Metamorphosis Into a Digital Economy

Swiping India into the future

Metamorphosis into a digital economy

November 2017

KPMG.com/in Table of contents

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The Indian payments landscape As per a latest study, the has undergone radical country’s digital payment transformation in the last ecosystem is poised to few years and it has gained reach USD500 billion by further momentum after the the year 202001. Frictional recent demonetisation by the inefficiencies associated government. The current push with cash transactions could by the government towards further propel digital payments. digitisation and start-up India’s cash to Gross Domestic incubation programmes augurs Product (GDP) ratio of 12.04 well for the industry. Many per cent is substantially innovative players like Paytm, higher than other comparable MobiKwik, PhonePe, etc. have countries02. At the same time, emerged in the recent past India ranks very low in respect and disrupted the market of digital transactions as well as quickly. The disruptions have the number of digital payment led to market incumbents points per million people.03 digging deep to match new Given this situation, a transition competitors. to a digitised economy is not only a natural trajectory of progression to a developed economy but also an expedient necessity.

01. Digital Payments 2020, BCG-Google, published July 2016 02. Medium term recommendations to strengthen digital payments ecosystem, Committee on Digital Payments, published December 2016 03. Can India meet the target of 2,500 crore digital transactions in 2017-18?, livemint.com, published 30 March 2017

The first step towards developing should not be any constraints Last but not the least, the an ecosystem is to dream big. during the ideation stage. cybersecurity ecosystem. Payment products or devices Developing a culture of innovation Growing digitisation has should ideally be able to: needs tolerance to fail to a great brought in numerous cyber extent. Only then fresh ideas can threats. There is a need for a • Receive or remit funds to be expected instead of simple well-established security system anyone, anywhere modifications to the present to counter the threats. The • Help in tracking the funds and process and products. This also first layer of the system should also arranging the funds from requires bonding and blending be an internal policing system the best source, including of different ages, genders and within the organisation to ensure lenders backgrounds and dismantling of protection at an organisational any hierarchy in an organisation to level. The second layer should • Know the spending pattern ensure free communication and be at the nationwide level with of the consumer, suggest exchange of ideas. organisations such as the Reserve and effect the expenditure or Bank of India (RBI), Computer investment Another critical element is the Emergency Response Team Financial Technology (fintech) • Use all known technologies (CERT), National Payments ecosystem. There are three from Near Field Corporation of India (NPCI), the major players in the fintech Communication (NFC) to Securities and Exchange Board ecosystems viz. banks, large satellite communication of India (SEBI) defining policies, IT companies and the fintech and design responses in case of • Ensure transaction safety. companies themselves. Fintechs a cyber-attack. Finally, there is a in their early stages are mostly For such advancements to need for a strong cyber-judiciary, small seeder units to banks happen, there is a need for to develop and update cyber laws and IT companies and may not development of multiple and punish the offenders. There is have the capability to grow on supporting ecosystems. Such a need for security professionals, their own. There is a need for ecosystems help ensure the forensic experts, and auditors at a collaborative environment to delivery of a robust, secure, user- each of these layers along with a bring all the players together and friendly, highly available and easily creation of awareness from top to allow them to grow together. accessible payment system. bottom in an organisation. There is also a need to enable The key factor is an innovative policies for such a thing to happen, ecosystem and developing such which is where the regulators an ecosystem is an academic- must act proactively to help industry collaboration. A blend of ensure that fintechs develop free ideas at the academic level into a sustainable business by and inputs from the industry can themselves. lead to mushrooming of start- ups and start-up incubators. In any research organisation, there

One of the biggest changes etc. However, banks found hand, provide the much needed that the payments industry has themselves lacking the required technological support to banks seen in recent years has been skill sets to build, implement and in order to reach a newer set of in terms of the channels used integrate the solutions relevant to customers. The regulator’s intent to make payments. Hand held the use cases of the consumers. on adapting to the new realities of devices have outgrown all other This combined with the perceived the digital ecosystem and framing channels due to ease of making benefits of being the first policies to that effect is helping transactions and the accessibility movers led them to partner the process. Systems like e-KYC that they provide04. Mobile with the fintechs. This has led (electronic-Know Your Customer) numbers form an important node to the development of a unique and digital signatures have made of the Jan Dhan, Aadhaar, Mobile ecosystem, an amalgamation of customer onboarding completely (JAM) trinity which is aimed finance and technology where paperless. As per RBI’s amended at connecting bank accounts, the fintechs rather than being Know Your Customer (KYC) rules, Aadhaar and the mobile numbers. competitors of banks have started banks can open new accounts by To promote the usage of digital acting as collaborators. simply using the Aadhaar number payments in urban locations and of the customer and a One Time The collaborations have been to accelerate penetration into the Password (OTP) sent to the linked on different fronts with the first hinterlands of the country and mobile number06. The millennials of them being around building develop trust among first-time want convenience and easy or developing ideas. Banks users, the government and the accessibility of financial products organise hackathons and similar banks have undertaken multiple and services. Such services events to source ideas for initiatives. Digi Dhan Mela was provided by online marketplaces development. The second kind of one such mission, which ran for a such as bankbazaar.com, ruloans. collaborations are where banks period of 90 days and offered cash com and policybazaar.com have share Application Programming incentives to both the merchants eliminated the need for financial Interfaces (APIs) in the public and consumers on the usage and non-financial organisations domain for the development of digital payments for retail to invest in building their own of solutions that can address a transactions05. network to source and onboard specific consumer need. Such clients. The collaboration between The push from the government open sourcing is helping develop fintechs and banks is not just also spurred interest from the payment ecosystem. The limited to onboarding, but also for fintech companies who had the third kind of collaboration involves effective customer engagement technology but were missing the exclusive partnerships between and servicing as well. momentum. With the collective banks and fintechs. efforts of the RBI, NPCI and the Such collaborations between government, a robust backbone fintech start-ups and the banks for digital payments in India has are bringing multiple synergies been created by systems such into play. Banks provide easier as Unified Payments Interface 04. KPMG India analysis 2017 means to fintech companies 05. 90 Days of Digi Dhan Mela: Towards Making Digital Payments (UPI), Bharat Interface for Money a Mass Movement, NITI Aayog, Press Release, published 30 to access financial systems March 2017 (BHIM), BHIM Aadhaar, Bharat 06. Amendment to Master Direction (MD) on KYC, DBR.AML.BC. and the fintechs, on the other No. 18/14.01.001/2016-17, RBI, published 8 December 2016 Bill Payment System (BBPS),

Over the years, form factors for technical prowess well to make fintechs should try and provide various payment products have headways into the payments contextually relevant solutions undergone drastic changes from industry by launching their own to overcome such challenges. cash to cards to personal devices payment products. Google There are many developments to crypto currencies. However, recently entered the market by that can be made possible using the underlying characteristics launching its UPI based payment contextual use of technology. of any successful payment app in India. Financial inclusion should be at product has remained the same. the core of any bank’s corporate Despite all these developments, A payment product must be policy and shouldn’t be simply structural issues still exist in a ubiquitous, secure, fast, efficient, a government-driven objective. country like India. With only 34 per and must have a value attached Only a combination of passion cent of the country having access to it and should be able to provide from the fintech companies and a to the internet07, products like a frictionless experience. Global purpose from the bank’s side can BHIM, PhonePe or Tez mean little mobile and internet giants like help bring an effective solution until the infrastructure supporting Samsung, Apple and Amazon on to the hands of the people and the backend of such technologies have used this concept and make ‘Digital India’ a reality. is improved. Banks and

07. internetworldstats.com, accessed 23 October 2017

India has made significant biometric authentication based payments while ensuring that development in the area of payment services like Aadhaar- the security is not compromised payments technology when enabled Payment System and with. India, in many ways, has compared to the global BHIM Aadhaar. become a benchmark for a counterparts; though, the number of developed nations for Indian regulators and statutory adoption has started picking its advancement in payments bodies are acting fast to ensure up only recently. India is one technology. that legal frameworks do not among the very few countries become a roadblock in the in the world to have a live real process of digitisation of time retail payment system like Immediate Payment Service (IMPS)08. With the launch of the UPI, one of the first of its kind in the world, India has entered into the elite group when it comes to payments technology. Some of the most developed economies of the world, like the U.S. and Australia, have been running on legacy systems and are only now looking to roll out real-time payment systems. The closest counterpart of the UPI is expected to come into existence in Europe only when the second Payment Services Directive (PSD2) regulations are enacted in 2018. Bharat QR is the first interoperable Quick Response (QR) code-based payment system in the world jointly developed by Visa, MasterCard and RuPay, and to be joined later by American Express. Considering that 99 per cent of adults in India09 are covered under Aadhaar, this has opened new possibilities for

08. The Global Adoption of Real-Time Retail Payments Systems (RT-RPS), SWIFT, accessed 23 October 2017 09. Aadhaar covers 99% of adults in India: Prasad, The Hindu, published 27 January2017

India is at the turning point of educated societies of the world servers, and stealing of data, a digital payments revolution, i.e. the U.S., accounts for 57 per to name a few. ushered in by the government’s cent of the total cybercrimes in Organisations should put in demonetisation exercise late the world. place an indemnification clause last year. This has brought The customer data which the in their agreements with service mobile phones at the centre banking system is holding has providers to fix the responsibility. of this revolution. The mobile been classified as sensitive However, the bigger question phones involve flow of personal personal data as per section 43A is who takes accountability for a data of millions of users that of the Information Technology cyber-breach, in case something is sacrosanct. To ensure that Act, 2011. Organisations have goes wrong even after having PCI- this data is not compromised valid compliances on their books DSS compliance – the consultant, in any way while people use but are not compliant functionally the certifier, or will there be joint different digital payment modes, as per the security compliance responsibility? robust security across devices is standards. There are cases where absolutely necessary. The issue of cyber security is employees have successfully dealt with different levels of The government aims to clock stolen data of their employers seriousness at various strata around 2500 crore digital payment and have established companies of the Indian corporates. There transactions in FY 2017-18 via of their own using the stolen are large banks and financial different payment modes such as data. Lapses in compliance of the institutions where security Unified Payments Interface (UPI), National Cyber Security Policy, is treated as an investment Unstructured Supplementary 2013 or Payment Card Industry- rather than an expense. These Service Data (USSD), Immediate Data Security Standard (PCI-DSS) institutions have every kind of Payment Service (IMPS), Aadhaar standards leads to such data checks in place to keep their enabled Payment System (AePS) theft instances. As a proactive network and data safe. There and Debit Cards10. While these measure, corporates should put are mid-size institutions who tools create a digitally-empowered in place reasonable checks and treat security as a compliance society, one important element balances, to not only identify such matter and having been forced by that could decide how successful instances but also report such regulatory bodies such as the RBI these payment products are going instances as and when they occur and the SEBI. These institutions to be is cybersecurity. As per in order to maintain data integrity do just enough to be compliant data released by the RBI, there and subsequent corrective action. with various certifications such were 16,468 instances of cyber With a multitude of digital as PCI-DSS and other regulatory frauds during the financial year payment transactions happening requirements. Then there are 2015-16 in India11. However, many via digital channels, the chances fintech start-ups, who in their of the breaches go unreported in of a security breach exist, early stages are more concerned India. Another figure reported by particularly when many mobile about getting their first business the Ministry of Electronics and banking apps and banking and cybersecurity is not on their Information Technology (MeitY) transaction channels are not priority list. It is not till their first states that there were 27,000 deploying hardware-level security encounter with banks and bodies instances of cybercrimes in the to make digital transactions more such as the NPCI, that they realise first half of 201712. Cybercrimes secure. Security issues may the need for security standards. are a concern not only for India include multiple fake accounts, but also for developed countries psychological manipulation of the world. According to 10. Mission to increase digital transactions to 2,500 crore; 20 lakh (phishing), weak device Aadhaar Pay machines, The Economic Times, published 1 data by a leading American February 2017 authentication, hacking of 11. RBI reported 16,468 instances of financial cyber crime in 2015- telecommunication company 16, medianama.com, accessed 23 October 2017 12. 652 social media URLs blocked by govt till June 2017: MoS one of the most developed and Home, gadgetsnow.com, accessed 23 October 2017

There are organisations including Over a period of time, cybercrime the hardware and software as companies in the payments has become a global business, design, and not as add-on features industry that provision budgets with criminal enterprises mirroring or a compliance requirement; to pay ransom in case of ransom normal businesses in their work as the latter will be susceptible attacks. However, the biggest practices. External threats are to hacking. Nonetheless, the question here is – how are not the only factor in driving the benefits of digital and card companies going to show the need for a reliable cybersecurity payments are decidedly greater entry of the amount paid as policy. Today, organisations than those of cash. To minimise ransom in their books of accounts, operate in a marketplace that (if not eliminate) the risk in digital what entry will be passed - paid is increasingly dependent on payment transactions, simplicity, ransom? Is it permissible under flexible collaboration and rapid security and ubiquity should be the laws of this country? omni-channel transactions. the watchwords for any payment There is exponential growth system or gateway to succeed. In order to overcome financial in financial transactions from To safeguard the details of users, liability of such cybercrimes, mobile devices, in particular, and such a system should have the organisations must look at that leads to growing concern ability to tokenise, encrypt and protecting themselves by taking about data security, as more and authenticate data before use. appropriate cyber insurance more information is exchanged policy. However, organisations The government has taken across mobile and collaborative should avoid taking off the shelf numerous measures in terms networks. cyber insurance policy as they of regulation through bodies are of little help considering Financial institutions need to such as the RBI and the SEBI, the complexity of cybercrimes. take the right action to close and programmes such as Cyber Organisations must take help of such gaps, compete successfully Swachhata Mission, etc. to a good cybercrime lawyer to help against criminals and keep their control the incidents of cyber them choose an insurance policy customers safe in an environment breaches. However, there is a that best suits their requirements. that is becoming increasingly need for cyber awareness at the Some of the points that needs to unsafe. consumer end as well. From using be considered while taking cyber a free public Wi-Fi to a shared The red-flag on security is insurance are – How the cyber phone number, many activities not without reason. Globally, insurance company is going to performed without considerations numerous events of hacking make good for the losses incurred for security, act as a gateway for have already been noticed on by a particular organisation, leak of critical data. email accounts, databases, and what is the extent to which an across social media platforms. In There is a need to consider insurance company is going to such cases, the financial privacy a number of strategic risk cover the organisation in case of and security related implications parameters, many of which an untoward event, and how the for individuals, institutions and are directly connected to the insurance company is going to nations is enormous. As digital regulatory requirements. This make good for the loss of brand payment transactions soar, cyber- makes it necessary, not simply value or reputation? crimes are also expected to rise. to safeguard information and There is also an emerging risk of transactions against cyber threats, After the demonetisation drive shadow IT. Shadow IT is a solution but to be highly proactive in that took place late last year, developed and deployed within developing methods, processes Indians have scrambled to the organisation without the and technologies, driven by undertake digital transactions. explicit approval or knowledge of an end-to-end, top-to-bottom Given this scenario, cyber the IT function of the organisation. strategic vision to stay a step analysts have also warned of This increases the likelihood of ahead. serious vulnerabilities in the uncontrolled and unofficial data digital payment systems used flow due to the negligence of across the country. To address the vendor and minimal or no this threat, it’s necessary to have oversight of the organisation’s security features embedded in IT department.

Financial institutions today accessing an account verifies The proliferation of mobile devices operate in an environment in its identity through a second (smartphones, tablets, etc.) has which risk is not just a primary question, or check-in procedure. given consumers more choices concern, but also a multi- Another benefit of such security than ever before. In current card- dimensional and highly complex systems is that, even if a person’s based systems - be it credit or issue. Several methods can be smartphone is stolen, payments debit card - the traditional role of adopted to boost cyber security. cannot be made from the device banks in issuing physical cards, In the tokenisation method, for unless authorised through a that are dispatched to users could example, the system or device fingerprint or the specific PIN be substituted by new forms of does not store any account or created by the user during the intermediaries, such as trusted card number details, but relies on setup procedure. service managers, that make tokens to undertake transactions. mobile devices capable of over- Although, the demonetisation When a transaction takes place, the-air provisioning. The time is drive has fast-forwarded India’s the device transmits two sets of ripe to drive digital payments digital transition, issues of data to the payment terminal. The across India using financial payment safety and security first set includes a 16-digit token instruments that are backed by have not kept pace with these representing the credit or debit robust security solutions. developments. If repeated card number. The second set security breaches occur, At a time when cyber threats are includes a one-time cryptogram or apprehension in people’s mind on the rise due to increased digital code generated by the encryption will slow down the pace of payment transactions and effects key of the smartphone. The third digital payment transactions and of demonetisation, banks and safety element is authentication, adoption in India. It is, therefore, other stakeholders in the value with the user being identified by critical that the issue of security is chain of digital payments feel the the user ID, fingerprint, or other given paramount importance by all need for good cyber insurance in code. stakeholders. It is important that place to deal with the liabilities Today, Single-Factor the digital payments industry also arising out of cybersecurity Authentication (SFA) is clearly upgrades its systems to ensure breaches. Various cyber insurance not as safe as a Two-Factor the security and safety of data as covers are available for banks Authentication (2FA). Password- well as funds of its customers. If today, but the cyber liability based authentication is the that happens, stakeholders could insurance has seen more demand most common form of SFA. In potentially benefit – including the from banks. 2FA, an extra layer of security government, the digital payments is added to the standard log-in industry and the customers at procedure, whereby the person large.

Another important factor in One of the biggest risks to the securing the IT systems of any payments industry comes from organisation is to put in place the industry itself, which does a robust cybersecurity culture not take enough measures to at the heart of the organisation. handle cyber grievances. In the Employees today use various era of social media, even a couple tools that are available at their of disgruntled customers whose disposal. Though, these tools grievances are not resolved on make their work easier, there time could potentially malign the is always a risk of cyber breach reputation of an organisation. through the use of unmanaged Some of the steps, if taken, can devices. Traditional security help organisations address measures employed by the grievances and keep them from organisations to make the spiraling out of control. First, systems cyber secure are often they must put in place an Online ineffective in securing the data Dispute Resolution (ODR) that passes through these mechanism for cybersecurity endpoints. Lack of poor company grievances. Second, they could culture with respect to cyber provide an option for grievance security may lead to security resolution in the payment apps vulnerabilities. Employees should itself. The grievance registered be the first drivers of a robust by the customer on the payment cybersecurity culture, inside or app goes directly to the grievance outside the corporate network redressal officer, who should be without compromising on the held responsible for resolution of data security. The cybersecurity the dispute within a defined time culture has to be built by the top frame. Third, all payment apps management in the organisation should be available in regional that goes down to the bottom of languages for customers to help the hierarchy in the organisation. them from falling prey and being Until and unless an organisation is cheated on the pretext of dispute not cyber aware – the organisation resolution. cannot become a cyber-secure Cyber risks are a natural organisation. The risk and consequence of increasing compliance solutions should digitisation. Investment in be designed to help banks and security infrastructure alone isn’t financial institutions: enough. Also, the most insidious • Deal with the growing threats attacks happen and bypass any from organised crime infrastructure or awareness training. Companies should • Manage the risk of frauds accept the eventuality of such an through greater collaboration attack and should look at cyber • Safeguard business from insurance covers customised as insider threats per their needs. Finally, effective monitoring of risks, timely • Maintain full compliance with mitigation and a single and constantly changing regulations transparent communication on • Build trust with customers, any breach can help reduce the regulators and partners alike. impact while retaining the trust of the clients.

Financial inclusion has assumed In a country as vast as India, Given the enormous critical importance in policy level taking physical bank infrastructure heterogeneity of India’s decision-making over the last to the last mile customer is a population, the government has few years. Taking into account capital intensive and slow process. developed different options for the varied requirements of Historically, the expansion of card different segments. There are Indian society, various attempts base has been slow and so has more than 1.2 billion mobile phone have been made frequently been the adoption of other digital subscriptions in the country14 to make people financially payment modes. For this purpose, with a third (approximately 45 inclusive. However, a number the government took steps crore)15 of them using the mobile of challenges have still kept towards exploiting the potential internet. BHIM and UPI caters to real benefits of these efforts of 1.2 billion mobile connections the digital payments need of the away from the common man. in the country to bring bank segment who use a smartphone Some of the challenges that still branches close to every citizen (approximately 30 crore)16. USSD, plague financial inclusion in India in the country and making digital which can work on any mobile includes: payments convenient, fast phone with a GSM network and safe13. Use of Aadhaar as without the need of internet • Bringing behavioural change in a financial address, linking of connectivity, which make up for people to use bank accounts Aadhaar to bank accounts and nearly 66% of the total mobile and debit cards subsequent use of biometrics phone users in India17. Apart from • Lack of financial literacy and for authentication of transactions these phone based solutions, awareness about financial were some of the initial steps India has nearly 1.18 billion products taken in this direction. The launch Aadhaar numbers18 and more of Aadhaar-based payment than 67 crore bank accounts that • Lack of sustainable incentives services like AePS and BHIM have been seeded with Aadhaar19. to business correspondents to Aadhaar, USSD for feature phones, AePS and PoS solutions cater to carry out services BHIM app for smartphones are these users, who have Aadhaar • Poor network connectivity in some of the other steps taken seeded bank accounts and also tier 4, tier 5 cities and rural towards facilitating mobile-based have debit/credit/prepaid cards. areas payment services and bringing For closer handholding to senior banking at people’s fingertips. citizens and less literate people, • Possibility of fraud due to lack the banking correspondent model of financial literacy. India is making an attempt to has been developed with a special transit to a less cash economy by The three pillars of JAM - the focus on rural areas where a using digital modes of payment. Jan Dhan Yojana, the Aadhaar banking correspondent helps Individual consumers have initiative and the Mobile number extend financial services. several benefits in going less- are called the trinity of reforms in cash and to aid this further, the India. The JAM trinity holds the government has also announced key to one of the biggest reforms several incentives on digital ever attempted in India i.e. Direct 13. Telecom subscriber base in India crosses 1.2 billion mark, payments. Revamped modes livemint.com, published 14 July 2017 Subsidy Transfer (DBT). The JAM of digital payments have been 14. Telecom subscriber base in India crosses 1.2 billion mark, trinity allows the state to deliver livemint.com, published 14 July 2017 launched such as BHIM app and 15. 40% of Mobile Internet Users In India Are Still Hooked Up to 2G direct benefits to the beneficiary Network, dazeinfo.com, accessed 23 October 2017 USSD 2.0. Large-scale awareness 16. Number of Internet users in India could cross 450 million by in a targeted and less distortive June, livemint.com, published 2 March 2017 campaigns have been organised, manner. 1 7. Share of mobile phone users that use a smartphone in India especially the Digi Dhan Mela from 2014 to 2019*, statista.com, accessed 23 October 2017 18. Govt savings through DBT touches Rs 65,000 crore: Javadekar, in 100 cities for education and deccanchronicle.com, accessed 23 October 2017 19. Nearly 67 crore bank accounts seeded with Aadhaar: Ravi handholding of the public to adopt Shankar Prasad, economictimes.indiatimes.com, published digital payments. 11 July 2017

Aadhaar – the national identity The government has taken The entire Aadhaar platform is project was instituted on the several initiatives to foster an built to connect all segments principle of inclusion, an attempt environment of financial inclusion of the society under a unified to bring all citizens under a single in the country. These initiatives identity system and payments fold. The project with its massive coupled with technology have is one of the biggest areas of repository of biometric and helped in creating an ecosystem impact that Aadhaar has brought resident data have been leveraged that allows the benefits of these about. Aadhaar has transformed across diverse sectors in order to initiatives to reach the un-banked the way we transact. Aadhaar- transform the way we function and under-banked sections of based payment solutions are as a nation. In the payment and the society. The JAM trinity has built in such a way that it reduces banking sector alone, Aadhaar played a critical role in building this the costs of providing financial authentication has been used in ecosystem that is conducive for services. For instance, AePS multiple ways in order to bring the digital financial infrastructure: through Micro Automated Teller about financial inclusion and Machines (Micro ATMs) allows • The Pradhan Mantri Jan-Dhan simplify the way we transact people in the remotest of areas to Yojana (PMJDY), touted as today. access banking services without the largest financial inclusion the need to setup a full-fledged As part of the endeavour to initiative in the world20, has branch. Similarly, the BHIM make India a less cash and more been successful in opening Aadhaar removes the need for digitised economy, UIDAI (Unique more than 30 crore bank a PoS equipment at stores and Identification Authority of India) accounts21, thereby ensuring merchant locations. in collaboration with NPCI, RBI that at least one member of and banks introduced several each household in the country In addition, the sheer size of the initiatives to provide easy and has a bank account Aadhaar programme with more efficient payment solutions than 99 per cent26 (1.18 billion27) of • Proliferation of Aadhaar to businesses and individuals adult Indian residents registered to more than 1.18 billion22 alike. Today, the payment under the programme provides residents of the country have solutions supported by Aadhaar a concrete base to build and addressed critical challenges authentication includes AePS, scale solutions that can have with respect to the delivery of Aadhaar Payment Bridge (APB) widespread impact. financial services. Using the and the BHIM Aadhaar. digital authentication process, Considering the need for a simple Aadhaar based e-KYC accounts 20. Pradhan Mantri Jan Dhan Yojana (PMJDY),Launched by the and cost-effective payment can be created at the click of a Prime Minister Shri Narendra Modi on 28th August, 2014, Celebrates its First Anniversary, Press Information Bureau, solution and the one that does mouse Government of India, accessed 23 October 2017 away with the requirement of 21. pmjdy.gov.in, accessed 23 October 2017 • With over 30 crore 22. Govt savings through DBT touches Rs 65,000 crore: Javadekar, carrying a card and Personal deccanchronicle.com, accessed 23 October 2017 smartphones23 in the country Identification Number (PIN) 23. Number of Internet users in India could cross 450 million by that is likely to grow to over June, livemint.com, published 2 March 2017 by the customer and builds 24. India projected to have 530 million smartphone users in 2018: 50 crore by 201824, India has Study, firstpost.com, accessed 23 October 2017 customer confidence and trust in 25. Nearly 67 crore bank accounts seeded with Aadhaar: Ravi already become the world’s Shankar Prasad, economictimes.indiatimes.com, accessed 23 digital payments by allaying the October 2017 second largest smartphone concerns around compromise 26. Aadhaar covers 99% of adults in India: Prasad, The Hindu, market published 27 January2017 of PIN, solutions such as AePS 27. Govt savings through DBT touches Rs 65,000 crore: Javadekar, deccanchronicle.com, accessed 23 October 2017 and BHIM Aadhaar have been • 67 crore Aadhaar seeded bank launched. While AePS allows account25. P2P transactions, BHIM Aadhaar allows Person to Merchant (P2M) transaction using biometric authentication.

Aadhaar is an IT enabled identity Andhra Pradesh became the first The time is ripe for linking solution that has been used by state in the country to implement everything to Aadhaar, thereby, various entities for business AePDS (Aadhaar enabled Public positioning Aadhaar itself as a process re-engineering of Distribution System) in fair price virtual card that has the capability e-governance services. The shops28. Online authentication to serve all purposes, right from potential of Aadhaar is being services provided by UIDAI identification proof to address effectively leveraged by (fingerprints, iris and photo for proof to financial address, etc. institutions from the government, face recognition) are used for public sector and private sector the sale of Public Distribution to improve service delivery to the System (PDS) commodities citizens of the country. to Below Poverty Line (BPL) beneficiaries in all fair price shops. This has improved efficiency and transparency in the system and enabled on time ration delivery to eligible beneficiaries.

28. Best practices from our state, NITI Aayog, accessed 23 October 2017

Digital is going to play a critical can allow the merchant to receive international payments, therefore, role in financial services as well the payment from the customer. it is not so easy to replace the by 2020. Currently, there are The UPI is getting its foothold in debit card from the system. over 4.5 crore active internet the market gradually and strongly, Going forward, the UPI may have banking users in the country. With and various foreign countries like cards available on its platform for increasing banking user base and Brazil, Australia and Mexico are making payments. Hence, the digital footprint, this is expected looking to replicate this payment customer will be the king of the to grow to 15 crore by 2020. After instrument. market and the ease of payments demonetisation, mobile wallets and diversified set of benefits The UPI has merits over the have shown steady growth with and offerings could become key m-wallets because of the limited respect to pre-demonetisation differentiators amongst cards, cash-transferring abilities of levels. m-wallets and UPI apps in getting m-wallets in comparison to the the major market share. Mobile phones are one of the UPI. While there are speculations most significant innovation that it could put an end to the The future of the banking industry with the capability of fostering mobile wallet industry and is likely to be driven by the financial inclusion to the last mile debit cards, however, it doesn’t younger generation of customers customer in semi-urban and rural seem to be happening anytime who expect customer service areas. About 65 per cent of India’s soon. In fact, wallet players have and innovative products as the population, which is under 35 benefitted after the launch of the primary factor for choosing years of age29, is comfortable in UPI as they have also tied-up with a bank. With the increase of using mobile devices to complete banks to add one more money younger population in India, banks person-to-person (P2P) financial loading option to their bouquet. need to focus on these young transactions for a variety of Now that the UPI is also available customers and offer products on purposes. The shift in usage as a mobile based real time new-age platforms where these patterns of mobile phones is payment system, competition customers frequently visit such expected to help in the uptake of has become intense in the as social media, chat platforms, digital banking. category. The m-wallet players etc. The growing number of need to look for an interoperable urban centers in India provide a The launch of UPI has empowered model just like the UPI, which is massive scope and burden for bank account holders to send as bank-agnostic, in order to sustain banks to tap into these customers well as receive money using their themselves in the market and through conventional branch smartphones without having to they should also work towards banking. Today, the banking enter the bank account number short sizing the payment flow and needs of customers are 24x7, and Indian Financial System Code experience for their customers as going beyond the branch banking (IFSC) of the beneficiary. The it is a tedious job for customers to timings, therefore, banks need to UPI allows both push and pull first load money and then pay. provide omni-channels to serve payments, thus making it more their customer needs which will convenient for the customer as On the other hand, the debit differentiate them from the other well as the merchant to make and card is still the only option to banks. receive payments. Merchants are withdraw money from ATMs as not required to own a smartphone the current infrastructure of ATM to accept UPI payments as UPI machines does not support any also works on both static and kind of cash withdrawal process dynamic QR codes. Therefore, a without the use of debit cards. 29. India to supply over half of Asia’s workforce: report, sticker of a static QR code alone Also, the UPI does not support thehindubusinessline.com, accessed 23 October 2017

The major changes for the digital payment to merchants, domestic should work around building economy are being done at the remittance, etc. The cash tailor-made solutions for end grass root level. Under the Digital replenishment/settlement is to be users which serve their needs of India initiative, the Government done between the bank and the varied payments. Industry-specific of India is working on creating merchant. payment instruments can help digital villages where all the ease the adoption of the digital Despite the urge to go digital, transactions and reporting will channel. For example, a village the maximum usage of digital be done through the digital with handicraft production should medium for transactions is in the medium. The government is be provided with a payment urban areas, and primarily done by working on fulfilling infrastructural solution which can be as close as users through smartphones. For requirements for these villages possible to the understanding of instance, the T-Wallet launched such as internet connectivity, the workers of that industry. by the Government of Telangana multi-lingual banking solutions, is a state run e-wallet service for The Merchant Discount Rates trained and skilled staff, etc. The the people of Telangana. About (MDR) have grown significantly government is also considering 95 per cent of the total users over a period of time and with the an incentive of 2 per cent over the of Telangana Wallet (T-Wallet) growing size of digital payments, applicable Goods and Services are smartphone users despite the banks are not willing to let Tax (GST) tax rate in case of the solution being available go of these charges as it brings payment being made digitally for every type of user – i.e. them significant revenue. The where the bill amount is up to INR users with a smartphone, a launch of the BHIM app has made 2,00030. Various banks have also feature phone or ones without on-boarding charges very low and taken up this opportunity and they a mobile phone. There is a the operational charges are also are using their Corporate Social significant gap in awareness on the lower side in comparison Responsibility (CSR) funds to fuel and acceptance among users to the traditional PoS-based this initiative and are adopting which needs to be filled by the payment acceptance solution villages to transform them into digital payment organisations for merchants. The merchant digital villages. By doing this, as well as by the government. only needs to have a sticker of a banks are not only increasing their It is the responsibility of all the static QR code allocated to him penetration into the rural market players in the domain to provide by the bank in which he holds but are also increasing and driving solutions which are as simple an account, with almost zero or the revenue of their products. as it can be, contain no frills and minimal maintenance charges. Even though there is a lot of noise require no major infrastructural By doing this, the merchant can around digital, it does not mean changes, thus, making it a product move away from expensive PoS that ATM machines are going to or service that appealed to the terminals and the charges levied vanish. The ATM is going to co- masses and catered to a large on its transactions, which is exist with the digital products as section of the society. favourable for smaller merchants. the size of digital transactions is The government should also All these initiatives have created less than 2 per cent in the overall incentivise stakeholders by a conducive environment for financial transactions space. It is reducing the charges levied accelerated growth in digital likely to take some more time for on digital transactions as it will banking in general and digital digital transactions to take over help promote digital payments. payments in particular. Leveraging the market, and replace more There is a need to spread the various technological than 2 lakh existing ATMs. Banks awareness of digital payments innovations, fintechs are also are also now working on Public rather than introducing newer bringing in new ideas and Private Partnership (PPP) models payment instruments and end disrupting traditional financial for cash and digital medium by up confusing the customers. services in a meaningful way. installing Aadhaar enabled ATMs, Payment instruments such as the Several unique models have as these ATMs can work with UPI, BHIM Aadhaar, BBPS and emerged over the last few years, and without debit cards using Bharat QR have the capability to which have changed the way biometrics. These are portable bridge this gap and educate the digital payments are being done ATM terminals which are kept at end-user to opt for the digital in India. the merchant stores and can be medium as the payment interface. used for various purposes such Players in the payments industry as cash deposit, cash withdrawal,

30. Govt mulling 2% relief on GST for digital payments, The Times of India, accessed 23 October 2017

Post demonetisation, the country T-Wallet allows users to complete advanced technology platforms, has aimed to go less-cash, if the transaction using 2FA either provides scalable performance not cashless, and in the wake through Aadhaar and OTP, or and enhanced security, in addition of this, the need for multiple Aadhaar and Biometric, thus to the options of Telugu, Urdu and digital payment options has taking care of both feature phone English languages to the users. become pertinent. To help users as well as users who don’t One feature that distinguishes citizens overcome the cash have a phone. T-Wallet from the rest is that the crunch created by demonetisation user can operate the wallet even T-Wallet can be used through and with an aim to push digital without having a bank wallet. any of the 4,500+ MeeSeva payment transactions in the centers ensuring that rural citizens The existing digital payment state, the Telangana Government without phones are also able to solutions are mainly built for came out with a new initiative access the benefits of T-Wallet. smartphone users, and thus and launched T-Wallet31, a state- More than 200,000 citizens have the focus is urban-centric with owned wallet that allows users to registered for T-Wallet within very limited options for feature make payments to government as the first three and half months phone users and those with no well as private services. of its launch. This includes 7,000 phones. However, the T-Wallet With this initiative, the Telangana plus web users, 194,000 plus has been designed with a focus Government became the first smartphone users and 5,000 plus on feature phones and no phone state in the country to launch kiosk users. During this period, users in rural areas. Since it is a an official e-wallet32 that offers more than 72,000 users loaded government initiative, citizens are the anytime, anywhere platform approximately INR 25.80 crore naturally more likely to trust this for digital payments with no in their T-Wallets. During the digital payment solution. additional charge for citizens. same period, more than 167,000 The digital payment option is users have transacted for various available across formats such as services by making payments of online web browser, smartphone, over INR 5.34 crore. In order to feature phone and also for people popularise the T-Wallet, the state even without a phone. government has organized more than 100,000 Digithon campaigns The platform allows citizens to to encourage the use of T-Wallet make payments not only for and proliferating digital literacy in the services rendered by the rural areas33. government and private entities, but also facilitates the disbursal of With this wallet, the state various government entitlements government aims to deepen viz. pensions, scholarships and financial inclusion and increase Mahatma Gandhi National Rural digital transactions based on Employment Guarantee Act Aadhaar, with or without the need (MGNREGA) wages. for a bank account. The wallet that has been built on one of the most

31. twallet.telangana.gov.in, accessed 23 October 2017 32. Govt mulling 2% relief on GST for digital payments, The Times of India, accessed 23 October 2017 33. twallet.telangana.gov.in, accessed 23 October 2017

Nowadays, it has become Loyalty relationship is not just foster advocacy of their brand in a trend for retailers to enroll limited to traditional ‘reward the consumer’s mindset, when their customers under loyalty points’ but goes beyond, with it comes to a dynamic economic programmes. The rationale behind companies building a strong environment. Organisations have this is to reward the loyal/privilege following of loyal customers to ensure that their marketing customers and to create customer through a data-driven approach for communications and loyalty stickiness by offering freebies a more sustainable growth. Apart programmes are conveying the and discounts. However, behind from being economically viable, accurate message and to the these superficial gestures, the loyal customers turn out to be far appropriate target segment of actual play goes much deeper, more beneficial to an organisation customers in an effective and encompassing some of the most in not just one, but many ways. efficient manner, being viable in relevant information of economics, These include ease of retargeting, both the short and long term. psychology and data analytics accurate and cumulative analysis, In order to build an overall related to consumers. brand endorsement, word of customer experience and pitch mouth and increased brand equity. Data analytics excites for their offerings to the customer, organisations with the promise of Another important rationale to run there is a lot of buzz around completely automated customer these loyalty programmes is that innovation in the offerings by the experience programmes. By the difference between the cost retailers. The innovation has to integrating an analytics tool with of customer retention and the be done with a motive to create all the customer interaction points, cost they incur for a new customer a differentiated value offering including social media portals, acquisition is almost five times backed by data analytics. By one can keep track of loyalty to 25 times. Various customer embedding technologies like programme enrolled customers research studies have shown that customer analytics and big data, and analyse how they behave, as brands which have more active organisations are leveraging the well as what they think about their engagement with their customers, benefits of new tools to enrich experience with the company’s end up generating 9034 per cent the customer experience and to product or services. more frequent sales, 6035 per cent smoothen the process of earning increment in the average ticket customer loyalty. Considering the time, effort and size and 536 times more likely resources that go into customer visits to the store in future. acquisition, it becomes highly imperative for companies to Targeted product recommendation retain these customers. This is one of the most preferred ways requires a system for customer to keep customers engaged approach, their behaviour analysis as this helps retailers retain and segmentation, customer the customers towards their evaluation, Customer Relationship products. Building customer Management (CRM), loyalty and loyalty is a stepping stone for engagement channels. Hence, any organisation in the journey of

building a relationship with a loyal building a brand. And it is even 34. Infographic: Customer acquisition vs retention costs, customer gives a strong foothold more important for the companies mycustomer.com, accessed 23 October 2017 35. The Value of Keeping the Right Customers, Amy Gallo, to the retailer to start in this to establish right communication accessed 23 October 2017 36. How Analytics Is Transforming Customer Loyalty Programs, direction. with their customers as this helps kissmetrics.com, accessed 23 October 2017

Earlier, only a small sample the two needs to be mapped vi. Return on investment - Data of customer data was used and relevant models need to crunching and analytics play to analyse and create plans be developed. a bigger role when strategies for customer acquisition and and decisions are to be iv. Platform - Organisations need retention at a single point of formulated keeping the return to build a platform not only time, but now organisations are on investment or profitability for customer engagement constantly tapping the pulse of in mind. Hence, stipulated but also to capture the digital their customers at the click of a actions should reflect on footprints of customers in button. Research studies have profits as well. order to bring the offering highlighted that early adoption even closer to the customer. of analytics provides an edge One also needs to create to organisations who are in the relationships between data business of servicing and value platforms in order to create creation. Once the organisations a detailed profile of their become proficient with these customers. solutions and tools, they tend to widen the gap between them v. Relevance - Data analytics is as leaders and the competitors very important, but the model as laggards for the next few one develops out of it should years with a differentiated and help the company develop a customised offering for their relevant product. Aspirations customers. and innovation alone can’t drive sales. The product should Organisations can create loyalty satisfy basic and relevant and potentially benefit by needs, else it will be of no use. concentrating on factors like: i. Customer and communication - Concentrate on understanding and capturing the customer’s pulse and direct all communication in a personalised and targeted manner to the appropriate set of customers. ii. Data domination and data democracy - Data has now become a key factor to drive business. How well one knows their customer is now being decided by the amount of customer data and information one collects, analyses, and uses the available data and information to design intelligence-based loyalty. iii. Frequency - Knowing the data and knowing the customer is different. One may know the frequency or customer propensity models, but may not know the customer. Hence, a correlation between

In a survey among the participants i. Zero or minimal of the first Cards and Payments transaction charges Summit 201737, which had The participants were of the view representations from leaders that transaction charges for the across diverse functional areas of customers has to be minimal the payments industry, industry if the industry wished to bring veterans shared their experiences more users under the ambit of from the payments industry and digital payments. Participants also voiced their expectations to also opined that the economics the drivers of change. Some of of the transaction fee can be the views that came out strongly worked out on the concept of from the survey and have the economies of scale with lesser potential to be a guiding force for charges for users doing more the payments industry are digital transactions. This can help listed below. create a sustainable pricing model wherein transaction volumes are driven by transaction charges.

Is zero or minimal transaction charge in digital payment modes sustainable?

Can't say 4% Yes No 67% 29%

Source: KPMG and ET Survey, Cards and Payments Summit 2017

ii. Current market disruptors Which technology or product, in your opinion, has the maximum potential to bring about a change in the payment landscape in the country? Participants also opined that UPI is a revolutionary payment product and could potentially emerge as a disruptor in the Indian payments landscape, while blockchain is the upcoming technology to look forward to in Others the fintech space. 22%

UPI Blockchain 37% 8%

Biometric Bharat QR 22% 11%

Source: KPMG and ET Survey, Cards and Payments Summit 2017

iii Target markets for fintechs Which segment of customers should fintech companies target to take the lead from the established players? Participants were also of the view that fintechs should build their solutions around the challenges faced by people living in semi- urban and rural areas as these Urban areas are often neglected by the 5% mainstream financial institutions SME and are usually under-served 9% by existing financial products. With more people becoming Under 40 years Tier 2/3 (Urban and Rural) educated and tech savvy in these 19% 43% areas, there exists a tremendous scope for digital penetration as Rural the younger generation is more 24% receptive to experiment and embrace digital proliferation. There is a huge gap in the demand and supply of financial products that has to be bridged in these Source: KPMG and ET Survey, Cards and Payments Summit 2017 areas, and if served properly, the next big wave of business could come from the small and micro merchants who live in these parts of the country.

iv. Hindrances in the growth What are the factors that are hindering the growth of fintech of fintechs start-ups in India? The key hindrances that are highlighted by the participants in the growth of fintech companies in India include the absence of required infrastructure, Infrastructure awareness and enforcement of 10% cyber laws, lack of awareness Awareness Funding and education about fintech as an 37% 16% industry and data security.

Regulations 16% Lack of Govt. backing 21%

Source: KPMG and ET Survey, Cards and Payments Summit 2017

v. Threats for fintechs What poses the biggest threat to the fintech industry? The participants highlighted cybersecurity and cyber breaches as the real threats for fintech companies. In a world where None data is the new currency and the 10% most valuable asset, participants strongly emphasised the need to Others Cyber Security persistently maintain data security 15% 30% and integrity. Regulations 5% Block Chain Incumbents (Banks) 15% 25%

Source: KPMG and ET Survey, Cards and Payments Summit 2017

India is evolving on the States have also begun However, these fintechs are global platform as a digitally contributing towards this mission prone to a lot of challenges such active economy and post by launching their own wallets as the absence of an ecosystem/ demonetisation there is an and payment instruments. The infrastructure for them to flourish, aggressive push for digital Telangana Government has risks pertaining to the data and transformation of the payments launched a state run e-wallet cybersecurity space, recognition system in India. India has made known as T-Wallet which runs of fintech as an industry, exceptional progress in digital on smartphones, feature phones awareness and enforcement payments and is one of the few and is also available for people of cyber laws, etc. The critical countries in the world to have its without a phone, through the use requirement for sustainability of own real-time payment system in of biometrics. the digital ecosystem is a robust the form of IMPS and UPI. cyber security framework. This Digital transformation is not framework could help build Today, the Indian economy restricted to payments only but trust among users and other is flooded with a bouquet of organisations are also moving stakeholders, which in turn could payment products involving UPI, ahead with the application of help shift a larger part of the IMPS, National Electronics Funds big data and analytics in their population towards the digital Transfer System (NEFT), Real core business to get a bigger payment mode and expand the Time Gross Settlement (RTGS), share in customer expenditures digital payment landscape to AePS, etc. apart from various i.e. a larger share of wallet. reach the remotest parts of the m-wallet players like Paytm, Organisations are devising various country. MobiKwik, Freecharge etc. who loyalty programmes which incurs are almost running an ecosystem a cost for them, but by doing so, of their own. The government they manage to get richer data is working towards creating which helps them devise better a complete digital payments product offerings and business ecosystem where customers can plans. pay or receive money through Today, most of the major their Aadhaar number and also innovations in the digital space receive service delivery for various are being offered through social welfare schemes. The fintechs which are comparatively government has set-up various smaller organisations and which entities and missions such as the have the expertise of both the National Digital Payments Mission financial and the technology (Digi Dhan Mission), to focus on domains. These fintechs develop redefining the way customers financial products which can be spend their money that involves integrated or bundled with the cards, wallets, direct account financial products of banks and debit services, etc. NBFCs to bring value addition and uniqueness to the product.

Glossary 2FA Two-Factor Authentication AePDS Aadhaar enabled Public Distribution System AePS Aadhaar enabled Payment System ATM Automated Teller Machine API Application Programmeming Interface BBPS Bharat Bill Payment System BC Business Correspondent BHIM Bharat Interface for Money BPL Below Poverty Line CERT Computer Emergency Response Team CRM Customer Relationship Management CSR Corporate Social Responsibility DBT Direct Benefit Transfer e-KYC Electronic Know Your Customer FPS Fair Price Shops GDP Gross Domestic Product GST Goods and Services Tax IFSC Indian Financial System Code JAM Jan Dhan, Aadhaar and Mobile KYC Know Your Customer MDR Merchant Discount Rate MeitY Ministry of Electronics and Information Technology MGNREGA Mahatma Gandhi National Rural Employment Guarantee Act NEFT National Electronics Funds Transfer NFC Near Field Communication NPCI National Payments Corporation of India ODR Online Dispute Resolution OTP One Time Password P2P Peer-to-Peer P2M Person-to-Merchant PCI-DSS Payment Card Industry-Data Security Standard PDS Public Distribution System PMJDY Pradhan Mantri Jan-Dhan Yojana PoS Point of Sale PPP Public Private Partnership PSD2 Payment Services Directive 2 QR Quick Response RBI Reserve Bank of India RTGS Real Time Gross Settlement SEBI Securities and Exchange Board of India SFA Single-Factor Authentication T-Wallet Telangana Wallet UIDAI Unique Identification Authority of India UPI Unified Payments Interface USSD Unstructured Supplementary Service Data

KPMG in India, a professional KPMG has offices across India to provide rapid, performance- services firm, is the Indian in Ahmedabad, Bengaluru, based, industry-focussed member firm affiliated with Chandigarh, Chennai, Gurugram, and technology-enabled KPMG International and was Hyderabad, Jaipur, Kochi, services, which reflect a shared established in September 1993. Kolkata, Mumbai, Noida, Pune knowledge of global and local Our professionals leverage and Vadodara. industries and our experience of the global network of firms, the Indian business environment. KPMG in India offers services to providing detailed knowledge national and international clients of local laws, regulations, in India across sectors. We strive markets and competition. About ET Edge Acknowledgements ET Edge, an initiative of while developing into a one stop This publication has been prepared The Economic Times, has destination for the stalwarts of by a team comprising: been founded to empower the industry. multiple sectors, industries The plan is to formulate a Business team and segments through the focused holistic solution for dispersion of critical business • Nitish Nath Shrivastav key sectors which contribute knowledge through strategically • Rakesh Verma largely towards the GDP of developed conferences and the nation. Extensive market • Prateek Mehta summits. Foreseeing the research with core practitioners, tremendous potential which • Nishant Nayak experts, leading trend setters India has in store, ET Edge and policy makers is conducted strives to bring together to ensure that these platforms Design and Compliance team visionaries and key global are unparalleled in the vertical • Shveta Pednekar leaders through its enriched they cater to. Visionaries and knowledge platforms to aid the • Nisha Fernandes industry leaders contributing as symbiotic relationship societies speakers will only ensure that • Viswanath Ramachandran and businesses share. these platforms set themselves We aim to channelize global apart. Our delegates are key business intelligence vide management personnel and summits and conferences decision makers who can further through fortifying lectures, enrich the gatherings with workshops, panel discussions, their crucial insights and vast roundtables and case studies. experience. The forums would ensure that Retail, e-Governance, Real the senior decision makers are Estate, Infrastructure, equipped with information to Healthcare, Education, respond to challenges being Technology, Rural & BFSI are faced from a global perspective. some of the key sectors around We have substantial expedients which ET Edge aims to develop for the business & visualize it knowledge destinations. taking mammoth proportions

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