired customers. This will Further, success in digital payments will re- be relevant for payment banks, given they quire players to build “hybrid” networks that can only offer payment and deposit optimally combine digital solutions and phys- products on their own. ical networks. This will provide last-mile connectivity to a larger universe of users, while •• Access to a large distribution network: keeping transaction costs low through a digi- Providers can also partner with entities tal framework. This will also support physical that have large distribution networks like cash-ins and cash-outs, thereby enabling even telcos, retailers and business correspon- those who do not get paid digitally to partici- dents to have last-mile presence for pate in digital payments. enhanced customer convenience.

In the short to medium term, an extensive net- While these enumerate some partnership ex- work of cash-in and cash-out points will be im- amples, several options exist. The challenge perative for digital payments to be absolutely and the opportunity lie in creating a viable fungible. This network has to be created in a operating model that successfully creates val- cost effective way, with no conflict of interest ue for both parties. and clear retailer incentives and benefits. Reduce entry barriers for customers: Partner, partner, partner charge merchants and not customers Payments business economics will be tight. The transaction charge for payment transac- Combined with the fact that PSPs will need to tions, especially for Person-to-Merchant offer a wide range of services, it is obvious that (P2M) transactions should be levied on the one cannot do it all. Partnerships will also be merchant and not on consumers. Currently, critical for the success of payment banks. merchants are generally used to paying Mer- chant Discount Rates (MDR) on card transac- Partnerships may help payments service pro- tions. Moreover, 75 percent of the merchants viders with one or more of the following: covered in the primary research, believe that acceptance of digital payment instruments •• Lowering customer acquisition costs by like wallets will increase sales. Hence, it is leveraging partner customer base: likely that a marginal transaction charge for Partnerships can enable payment service use of a digital payment instrument may be providers to acquire a large base of acceptable.

42 | Digital Payments 2020 All merchants, including large and organised cate that on an average 80 percent of the businesses, need to realise and acknowledge data created / generated by banks and insur- the cost of doing business in cash. It is sur- ers is not currently used. Payment service prising that if one were to go to a railway providers need to look at how to carry out booking office, airline ticketing office, or analytics so as to offer right products / ser- even a movie theatre, and pay in cash, there vices to the right consumer at the right time is no extra cost. In comparison, if one were by leveraging data to drive the transition to use a non-cash instrument like a debit or from consumption driving payments to a sce- credit card, especially when transacting on- nario where payments drive consumption. line, one is charged a “surcharge” or convenience fee. This implies that merchants are mBank in Poland runs a digital discount pro- happy to accept cash, completely ignoring gram utilising the bank’s transactional data the costs of cash handling and cash manage- with automated redemption. The Bank anal- ment. It is imperative for banks and other yses transaction data of customers on several payments service providers to drive aware- dimensions like zip code, category, store, ness and educate merchants about the cost spend / trips etc. to create targeted offers of cash and ask them to view the transaction that are then customised for the consumer. charge for accepting a digital payment in- The offer is displayed on the bank’s online strument in light of the same. Payment ser- statement, below a relevant purchase. The vice providers can also offer value-added consumer can just click to activate the offer, services to make the entire proposition more and use a mBank payment instrument (credit economical for merchants and to improve / debit / prepaid card) at the point of sale to merchant acceptability of digital payments avail the offer. High relevance of offers and instruments. hassle-free redemption are reasons why consumers love the experience. Also, payments service providers can explore the possibility of charging users only when Urgent credit service could be another spe- money leaves the digital ecosystem. For ex- cific example. Enabled by an instant pay- ample, the current Peer-to-Peer (P2P) wallets ment system and coupled with advanced un- and other payment service offerings are derwriting, this can be done basis the seen as expensive and hence, have not customer and transaction data which the gained traction despite prevalent potential. bank / payment service provider already has. An alternative model could be to levy trans- For example, when a customer making a pur- action charges for P2P transfers or remit- chase on an e-commerce marketplace checks tances only when the recipient “cashes out” out using a digital payments instrument, he instead of at the point of transfer. Similarly, can be prompted to upgrade his purchase or merchants should be charged only when insure the product. The incremental amount they take the money out from the account can be funded through an instant line of and not when they receive it. This will drive credit provided by the bank or payment ser- a multiplier effect in usage, promoting the vice provider. Alibaba’s MyBank is an exam- use of digital money for a larger number of ple of one such offering. As an online bank transactions. Of course, this would need a with registered capital of 4 billion yuan, My- large number of online and offline avenues Bank gives out loans to small businesses, en- to be created where recipients of money can trepreneurs and consumers in China. It oper- spend it so that payment service providers ates on cloud computing platform and uses earn revenue as transaction fees on such data to calculate loan amounts. spends. Payment companies can drive more impulse Mine customer data to build purchases by adding a credit payment fea- additional revenue streams ture to their offerings. The idea is to trans- Banks and payments service providers must form the mobile phone into a credit card mi- look at alternate means to creatively mone- nus the payment strip. A customer could just tise large volumes of customer and transac- tap, shop, pay and walk. Obviously KYC tion data that they possess. BCG studies indi- norms and credit risks will have to be fac-

The Boston Consulting Group • Google | 43 tored into the thinking and development pro- Furthermore, banks and payment service cess. Payment service providers should also providers have an opportunity to deepen re- leverage analytics to better understand cus- lationships with customers by leveraging the tomer trends and preferences in order to pro- platform for other revenue streams. They can vide customised experience to customers. move beyond financial services to include This could include personalisation of services consumption based products and services in and interface, targeted offers etc. order to monetise the relationship. Having access to customer data on payments, banks Look beyond—from payments to and payment service providers are well posi- broader financial services needs to tioned to assess and identify customers’ consumption needs and behaviours in order to offer the Payments form the core of all customer right products and solutions best suited for transactions. Banks as well as payment ser- different life stages. vice providers offering payment services, have a great opportunity to expand customer If a bank or payments service provider is relationships by offering a full suite of finan- able to set up such new lines of business in cial services to customers. These may include order to expand customer relationships into savings and checking accounts, loans and additional revenue streams, it gives them fur- credit cards, investment products like mutual ther access to customers’ consumption data. funds, insurance products and other banking This in turn, can be leveraged to assess the services. While banks can offer most of these customers’ financial consumption need and products and services directly to their cus- potential, enabling banks / PSPs to offer tomers, independent payments service pro- them relevant financial service solutions. viders like telcos, PPIs or even payment This would complete the circle of end-to-end banks, need to forge the right partnerships to customer ownership by leveraging the com- be able to offer comprehensive financial prehensive potential of monetising customer products to consumers (Refer Exhibit 5.1). relationships.

EXHIBIT 5.1 | From Payments to Financial Services

2 3 Consumption From payments to From banking (FS) to banking (FS) Education Mcommerce consumption Access to not just Financial services / ecommerce Access to not just large transactions but also banking revenue pools Lending / large FS revenue pools Credit cards but opportunity to - provides platform to credit / loans deepen relationships expand its current with customers core businesses of providing platform for lending and insurance other revenue streams Current Payments and savings Insurance Work & live Entertainment accounts At the core of all customer transactions

1 Payments at the Other Investments core–access to financial customers services Opportunity to target Other Healthcare Travel a large base of under banking served customers services (aspirers, next billion) as well as by offering convenience to the Social served

Source: BCG analysis.

44 | Digital Payments 2020 Ping An in China is one such case in point. overall revenue pool and increase profitabili- From being a traditional financial services ty of payments service providers. player offering insurance, banking and investment products for almost two decades, Develop ecosystems to envelop Ping An is now pursuing an “Integrated Fi- customer needs nance + Internet” strategy. Ping An has ex- Developing vertical or ecosystem based offer- panded its offerings to provide consumption ings that provide end-to-end payments solu- related services including health, food, hous- tion to customers in these ecosystems pres- ing, travel and entertainment. By focusing on ents an opportunity for payments service everyday needs of users, Ping An can access providers. These could include ecosys- large amounts of active client consumption tem-centric, community-based or hyperlocal data, which in turn, provide insights into con- offerings that are easily scalable. sumption needs, behaviours, and customer potential. This enables Ping An to carry out One such example could be a hyper-local pay- precise and targeted marketing of its core fi- ments system built around the city transport nancial services products to customers (Refer system. This would translate into a payments Exhibit 5.2). solution accepted by the central transport network in a city, for example, metro and / or Finally, banks and payment service providers bus, as well as feeder networks i.e., taxis and can also explore offering relevant value-add- auto-rickshaws. This can further be expanded ed services to customers and merchants on to cover merchant establishments in and the network, which in turn can be charge- around metro stations, utility providers (water, able. For example, for merchants “acquired” electricity, education, telephone, and internet) by a bank or payments bank for accepting as well as local vendors and service providers. digital payments, the bank may also offer cash management solutions at a small fee. The objective should be to provide a ubiqui- These value-added services will add to the tous payments solution to customers with

Yijiantong Wanlitong Ping An Ping an Lottery tkt. merchants good good car Wanlitong house merchants

Health Consumption Buying info Buying info Life circle status file and Property info vehicle usage Risk appetite dieting habit Activated client Client consumption data

Client needs and behaviors

Existing customer base of life insurance Financial needs and potentials clients Life insurance Lending needs Investments health status credit status risk appetite Big data used for precise marketing

BCG China's Digital Generations 3.0: The Online Empire; BCG research.

The Boston Consulting Group • Google | 45 easy cash-in and cash-out points. This would form. The solution can also be used to pro- present the payments service provider with vide information on prevalent prices, weath- an opportunity to on-board a large number er conditions, technical services, inventory of customers in a contained geography while management tools and other value-added offering a compelling proposition to mer- solutions. chants and service providers on the network—timely payments, cash management / Exploit next generation technologies handling and incremental business. to build low cost and scalable solutions Building an agricultural payments ecosystem Successful digital payments solutions need could be another example. Solutions offered cutting edge technology platforms. Technol- should not, merely be a platform facilitating ogy is critical, not only to deliver solutions payment transactions, but should connect to that are convenient, simple and secure, but all parts of the agriculture ecosystem seam- to also ensure that costs of customer acquisi- lessly. It should perform as an end-to-end ag- tion, on-boarding and transactions are mini- ricultural payments ecosystem providing in- mal. For example, while contact-less pay- formation, enabling end-to-end transactions, ment systems may be useful in expanding MIS and tracking (for example, inventory merchant acceptance networks, Near-Field management), while bringing buyers and Communication (NFC) based proximity ini- suppliers together (Refer Exhibit 5.3). tiatives may prove to an expensive proposition for India. Low cost technology solutions The solution need not be restricted to pay- like app-to-app QR-codes or barcode readers ment transactions, it can also lend support may need to be developed and tested. Pay- to a wide spectrum of stakeholders including ment apps catering to lowest quality smart- farmers, dealers, traders, distributors, fer- phones, weighing less in size and able to tilisers company, seeds companies, insurers work on EDGE networks (or on no network etc. by bringing all of them on the same plat- at all!) may need to be designed.

Farm Crop / Irrigation Mandis2 equipment Farmers Co-operatives weather units Dealers (rates) Fertilizers companies insurance company Artiyas1

Pesticide Traders company

Corporate Seed buyers / companies Technical exporter Milk Co- Electricity Distributors Producer Weather services– company organization information seed operatives testing

: BCG analysis. 1Artiyas are the middlemen who charge commission from farmers for trading agricultural produce. 2Mandi rates are the wholesale rates for agricultural produce.

46 | Digital Payments 2020 In addition to being super advanced, technol- Payments are critical for banks as they help ogy needs to adjust to evolving market re- in multiple ways: quirements. For example, we need products that can work despite poor infrastructure •• Payments determine the primary bank and prevalent connectivity conditions in In- for customers dia. Apps need to work in no network areas—for example, basement parking, in •• Cross-sell other products via access to planes for in-flight purchases etc. Such sce- spend patterns narios are causing players to explore and ex- periment with “show code” or OTP options •• Drive lower cost to serve that enable transactions even when both parties are offline. •• Access “new to bank” customers

Scale, scale, scale Payments determine the primary Lastly, but most significantly, scale is critical bank for customers to make the business model viable for pay- Customers tend to keep more balances in ac- ments. Building a world-class payments busi- counts or payments instrument used for pay- ness requires significant investment in tech- ments. If banks can fulfil all payments needs nology, infrastructure and partnerships with of existing account holders, they will be able wafer thin margins. Hence, the model re- to retain and grow their Current Account / quires high volumes to be sustainable. Par- Savings Account (CASA) balances. Else, they ticipating players must look to build sizable stand to lose these balances to independent scale over the next few years so as to recover payment service providers. costs. As outlined earlier, the opportunity is potentially huge with the requisite scale Cross-sell other products via access translating to tens of millions of customers. to spend patterns Those who make bold moves and build Payment transactions give banks access to scale, have a good opportunity to build a their customers’ transaction and spending profitable and valuable business. patterns. Banks can then use analytics to cross-sell or up-sell relevant products to customers. Those who make bold Drive lower cost to serve moves and build scale have Migrating payments transactions to digital and mobile based platforms will reduce a good chance to win transaction costs for banks and bring down operating costs.

Looking ahead, it is clear that all payment Access “new to bank” customers service providers, including payment banks, Banks that take leadership position in will need to identity and adopt sustainable offering digital / alternate payments, will be models of monetising customers acquired by able to attract new customers—who are them, by offering innovative and differentiat- either unbanked or banking with other ed payment solutions. Providers will need to financial institutions. With new payment take a broader view of the opportunity and service providers / challengers acquiring the think holistically to ensure economic viabili- existing payment services customer bases, ty of their businesses. traditionally the bastion for banks, this could pose a threat and potential loss of customer relationships and possibly affect Call to Action for Banks the CASA balance. In order to maintain or defend their position as key payment providers and related value In the new world of payments, it is challeng- added services, banks need to take proactive ing for incumbent banks to create a compel- action spanning several dimensions. ling proposition for digital consumers. Banks

The Boston Consulting Group • Google | 47 are constrained by regulations and a conser- should explore a wide spectrum of partner- vative risk-averse mindset and often find it ships, be it with large merchants to serve as an challenging to develop customer-centric of- anchor use-case for payment solutions, or with ferings that require a start-up like approach. fin-tech start-ups to provide cutting edge capabilities in security, authentication etc. Our experience with banks suggest five additional areas that banks may need to work Go creative in communications on, in order to keep pace with the digital Given that traditional channels such as payments opportunity: branches etc. are not available to digital propositions for customer acquisition, banks •• Create a “digital organisation” need to ensure creativity in their marketing initiatives in addition to increasing spends. •• Understand customers—cannibalise pain points Asks from Regulators and •• Build a two-speed IT capability Industry Bodies One of the consistent themes seen across •• Be innovative in partnerships successful payments case studies, is the pro-activeness and vision displayed by regu- •• Go creative in communications lators and industry bodies in the respective markets. In a market like India, where the Create a “digital organisation” regulations are still to evolve, it is impera- Banks need to build a digital payments tive that the Government and regulators friendly organisation, integrating flexibility, take a long-term view to building a sustain- agility and innovation. Banks need to think able digital payments market. like start-ups to develop payment solutions which are intuitive and customer friendly, Over the past few years, we have seen several allowing for easy KYC, simple on-boarding progressive and forward-looking regulations and hassle free transactions. that promote the proliferation of digital payments—prepaid payments instrument guide- Understand customers—cannibalise lines and payment bank licenses to name a pain points few. However, these are initial steps and a lot It is critical that banks invest in understand- more needs to be done on an ongoing basis. A ing their existing customer base including few specific areas where Government and reg- needs, gaps and pain points in order to pro- ulatory intervention can go a long way in en- vide innovative solutions. Banks should also suring sustainability of the digital payments in- identify opportunities to provide relevant val- dustry, are listed below: ue-added services to customers to deepen customer relationships and build switching costs. •• Build awareness about cost of cash

Build a two-speed it capability •• Incentivise use of non-cash instruments Banks are typically disadvantaged by their IT solutions legacy—these do not support •• Policy for electronic transactions with cutting edge or agile digital payment solu- government agencies tions. There is a need to invest in the cre- ation of a two-speed IT world, enabling •• Simplifying KYC requirements them to run and manage core banking solutions while allowing them to offer technolog- •• Making digital transactions simpler ically agile solutions that are customer friendly and intuitive. •• Invest in building acceptance networks

Be innovative and partnerships •• Set-up common infrastructure Partnerships are critical, both for banks and independent payments service providers. Banks •• Framework for grievance redressal

48 | Digital Payments 2020 Build awareness about cost of cash etc. The feasibility of removing this charge Cash poses huge cost implications for the econ- should be considered by the Government. omy both in terms of direct costs (printing / transporting notes, weeding out soiled notes, Simplifying KYC requirements combating counterfeiting by several means in- Easy sign-up and on-boarding of customers cluding periodically introducing new series of is critical for electronic or digital payments currency notes and withdrawing existing ones, to acquire scale. Regulators should continue etc.) and indirect costs (loss of tax revenue, cre- supporting enablement of electronic KYC ation / prevalence of black money, etc.). Even norms on a widespread basis—including rel- so, cash still remains the only payment method evant regulatory clarity where required. This that is not disincentivised. There is no visible may include using biometric or iris-based cost of cash to merchants or consumers in com- recognition on customer smartphones en- parison to all other payment methods. abling Aadhar-based KYC for existing and new customers. Similarly, appropriate regu- Government / regulators / relevant industry latory frameworks may be put in place for bodies should lead the charge in creating a Aadhar or other identity-based eKYC for “cost-of-cash”, which could include a “sur- merchant use. charge” to be levied on cash transactions above a certain threshold. Making digital transactions simpler As highlighted earlier, a large proportion of Incentivise use of non-cash transactions conducted via digital payment instruments instruments are expected to be micro in na- Merchant Discount Rate (MDR) should be ture (less than INR 100). The regulator may relative to the true cost of the payments in- consider waiving off the need for two-factor strument. The true cost of cash to the user authentication process for transactions be- (including government / RBI / banks / ser- low a minimum threshold, say INR 500. This vice providers / merchants / customers) has would increase convenience and further pen- to be appropriately reflected in order to ar- etration of digital payment instrument usage. rive at the correct merchant discount rate or MDR. Any situation that makes cash appear Invest in building acceptance artificially cheaper should be corrected networks through regulatory means. One of key impediments hindering the rise of digital payments is the acceptance network. In addition, the RBI should ensure that MDR Customers expect universality of payment in- incentives are communicated adequately to struments and merchants will need suitable stakeholders. For example, even though the incentives to adopt acceptance of electronic RBI has capped MDR on debit card transac- payments. Once merchants realise the inher- tions in 2012 to promote usage in lieu of cash, ent advantages of electronic payments, they most merchants are still unaware of the differ- are likely to continue. The proposed accep- ence in MDR between debit and credit cards. tance development fund (ADF) should be op- erationalised soon and provided adequate Tax benefits could also be provided to mer- capital to ensure that the merchant accep- chants, especially in cases wherein a certain tance network, especially for electronic pay- minimum proportion of the merchant’s ments, can be expanded manifold. transactions are carried out through digital payment instruments. Set-up common infrastructure The Government should encourage public Policy for electronic transactions sector institutions and other industry bodies with government agencies like NPCI to deploy common payments infra- Certain government departments, PSUs and structure that can be leveraged by payment other organisations currently levy a conve- service providers. The Instant Money Pay- nience fee or surcharge on electronic or digi- ment System (IPS), Bharat Bill Pay System tal payments for essential commodities, utility (BBPS) and Unified Payments Interface (UPI) services, petrol pumps, gas agencies, IRCTC are great examples of such infrastructure,

The Boston Consulting Group • Google | 49 which in turn, can revolutionise electronic In summary, for digital payments to succeed payments in India. IMPS has already seen in India, it is imperative that enabling policy good success and the Government should frameworks and infrastructure be put in continue to encourage and incentivise the place. While there have been several devel- build-out of such common infrastructure. opments in the right direction over the past few years, the trend needs to continue and Framework for grievance redressal efforts need to be stepped up so as to pro- The government and RBI should put requi- vide a conducive and sustainable business site framework and policy in place, for cus- environment for payment service providers. tomer protection and grievance redressal. For example, appropriate and customer friendly guidelines to deal with fraudulent transactions will boost customer confidence and promote usage of digital payment instruments.

50 | Digital Payments 2020 FOR FURTHER READING

The Boston Consulting Group FinTechs May Be Corporate FIBAC 2015—Inclusive growth publishes other reports and articles Banks’ Best “Frenemies” with Disruptive Innovations on related topics that may be of An article by the Boston Consulting A report by The Boston Consulting interest to senior executives. Recent Group, July 2016 Group in association with The examples include: Federation of Indian Chambers of Global Retail Banking 2016: Commerce and Industry (FICCI) and Banking on Digital Simplicity Indian Bank’s Association (IBA), A report by the Boston Consulting September 2015 Group, May 2016 The Changing Connected Customers Steer Digital Consumer in India Trends Driving Retail Bank An article by the Boston Consulting Transformation Group, April 2015 A report by the Boston Consulting Group, May 2016 India@Digital Bharat: Creating a $200 Billion Internet Economy Charting a Course to an A report by the Boston Consulting Optimised Payment Platform Group in association with Internet and An article by the Boston Consulting Mobile Association of India (IAMAI), Group, April 2016 January 2015

Ensuring Digital Readiness in The Mobile Revolution: How Financial Services Mobile Technologies Drive a An article by the Boston Consulting Trillion-Dollar Impact Group, April 2016 A report by the Boston Consulting Group, January 2015 The Power of People in Digital Banking Transformation Retail Payments: Regional A focus by the Boston Consulting Group, Diversity Is the Key November 2015 A report by the Boston Consulting Group, September 2014 Global Payments 2015: Listening to the Customer’s Voice A report by the Boston Consulting Group, October 2015

Unlocking the Potential of Consumer Digital Payments An article by the Boston Consulting Group, October 2015

The Boston Consulting Group • Google | 51 NOTE TO THE READER

About the Authors Ashish Iyer Acknowledgments Alpesh Shah is a Senior Partner & Senior Partner and Director This report has been prepared by Director in the Mumbai office of BCG Mumbai The Boston Consulting Group in The Boston Consulting Group. +91 22 6749 7249 collaboration with Google India. The [email protected] authors would like to thank Prateek Roongta is a Partner & Vikas Agnihotri, Director–India Director in the Mumbai office of Amit Kumar Sales, Google India for his inputs. The Boston Consulting Group. Partner and Director +91 22 6749 7013 The authors would also like to thank Chilman Jain is a Project Leader [email protected] the steering committee members: in the New Delhi office of The Dilip Asbe, Chief Operating Officer, Boston Consulting Group. Pranay Mehrotra National Payments Corporation of Partner and Director India; Vibha Kaushik is a Principal BCG Mumbai Rajiv Anand, Group Executive & Knowledge Analyst at Google India. +91 22 6749 7143 Head–Retail Banking, Axis Bank; [email protected] TR Ramachandran, Group Country Abhishek Awadhiya is the Head of Manager, India & South Asia, Visa; Industry - Telecom and Digital Bharat Poddar Nitin Misra, Head of Payments, Payments at Google India. Partner and Director Products and Operations, Paytm; BCG Mumbai Dhiraj Poddar, Co-Head India and +91 22 6749 7145 For Further Contact Director, TA Associates Adv Pvt Ltd; [email protected] Suresh Sethi, Business Head/CEO If you would like to discuss the M-Pesa, Vodafone themes and content of this report, Prateek Roongta for their guidance throughout the please contact: Partner and Director course of the report. BCG Mumbai BCG +91 22 6749 7564 The authors would also like to thank Neeraj Aggarwal [email protected] and acknowledge the support Senior Partner and Director provided by Stuti Agrawal, Alenka BCG New Delhi Alpesh Shah Grealish, Ankit Mathur and Nikit +91 22 124 459 7078 Senior Partner and Director Shah. A special thanks to Maneck [email protected] BCG Mumbai Katrak and Jasmin Pithawala for +91 22 6749 7163 managing the marketing process and Yashraj Erande [email protected] Jamshed Daruwalla and Pradeep Hire Partner and Director for their contribution toward design BCG Mumbai Saurabh Tripathi and production of the report. +91 22 6749 7568 Senior Partner and Director [email protected] BCG Mumbai +91 22 6749 7013 Ashish Garg [email protected] Partner and Director BCG New Delhi +91 124 459 7193 [email protected]

Ruchin Goyal Partner and Director BCG Mumbai +91 22 6749 7147 [email protected]

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