Innovate.Collaborate.Elevate Paynext 2018 June 2018 For private circulation only Innovate.Collaborate.Elevate | Paynext 2018

Contents

Foreword 04 Message from Deloitte 05 Introduction 06 Emerging Payment Technologies 10 Driving Digital Payments among Rural Customers 16 Market Entry by Global Technology Giants 22 Increasing Merchant Payments Acceptance- the Journey from 3 million to 30 million 30 Moving Beyond: Capturing Value from Payments Data 42 Abbreviations 54 About Banking Frontiers 55 About Deloitte 56 Acknowledgements 58

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Foreword Message from Deloitte

Dear Payment Mavens, several trending technologies and there imperative that it gets a strong market Digital payments in India has evolved further to drive simplicity, convenience Through this report, we have attempted clearly has been an upsurge in fintech offtake. I am often reminded of a quote into a multi-modal experience. In 2017, and mass adoption in order to penetrate to critically analyze various innovative We have come a long way to PayNext excavation and engagements. Banks are by Dr. Sam Pitroda during the launch we had foreseen that there will be a shift the last mile. For instance, two key means of payments and their potential 2018 starting from Mpay insights in now working towards leveraging more of IMPS by NPCI a few years ago where of digital payments from physical cards opportunities are finding solutions that to see mass adoption. Further, this 2014 where we intended to map the value from the existing payments data. he said that “For any technology to be and wallets to newer forms of payments can truly compete with the speed of cash report examines the problems plaguing leapfrogging payment revolutions that All this essentially proves that there is no successfully adopted, it has to be simple, such as Unified Payment Interface (UPI), in micro-payment situations (particularly widespread merchant acceptance catapult the banking and payments dearth when it comes to INNOVATE. scalable and secure”. This, even today Bharat QR, Aadhaar Enabled Payment in queuing situations), and developing and suggests solutions for the same, business to inspiring heights. This, we remains the necessity to ELEVATE any System among others. Payments through voice-driven mobile apps that can bring enabling the next wave of digital payment believe, is one of the most happening The recent past has seen some payment innovation cards saw significant growth post in the next wave in adoption. adopters in this country. The effect of times for the payment industry to strive, banks and wallets surrendering their demonetization, but growth since then entry of technology giants has been thrive and prosper with innumerable licenses, while some others merging We, sincerely hope, this report comes has sobered down. The new regulations In all this effort, payments businesses examined and finally the potential of options pampering the customers with or redefining themselves to make their quite handy to you in future, crafting your for prepaid payment instruments pose also have to find a path to viability. For capturing value from payments data the most delightful experience as ever. business models work and explore newer strategies and driving your payments serious questions around their future; this, they could possibly look at more has been explored. We have also looked possibilities. The entry of social payments business decisions. Do share your data for last few months show consistent collaboration - to provide value added at the continued search for more This year, the theme for PayNext Insights giants like Whatsapp, Google, Facebook, valuable feedback with us on my id decline in their usage. UPI, on the other services, to have a holistic bouquet effective micro-payment solutions, and 2018 is INNOVATE, COLLABORATE, Amazon etc. have given jitters to some of below. hand, has seen a dramatic rise as both of financial offerings, and to unlock the promise of voice-driven payments ELEVATE. This wonderful report is the new generation players as well as the new entrants (including technology monetization opportunities. Such apps. We believe these are the critical put together by our Research partner legacy players and banks, which are now giants) and incumbents alike have collaboration may need to look beyond elements, which will shape the evolution Deloitte, as a result of several months working more closely with fintech’s as brought UPI offerings to the market. financial services as well. To enable of this dynamic industry. of hard work and conversations with well as other members of the ecosystem Trends notwithstanding, the current such collaboration with rapid velocity, industry leaders, bankers, technologists, than ever before. Merchant acceptance payment landscape is still evolving in payments businesses could consider We hope that you find the analysis and regulators and industry observers. in India is still far from that in the the sense that there are multiple ways implementing application programming insights in this paper relevant and useful. matured markets. Unwavering focus of of payments, all seeking large-scale interface (API) based architectures The advent of UPI, BHIM and several the government, the creation of national adoption. and possibly even micro-services revolutionary technologies have made platforms and the thriving innovation architectures. many of the business models redundant ecosystem proves the market is in a As with internet and commerce, India is and given rise to a lot more of new strong mood to COLLABORATE. ‘mobile-first’ when it comes to payments, As these new paradigms take shape, it business models. The market is now and we believe mobile as a form factor would be crucial to test the scalability of eagerly waiting for UPI 2.0 to experience Ultimately, for all the above Babu Nair will play a significant role in payments solutions for mass adoption in a country newer revolutions. This report discusses transformation to be successful, it is [email protected] going forward – both on issuance side as diverse as India. Financial inclusion, and acceptance side. Innovation in use and digital payments (and even other cases on mobile is likely to help India non-financial services) would need to go leapfrog other standard means of hand in hand to transform lives and lift payments. India has been at the forefront households across country into economic Vijay Mani of introducing novel payment modes, well-being. Partner but players would have to innovate Deloitte Touché Tohmatsu India LLP

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Introduction Innovate. Collaborate. Elevate

Payments industry in India has those of debit cards at PoS. However, the experienced a paradigm shift in the new regulations around mandatory know last few years. Its rapid rise has been your customer (KYC) pose a question fueled by innovation in service models on their sustained growth. The newest and customer experience as well as by entrant in the arena – Unified Payment macro-events such as demonetization. Interface (UPI) has grown exponentially, As a result of demonetization, usage of driven by technology giants entering the cards at point of sale saw a steep jump fray. UPI disintermediates the transaction and has stabilized to a new normal. The provider from the account provider growth ever since has been gradual. and allows any company to craft use Mobile wallets, driven by their hassle-free cases and user journeys with a focus on onboarding and transacting experience superior use experience. saw the transaction numbers surpass

Exhibit: Digital Payments in India

Retail digital payments volume in India (in billions)

20 * 16 Digital payments have grown at a 12 CAGR of 53% over the last 5 years 9 8 and is expected to reach USD 1 trillion in value by 2023

FY14 FY15 FY16 FY17 FY18* Volume (includes card usage at ATM & PoS, m-wallets, UPI, PPI, PPI Cards, IMPS, AEPS)

*Note: FY18 data till Feb’18

Debit Card usage volume at PoS (in millions)

852 842 792 787 786 While debit cards are still primarily used for ATM transactions, volumes at PoS 370 384 have shown a significant uptick 308 328 Demonetization post demonetization

Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Actual Volume Projected Volume w/o Demonetization

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M-wallet transactions volume (in millions) Unwavering The Indian Government is undoubtedly focused on driving digital payments in the country. Promotion of focus by the digital payments has been accorded the highest priority by the Government to bring each and every segment 816 784 Government of the country under the formal fold of digital payment services. The Finance Ministry of India announced 3 660 676 a target of 25 billion digital payment transactions in FY 2017-18 . The Ministry of Electronics & Information M-wallets grew significantly Technology (MeitY) is working with multiple stakeholders including Banks, Central Ministries/Departments and 451 (growth rate > Debit and Credit States, to create an ecosystem to enable digital payments across the country. cards), but the recent change in The Government has also rationalized the Merchant Discount Rates (MDR), making them lesser for smaller 205 guidelines may dampen their 153 151 158 merchants with the clear aim of encouraging digital payments at such merchants. The Government went one future step further, and announced that they would bear the MDR for transactions less than INR 2,000 for two years with effect from 1 January 2018 by reimbursing the same to the banks.

Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Creation The Government and its various bodies have built national platforms, which have the potential of providing of national ubiquity and ease of making payments. Two such notable platforms are Unified Payment Interface (UPI) Actual Volume Projected Volume w/o Demonetization platforms and Aadhaar. The UPI platform allows for the construct of Payment Service Providers (PSPs). These are independent service providers with a focus on providing services and superior payments experience by UPI transactions volume (in millions) connecting with banks to enable information flow and interoperable transactions. This architecture seems to have fostered innovation and has resulted in exponential uptake of UPI. 482 Aadhaar is a unique identity number that can be obtained by any resident of India. Additionally, Aadhaar allows biometric authentication of the resident with a valid Aadhaar number. About 1.2 billion people in India 328 UPI has demonstrated the fastest have an Aadhaar number, as of May 20184. Further, the National Payment Corporation of India (NPCI) has and the most consistent growth created an Aadhaar Enabled Payment System (AePS), which uses Aadhaar for authentication and allows peer rate and is poised to become a to peer and merchant payments. key retail payment platform Thriving and One of the barometers for impending and sustained growth in any sector is the activity in the startup 59 27 innovative landscape in that sector. - - 0 2 15 Fintech According to Inc42 DataLabs, the Indian fintech sector reported 102 funding deals worth USD 2.59 billion until ecosystem Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 November 2017. Fintech startups grew by 31 percent year-on-year (YoY) to almost reach 360 in 2017. Some Volume of the key investments include Paytm securing USD 1.4 billion funding from SoftBank in May 20175, followed by Flipkart-owned PhonePe, securing USD 500 million from its parent entity. The thriving landscape is an Source: RBI and NPCI statistics indicator that this segment is bound to flourish.

Source: Deloitte analysis

As the industry expands further, it is Cards: This section examines upcoming possibility of mass adoption from the We believe that the growth in digital supportive regulatory policies, new expected to see more collaboration and payment technologies, their potential acceptance side of the equation. payments is likely to continue its upward platforms enabling proliferation of partnerships amongst various players use cases, and their prospect for mass trajectory, driven by key catalysts such such transactions, and a thriving and •• Moving Beyond – Capturing Value across the value chain, aimed at providing adoption. as increase in smartphone penetration, innovative fintech ecosystem. from Payments Data: This section holistic services with faster go-to-market. •• Driving Digital Payments among looks at enhancing sustainability Innovation and collaboration are crucial Rural Customers: This section for payments players by examining to elevate the reach of digital payments Table: Catalysts for further Growth of Digital Payments hypothesizes on ways to achieve the potential value added services. and financial services. next set of users beyond the early adopters. These are exciting times for the payments Rising India is witnessing significant growth in smartphone ownership and data usage. Increasingly, more people are However, while the digital payments are sector. As it accelerates forward aided smartphone and becoming comfortable using smartphones for various purposes. This marked shift in behavior can only prove expected to grow by leaps and bounds, •• Market Entry by Global Technology by innovation, collaboration, enabling data penetration to be encouraging for digital payment use cases through the smartphones. there is still a significant proportion of Giants – This section highlights the policies, and focus on customer the population which is yet to jump on implications of the entry of technology experience, creation of all-inclusive India is expected to have ~500 million smartphone users by end of 20181. This is the second largest the bandwagon. This report examines giants into payments, their advantages, ecosystems and deeper penetration into smartphone base in the world and still has significant potential to grow, given the falling prices of such devices. the future of payments through the and potential areas of play for the hinterlands of the country is likely to Further, the total wireless data usage in the country has grown ~5 times from December 2016 to December lens of making it more pervasive. More incumbents. create an unparalleled success story. 2017. The average data usage per active data user per month has grown from 1.16 GB in 2016 to 4.13 GB in specifically, it covers the following topics: 2017. On the other hand, average tariff per GB of wireless data has fallen from ~INR 75 in 2016 to ~INR 19 in •• Increasing Payment Acceptance at •• Emerging Payment Technologies 2017. 2 All these factors augur well for growing smartphone and data usage. Merchants– Journey from 3 million to – Going beyond Smartphones and 30 million: This section examines the

3 Website of Minsitry of Electronics and Information Technology 1 Economic Times 4 Aadhaar Dashboard, UIDAI (https://telecom.economictimes.indiatimes.com/news/india-to-have-530mn-smartphone-users-in-2018-study/61097817) 5 Economic Times (https://economictimes.indiatimes.com/small-biz/money/paytm-raises-1-4-billion-from-softbank-valuation-jumps-to-over-8-billion/ 2 TRAI, Yearly Performance Indicator Report, 2017 articleshow/58733667.cms) 08 09 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Emerging Payment Technologies Going Beyond Smartphones and Cards

Evolution of Payments in India While the payment needs of the urban The Indian economy has traditionally and affluent population have been been dominated by cash. However, the somewhat met, the rest of the population increased smartphone adoption, and presents a large opportunity to include favorable regulatory policies have created the masses in this digital revolution. the baseline infrastructure required for However, this widespread adoption of a leapfrog growth in digital payments. digital payments will require the payment Further, relentless innovation, easy to products to be as convenient as cash. use payment products, interoperable While innovations such as mobile wallets payment platforms and customer have been successfully replicated in India, awareness are expected to continue to there have been other examples such drive the shift to digital payments from as the Near-Field-Communication (NFC), cash. which have seen very limited adoption. In light of this need, we have identified a Emerging Payment Technologies few payment innovations that have seen In this era of ‘Digital Darwinism’, an adoption in other geographies and could era where technology and society are be relevant in the Indian context. evolving faster than businesses can naturally adapt, India has displayed a significant growth in adoption of digital Exhibit: Payment Innovations payments. India now represents one of the largest market opportunities Invisible / Contactless for payments for global technology payments companies and home grown Fintechs •• Amazon Go alike. Further, the emergence of the •• Disney Magic Bands digital five forces – Social, Mobile, •• PaidEasy Analytics, Cloud (SMAC) and Internet of Things (IoT) – is helping these technology Voice Based Biometric payments companies to reimagine the customer payments •• Mastercard and come up with innovative and easy-to- •• Amazon Alexa •• Barclays use payments products. •• Samsung

Social Media Audio QR / Sound payments based payments •• Facebook •• Google Tez •• WhatsApp •• ToneTag •• Twitter •• Snapchat

Source: Deloitte analysis 10 11 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

1. Invisible / Contactless Payments example, Amazon has made payments 3. Social Media Payments day today activities. The latest evolution be traced back to 2015, when e-wallet While NFC, owing to lesser number of at its convenience store – Amazon Go – Social media has come a long way since involves enabling payments through providers such as Venmo let users sync NFC enabled terminals and high cost completely ‘invisible’ where customers being introduced as an innovative these social media platforms, especially their wallets with Facebook and convert of upgrading PoS infrastructure, has scan their phones at the entrance, grab method of communication. What started peer-to-peer (P2P) payments. transactions done within the app into a not seen much adoption in India, other the desired products (which automatically as a medium for connecting with peers Facebook status. Today, most of the social forms of contactless payments have get charged to their accounts) and just across the globe has morphed into a The first few use cases of social media media giants such as WhatsApp, Twitter, seen adoption in the United States. For walk out of the store. platform for conducting a lot of day-to- being used as a payments platform can Snapchat, etc. have joined the foray.

Table: Key Examples of ‘Invisible’ Payments Table: Key Social Media Payment Giants

Payment Technology Description / Payments Use Case Social Media Platform Description / Payment Use Case Amazon Go •• Amazon Go is a convenience store in Seattle, United States, where customers use an app to Facebook •• With 2.2 billion users, Facebook is the largest social media player in the world. Facebook launched its enter the store and enter the turnstiles by scanning a QR code P2P payments functionality in its Messenger app in the United States and the United Kingdom and is planning to replicate the same globally. •• Any product that a customer picks up is added to the virtual cart and the customer can simply walk out without the need for cashiers Snapchat •• Snapchat’s payment feature, called Snapcash works similar to most peer-to-peer payment features. When the user types the dollar symbol and enters an amount the send buttons morphs into a green •• Payment source is linked to the Amazon account in the app and the same is charged for Snapcash button. payment of the bill WhatsApp •• WhatsApp in India, has launched its P2P payments feature riding on the Unified Payment Interface Disney Magic Bands •• Disney launched Magic Bands in 2013 to offer friction-free experience to its guests (UPI) platform. • Instead of park entry tickets, FastPasses, hotel room keys and credit cards, Disney guests wear • Twitter •• ICICI Bank has collaborated with Twitter and has enabled banking via Twitter. ICICI customers can these wrist bands, scanning them against a touch point to complete transactions make P2P payments, recharge prepaid mobile, check account balance and view last three transactions PaidEasy •• Integrated with iBeacons, the app opens a “check” as diners enter a restaurant or bar and is using Tweets. synced with the retailer’s PoS Source: Respective websites and press releases •• The server adds items to the bill that are paid out in-app

•• Customers can view their tab at any point and split, tip and pay the bill without waiting While WhatsApp and Twitter have already 4. Biometric Payments Iris, that are available in the market and Source: Respective websites and press releases made their foray into the Indian market, With increasing adoption of Aadhaar can be tapped using mobile devices. there is significant headroom for other and launch of payment platforms such This kind of authentication has an large social media players to create a as Aadhaar Enabled Payment System advantage over traditional passwords or ‘big bang’ in the Indian digital payments (AEPS) and UPI, fingerprints have started secret questions, which are insufficient Similar models could be considered for placing a call, or reading a text. Now, To use this service, United States space. Banks may also leverage social gaining traction as a means for payment for personal identity simply because suitable replication in the organized retail voice services such as Amazon Alexa Bank customers must have an Alexa media platforms to enable non-financial authentication. To make customer they provide evidence of ownership of space and hospitality industry in India, are making it easy to check an account device such as Amazon Echo, Echo banking transactions, which can be done experience even simpler, there are knowledge whereas biometrics provide wherein payments can be made invisible balance or hear a payment due date Dot or Tap, plus the Alexa App on easily while checking the daily feed. alternative biometric modalities, such information regarding who the user is and customers can enjoy a frictionless without picking up a phone or logging in their smartphone and an Amazon as Face Recognition, Voice Biometric, rather than what he / she knows. shopping experience. This may require to internet banking. account. These customers will be the Payment providers to tie-up with able to complete banking tasks such such chains and deploy the acceptance In such an example, United States Bank as checking an account balance or Table: Key Examples of Adoption of these Technologies infrastructure. has tied up with Amazon to extend voice making a payment to a United States based banking to its customers. Bank credit card, simply by speaking Platform Description / Payment Use Case 2. Voice-based Payments a command to an Amazon Alexa MasterCard •• MasterCard launched payment solution ‘Identity Check Mobile’ in 12 markets in Europe in 2016, which The introduction of new voice-driven device. allows mobile payment verification using ‘selfies’. digital assistants (e.g. Apple Siri, Amazon Alexa, Microsoft Cortana, Google With the recent launch of smart Barclays •• Barclays rolled out voice biometric-based authentication for customers calling their call-centers wherein Assistant) is providing the springboard speakers, banks can explore the customer’s voice is compared to the voiceprint on file. for enabling voice- based payments and partnerships to enable voice based •• Like a fingerprint, a voice print is individual to each person and is made up of over 100 unique banking transactions. Customers are banking transactions. Payment characteristics, which are based on the physical configuration of a speaker's mouth and throat. already getting accustomed to speaking providers can also enable P2P Samsung •• Samsung launched a Galaxy tablet with built-in Iris capability that is ready for Aadhaar authentication to their devices for simple tasks such payments and bill payments using and can be used for payments and banking. as getting directions to a restaurant, such voice driven digital assistants. Source: Respective Websites and press releases

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With increasing smartphone penetration digital payments as it is simple to use and in India, face recognition and Iris based doesn’t require a more-expensive NFC authentication can be explored to chip or a camera for scanning QR code in conduct day-to-day banking transactions the device. and bill payments. Voice biometric-based payments can also see a wide adoption, Google launched its payments app ‘Tez’ especially with people using feature in India, which, using the “cash mode” phones provided banks / payments option, negotiates a connection using providers can support local / vernacular ultrasonic sounds to identify the payer language capability. and the payee. This doesn’t require any exchange of personal details such as 5. Audio QR / Sound-Based Payments bank account number or phone number. Audio QR allows customers to make It works with any phone with a mic and payments over connected devices within speaker and the Tez app installed. a suitable diameter range. The speaker at one end throws ultrasound frequencies Similarly, ToneTag allows for secure in form of pulses. The receiver at the proximity (offline) payments using sound other end captures the pulses and (Tone) or NFC (Tag). Depending upon converts the frequencies back in the user device and retail PoS hardware, the original data. Audio QR is considered mobile application can toggle to initiate to be an astute mechanism for making in-store purchases using sound or NFC

Table: Propensity of Adoption of Payment Technologies in India

Payment Potential Use Cases in India Key Implications Propensity for Technology Adoption in India Invisible / •• Payments in organized retail •• Partnerships with such merchants and Contactless deployment of acceptance infrastructure •• Payments in hospitality and Payments entertainment chains •• High cost of setup of infrastructure Voice-Based •• All banking transactions •• Integration of voice-based assistants in Payments smartphones •• P2P payments •• Local / vernacular language capability •• Bill payments Social Media •• Non-financial banking transactions •• Smartphone requirement and risk of fraud Payments •• P2P payments

•• Micropayments Biometric •• Banking transactions •• Smartphones built in with biometric readers / Payments Iris capability •• Bill payments •• Local / vernacular language capability for voice biometrics Audio QR / •• P2P payments •• Limitation on range / requirement of devices to Sound-Based be in close proximity •• Merchant payments Payments

Source: Deloitte Analysis

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Driving Digital Payments among Rural Customers Digital Payments Largely Driven by Urban Customer

Limited Last Mile Infrastructure focused on urban areas and introduction Traditionally, almost all the initiatives of these innovations in rural customers taken by banks to provide banking is majorly an afterthought rather than services and innovative products have being a primary objective. The same is followed the “urban-first” approach confirmed by the low level of penetration wherein the intensity of investments is of banking infrastructure in rural areas.

Exhibit: Rural Banking Infrastructure6

Population Branch Infrastructure ATM Infrastructure POS Infrastructure* 8%

18%

70%

35%

Source: RBI statisitics, SBI press release *The POS infrastructure penetration is only for that of SBI PoS, but is indicative of the overall penetration

Main reasons for such disparity between •• High cost in reaching out to the last mile urban and rural banking infrastructure is rural customers due to the following reasons: Due to the above factors, acquisition •• Lower spending capacity and business and servicing of rural customers is potential among rural customers perceived to cost higher, and low revenue vis-à-vis urban customers and lower proposition for banks which leads to lower merchant and customer density returns on incremental investments and •• High cost of maintenance and thus dis-incentivizing banks from making sustainability of rural infrastructure significant investments in rural areas.

6 RBI Payment Systems Indicator; SBI https://www.sbi.co.in/portal/documents/44978/156388/SBI+Press+Release+-+SBI+becomes+the+Top+Merchant+Acquirin g+Bank+in+the+country.pdf/14946221-b987-49e2-aa61-b351b3b6c4e3 16 17 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Digital Payments also an “Urban First” smartphone, knowledge / awareness investments on the supply side. 1. Raise Awareness among Rural staff, who in turn can act as influencers Raj14 to develop training modules Phenomenon among customers about various digital Additionally,the availability of low cost Banking Staffc for driving adoption of digital payments for raising awareness about various Similar to the urban-first push approach payments products etc. affordable data which is expected to drive With the objective of driving financial among customers. digital products like UPI, AEPS, USSD, followed by banks, even digital payments the demand among both the urban and inclusion in rural areas along with the mPoS etc. adoption has seen a similar pattern of Low Cost Data to Drive Adoption rural customers. push by the Government (introduction of These communication and awareness urban adoption, where in 44 percent among Rural Customers Jan Dhan Aadhaar Mobile trinity), banks campaigns can be in the form of In order to drive employee engagement of urban customers have taken up While traditionally, all initiatives To drive adoption among rural have started opening branches in the mandatory internal training for bank and motivation in these rural branches, using these digital payment channels undertaken by banks have followed the customers, it is imperative that banks rural areas at a faster pace (CAGR 7.2 employees, and/or financial inclusion banks need to look at incentivizing vis-à-vis rural customers being a urban-first philosophy, there seems to do not replicate the approach taken for percent) than the overall bank branch campaigns/melas targeted towards the employees by considering softer distant second, at only 16 percent7. This be a potential for adoption of digital acquiring urban customers. Banks would network growth (CAGR 6.5 percent)9. customers. Internationally, banks are alternatives such as: difference in adoption and usage can be payments among rural customers in have to introduce certain tweaks to their investing in training their employees on a. Introduce gamification techniques, primarily attributed to lower internet parallel with urban customers. This digital product offerings to promote However, driven by the limited business digital banking, wherein digital banking which drive engagement and penetration among rural customers can be largely attributed to the dis- awareness and adoption among rural potential in rural areas and unviable related courses have been made part of content retention, rather than static (15 percent) vis-à-vis urban customers intermediation caused by technology customers, aimed at addressing the key economics, these rural branches are the mandatory training. For example, slides based training, incorporating (77 percent)8, lower penetration and which enables banks to reach out to rural challenges faced by rural customers. typically manned by 1-2 bank employees. a. Maybank in Malaysia has introduced compliance to training as part of comfort of rural customer in using a customers with minimal incremental As per a joint study conducted by NPCI a mandatory digital upskilling annual appraisal etc. and Microsave10, bank employees in rural programme for its bank employees, b. Providing enabling influencers to branches don’t have adequate training which focusses on enhancing employees, such as identifying and Exhibit: Key Steps to Drive Adoption among Rural Customers about digital payments products like employee digital literacy.11 posting local employees (at entry AEPS, BHIM, UPI etc. and knowledge b. DBS Singapore is planning to invest level) near their rural areas, so they of use cases, or even the bandwidth to SGD 20 million for training its are motivated in driving business educate customers. employees on digital banking and locally. emerging technologies.12 Driven by the lack of awareness and 2. Provide Vernacular Language motivation among the banking staff, even Similar initiatives have also been taken Support Provide Vernacular the rural customer remains unaware by Indian ministries and regulators India’s internet using population is Language Support about the digital payments products, to focus on raising awareness among estimated at approximately 400 million, their applicability, and their advantages stakeholders related to digital payments, among which English speaking population which in-turn limits the adoption at the and banks have taken up initiatives is estimated to be approximately 175 last mile. in driving digital transactions across Million (~44 percent of user base) i.e. villages. Some of these initiatives include: majority of the user base is not proficient Possible Steps to Increase Awareness a. NPCI has formed partnerships with in English. However, the content accessed among Branch Staff fintech (Payso)13 to raise awareness by Indian users on the internet is almost In order to raise awareness among all the among youth who in turn are 99.9 percent in English with Hindi based stakeholders about the various payment expected to drive adoption of BHIM content being 0.05 percent, Bengali 0.018 modes, appropriate and applicable use UPI Merchant payment solutions. percent and Tamil being less than 0.007 cases, various entities (banks, NPCI, RBI, b. The Ministry of Rural Development percent15. GoI) could consider conducting local level has tied-up with the National Institute programs, and training for the banking of Rural Development and Panchayati

Raise Develop Awareness among Easy to use interface Rural Bank Staff •• Voice based authentication

•• Reduce system friction

9 RBI branch statistics 10 http://www.microsave.net/files/pdf/NPCI_Cashless_CaseStudy.pdf 11 https://www.finextra.com/pressarticle/73774/maybank-embarks-on-employee-digital-upskilling-programme 12 https://www.dbs.com/newsroom/DBS_to_invest_SGD20_million_over_five_years_to_transform_employees_into_digital_workforce_in_support_of_ Singapores_aim_to_be_smart_financial_centre 7 “Internet in India 2017” study by IAMAI - IMRB; https://www.livemint.com/Politics/PhY0kTxoJqq6U9GISIpSaK/Only-16-of-rural-users-access-Internet-for- 13 http://www.cio.in/media-releases/npci-payso-partner-create-digital-payment-awareness digital-payments.html 14 http://serviceonline.gov.in/resources/homePage/99/PDF/pkg_cashless.pdf 8 http://www.trai.gov.in/sites/default/files/YPIRReport04052018.pdf 15 https://www.techinasia.com/talk/india-vernacular-internet 18 19 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

As per Google’s estimates, 70 percent Possible Steps to Increase Adoption While banks are yet to fully adopt this In order to drive the adoption of digital of users consider digital content among Rural Customers approach in providing digital services, payments, among other things, banks in vernacular language to be more As more and more consumers in fintechs/startups have already started need to introduce frictionless payments, trustworthy than the content presented India who might not be fluent in working on providing vernacular that can improve customer experience in English16. This discomfort increases English language come online, having language support and are seeing market which in turn could result in increase even further if the digital media is applications which support vernacular traction. Some of these players (as per adoption. Some of the examples for being used for performing financial languages are likely to play a key role their respective websites / mobile apps) these are discussed below: transactions as customer’s money is in driving customer adoption, comfort include: a. Voice-based authentication for at risk, which is also supported by the and trust in using these applications. As a. PhonePe currently supports 10 non-financial transactions – ICICI IAMAI-IMRB study tracking usage of per the IMRB’s estimates, by 2021, six vernacular languages (top six along Bank has collaborated with Nuance online channel for financial transactions.17 vernacular languages (Hindi, Marathi, with Malayalam, Kannada, Assamese, Communication to make their Bengali, Tamil, Telugu and Gujarati) are and Odia) systems intelligent enough to identify expected to comprise almost 75 percent b. Paytm currently supports 10 and authenticate the customer, based of the vernacular language internet users. vernacular languages (top six along on their voice20. A similar system has with Malayalam, Kannada, Punjabi, been developed by Barclays wherein and Odia) the customer’s voice is used for c. Sharechat supports 10 languages, passive customer authentication21. Exhibit: Vernacular Language Internet Users, 2021 27 dialects, currently caters to an b. Voice enabled transactions – HDFC approximate 3.5 Million active users Bank has developed a voice activated daily18 banking services platform, by d. DailyHunt supports 14 vernacular integrating its systems with Amazon languages and has more than 150 Alexa22, wherein the customer can 28% Million application installations check balances, get bill due dates Others and plans to enable bill payment, 38% 3. Develop Easy to Use Interfaces similar to United States-based Bank’s Hindi Current application usage interfaces integration with Amazon Alexa. provided by banks involve a lot of c. Alternate authentication manual intervention. A card-based mechanisms – DBS’s Digibank payment involves up to 17 clicks/input application has reduced the provided by the customer which jumps dependence on OTPs, by taking 5% to 39 clicks in case of a netbanking device binding as one of the payment Gujarati transfer19. These steps include customer authentication factors. Some of the authentication, selecting the beneficiary, alternate authentication mechanisms 6% entering transaction details, providing that can be considered include Telugu transaction authorization etc. As there combining device binding as first are multiple steps involved in performing factor, and customer biometrics, or 6% 9% a transaction, it leads to multiple system voice acting, as the second factor, Tamil Marathi hops, leading to payments friction during that can migrate the customer a transaction potentially leading to authentication at the bank side to the 8% transaction failures as well. customer side. Bengali Source: IMRB

18 https://www.forbes.com/sites/baxiabhishek/2018/03/29/more-indians-access-the-internet-in-their-native-language-than-in-english/#18fbbf4a4a03 19 https://juspay.in/juspay-safe 20 https://www.livemint.com/Money/38DtvU1IPgxaeyKEdTXbXJ/Product-crack-ICICI-Banks-voice-recognition-system.html 16 https://timesofindia.indiatimes.com/business/india-business/90-of-new-net-users-non-english/articleshow/58371769.cms 21 https://wealth.barclays.com/en_gb/home/international-banking/insight-research/manage-your-money/banking-on-the-power-of-speech.html 17 “Internet in India 2017” study by IAMAI - IMRB; https://www.livemint.com/Politics/PhY0kTxoJqq6U9GISIpSaK/Only-16-of-rural-users-access-Internet-for- 22 https://cio.economictimes.indiatimes.com/news/enterprise-services-and-applications/hdfc-bank-experiments-voice-activated-banking-with-amazons- digital-payments.html alexa/61033641 20 21 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Market Entry by Global Technology Giants Entry by Global Technology Giants and its Impact on the Incumbents

The payments landscape in India is In India, the launch of Unified Payments undergoing a digital transformation with Interface (UPI) has disintermediated the the advent of instantaneous, cashless, payments value chain away from banks, paperless, financial transactions, and and has given the ability for any payment digital payments in India are expected system provider to own the customer. to reach USD 1 trillion by 2023 from the Since the launch of UPI, the interest in current value of less than USD 200 billion the payments market in India has seen a in 2017-1823. spurt from the likes of Google, Facebook, and Samsung among others. The burgeoning digital payments landscape in the country has compelled Entry of Technology Giants in the the global technology and social media Digital Payments Space in India majors to take notice and enter the fray. The digital payments opportunity Globally too, technology and social media seems to have certainly caught the players have been striving to increase eye of global technology giants, customer engagement on their platforms who are creating platforms for all- by providing a plethora of services which encompassing engagement of end keeps customers on their platforms. customers. Commerce is a big use-case, Payments and commerce are such and payments is an essential part of enablers, which are being assimilated into commerce. Further, payment behavior the platforms themselves. China’s Wechat is seen to generate data sets, which lets is a prime example that hosts a range of such platforms enrich their customer functionalities through mini-programs profile that can be consolidated and and enables payments through WeChat monetized. This seems to have galvanized Pay. Facebook enabled card linked peer- the interest of such large platforms. to-peer payments through its messenger app, and has recently opened it up for Key foreign players who have already Paypal too.24 entered the Digital Pament landscape in India include Google Tez, WhatsApp, Facebook, Samsung Pay, Paypal, and Stripe among others.

23 Credit Suisses Report, Digital Payments Statistics, 2018 24 Respective websites and press releases 22 23 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Table: Key Global Players in Digital Payments in India S.No Entrant Details

S.No Entrant Details •• Investment to allow Amazon Pay to develop more local innovations for Indian customers 1 Google Tez •• A payment-focused B2C product with multi-lingual capabilities •• Amazon Pay has started tying up with other online merchants to be available as a payment option. For (Launched in first time users, it creates an Amazon account itself and thus, uses it as a hook to create users for the •• Allows users to pay bills, make peer to peer and merchant payments through the use of UPI and Bharat September larger Amazon platform Bill Payment System (BBPS) 2017) 5 Stripe/Stripe •• Stripe is one of the largest online payment processor in the world •• Offers rewards in the form of cashbacks for doing payments on the app Atlas (Launched •• Currently offers services in invite-only beta mode with a small group of companies in India •• Has 16 million users by May 201825, which includes half-a-million small merchants; these merchants use in December Google Tez in P2P mode 2017) •• Users can now link their Indian bank accounts

26 •• Has ~80 billers on the platform •• Expected to bring in more beta users on the platform to improve the functionality of specific features 2 • Whatsapp launched beta version of its P2P payment service based on Unified Payments Interface (UPI) WhatsApp • •• Plans to build new products specific for India users and hire an engineering team Payments •• Allows users to transfer money to WhatsApp contacts within a chat itself •• Stripe Atlas is a tool that helps Indian entrepreneurs/Internet companies in India expand their business (Launched in •• WhatsApp Payments launched a new Request Money feature on the app in April 2018; The Request operations abroad30 February 2018) money option is live on Android beta of WhatsApp; allows users to scan a QR code or enter a UPI ID in order to demand a payment Source: Respective websites, mobile apps, press releases, news articles

•• Recently, rolled out the “enter UPI ID, scan QR code” feature for payments on the platform; available on Other Key Players Considering Foraying in Digital Payments in India Android and iOS Apart from those who have already launched operations in India, there are other noticeable companies with plans to enter the 3 Samsung Pay •• Samsung Pay is a mobile payments platform country soon. (Launched in •• Allows customer to use his/her phone in place of a debit or credit card when paying at merchants March 2017) Table: Key Global Players Considering Foraying in India •• User can also make payments via UPI or Paytm

•• Leverages the NFC technology to enable contactless payments at compatible PoS machines S.No Entrant Details •• Also allows for contactless card payments using magnetic secure transmission (MST) technology, 1 Facebook •• Facebook is ready to enter payments in India; currently beta testing with recharges for mobile phone on which mimics the card swipe on any point of sale (PoS) terminal. This allows it to work with existing PoS Payments Messenger machines which do not have NFC, without any upgrades to the machine •• Messenger P2P payments are only available in the United States, United Kingdom and France •• Service is available on the Galaxy Note 8, Galaxy S8, Galaxy S8 plus, Galaxy S7 and Galaxy S7 Edge, •• Facebook has sought an Indian patent for its electronic payment system enabled through messaging Galaxy J7 Max and Galaxy J7 Pro 2 Apple Pay •• Apple has already begun testing their Apple Pay service in India; however, yet to be formally launched •• Plans to bring its payment service to non-Samsung smartphones •• In November 2017, India became the third-largest market for Samsung Pay, behind South Korea and •• Apple Pay securely stores credit cards, debit cards, or other sensitive payment information from the Russia with 25 lakh account users/owners in October 201727 wallet app and lets the user pay for goods directly from their mobile device •• Till date, Samsung has 17 partners on board, including 10 banks and digital wallet providers Paytm and •• Has a second factor of PIN or fingerprint MobiKwik, and is in talks with a few more banks •• For Apple Pay to work, the merchant needs to have a contactless machine, which is compatible with •• Has recently started loyalty program for making payments through Samsung Pay Apple Pay 4 AmazonPay •• Amazon Pay is a payment option similar to how mobile wallets work but limited to transactions within •• During the transaction, TouchID or FaceID is required to authenticate the payment and a subtle vibration (Launched in the platform confirms that the transaction was successful December 2016) •• Amazon Pay balance (stored value account/wallet) grew Y-o-Y by 409% in 201728 •• Apple is already in talks with Starbucks and Croma stores, and banks like HDFC Bank, Standard •• Secured a licence from the Reserve Bank of India (RBI) to operate a prepaid payment instrument (PPI) in Chartered and Citibank to make their hardware compatible with the contact-less payments service of March 2017 Apple Pay

•• In March 2018, Amazon Pay raised USD 30 million (INR 195 crores) from its parent entity and from Source: Respective websites, mobile apps, and press releases, Deloitte Analysis Singapore-based Amazon Corporate Holdings Private Limited; just over five months after Amazon Pay India received a capital infusion of USD 40 million (INR 260 crores)29 Differentiators and Advantages of could potentially be a captive base to Global Players provide payments capability. In addition, The Global players have some unique they also have a large investment 25 NDTV Gadgets (https://gadgets.ndtv.com/apps/news/google-io-2018-nbu-tez-datally-files-go-1848843) advantages which play in their favor. appetite and an upper hand as far as 26 Google Tez (https://tez.google.com/) Some of these players already have a cross-border use cases are concerned. 27 Times of India (https://timesofindia.indiatimes.com/business/india-business/india-samsung-pays-3rd-largest-mkt/articleshow/61553399.cms) 28 Inc42 (https://inc42.com/buzz/amazon-india-investments-digital-payments-amazon-pay/) well-entrenched user base in India that 29 Economic Times (https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/amazon-india-gets-rs-2600-crore-infusion-for-marketplace/ articleshow/64083599.cms) 30 Stripe (https://stripe.com/blog/india-private-beta) 24 25 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Table: Key Advantages How do Incumbents React? scale-up and where the incumbent could What does the entry of such players gain the first mover advantage. Some Incumbent Base Investment Appetite Cross Border Use Cases mean for incumbents? of these opportunities also require an Payments players in the country can existing channel of distribution that the •• Some players such as Whatsapp and •• Widespread Digital payments in India require •• Owing to their international still leverage certain opportunities and incumbents can leverage better. The Facebook have large incumbent bases, a behavioral shift presence, a few of these entrants abilities to thwart the threat posed by incumbents would have to identify these which are already highly engaged on the can consider enabling services •• While superior customer experience new entrants. There are niche segments niches and focus on quick execution to respective platforms beyond India for any cross-border definitely plays a role, a discerning Indian and use cases which have potential to gain dominance. transactions •• Whatsapp has over 200 million monthly customer is always looking for value active users in India31 while Facebook •• While this might be beneficial for •• Digital payments players have been has 241 million users in India as of July only a certain section of users, it still Table: Key Proposed Opportunity Areas showering consumers with offers, cashbacks, 2017 32 provides a differential advantage to and promotions in order to change their certain players Parameter Current Scenario Potential •• Indians spend approximately an average behavior in favor of digital payments Opportunity of three hours a day on smartphones •• These require investments and foreign Rural Payments •• P2P and P2M payments in rural India is largely done in cash and presents a and a substantial chunk of this time entrants are committing to it through their significant headroom for growth is spent on social and communication large war chests; For example, Amazon apps33 •• Incumbent could explore Aadhaar Enabled Payment System (AEPS) payments or infused INR 195 Crores in Amazon Pay in payments through IVR, which can be relatively easier to use and hence easier to •• Given the higher engagement, such March 2018, in succession to its investment adopt in rural areas platforms have significant potential to of INR 260 Crores in September 201734 have customer stickiness since they can •• Foreign entrants are largely providing services which are focused towards the urban •• For example, cashback offers/discounts by become a one-stop shop for multiple population Amazon Pay and Google activities including payments Mass Transit •• Mass transit payments in India are quite fragmented but present a huge Payments opportunity

Future Outlook – Hypothesis/Case socialize, make payments, online gaming, businesses, especially the ones that •• Fragmentation implies on-ground acquisition and activation Study buying grocery, hailing cabs, ordering may have subscription based recurring •• Incumbents could use their existing sales and distribution structures to do this Some of these technology platforms online food and even offline payments at payment model. For instance, online acquisition faster are likely to play a key role in shaping restaurants – all this without having to go media streaming service providers could both P2P and P2M payments, given to another app. These services not only contact the customer through this chat Deeper Multi-point •• Interoperable payments are multi-hop in nature, and can hence, have multiple their ubiquitous use and expanding use provide the company improved customer app (using chatbots) for subscription Integration breakage points; resulting in a poor success rate and hence a poor customer cases for customer engagement. WeChat stickiness, but also create a additional upgrade/renewal, and the user can experience in China is a prime example. Mobile revenue streams. complete the payment through UPI •• One way to address this problem is to have direct integration with multiple banks, payments have boomed in China, totaling functionality within the chat app. On for e.g. A prominent payment gateway is integrated with all major issuers and over USD 13 trillion in 2017. The stores Hypothetical use cases for a chat the same lines, while booking a ticket, acquirers to reduce number of breakage points and services are increasingly centered service – Making Payments Seamless an online travel agent can send a collect on mobile pay apps like WeChat Pay and for multiple scenarios payment request at the payment stage, •• However, players like Google Tez have already started integrating with individual Alipay. Both these companies accounted A well penetrated chat service could followed by sending the tickets (PDF banks for 93 percent of China’s mobile payment enable P2P, bill payments and C2B version) through the chat app. Further, Focused Payments •• Payments solutions so far have been trying to solve payments needs. However, segment (according to data from payments if it is successful in providing a utility biller (e.g. electricity) can send Solutions along there is significant innovation, that can be done in terms of building specific Analysys). Alipay is the market leader a platform to businesses for easier bills through this chat app to users, and with Value Added experience and value added services for defined segments. For instance, different in mobile payments, accounting for a customer outreach and interaction, and collect payments through the chat app Services experience for elderly, a single app for doing inventory, billing and multi-modal market share of 54 percent and WeChat also enable payments by becoming a itself. It could send payment reminders, payments for merchants etc. accounting for 39 percent (according to payment service provider under UPI. or provide advance payment discounts. data through September 2017).35 With The combination of messaging and •• Incumbents, being closer to the ecosystem can aim at developing such vertical over 900 million monthly active users, Through this service it could allow seamless payment within the same app, focused solutions and gaining a foothold in such segments WeChat is now a fully-fledged ecosystem small as well as large businesses to can allow businesses to interact and Source: Respective websites, mobile apps, and press releases that offers users a range of functions. have a presence on the platform and receive payments from customers, all as It helps users to do everything from interact directly with the customers. part of a single chat window. messaging, group chats, file transfer, The chat service could become the de video conferencing, business discussions, facto payment gateway for all such C2B

31 Whatsapp co-founder’s tweet, 2017 32 Livemint (https://www.livemint.com/Consumer/CyEKdaltF64YycZsU72oEK/Indians-largest-audience-country-for-Facebook-Report.html) 33 Economic Times (https://economictimes.indiatimes.com/magazines/panache/indians-spend-roughly-3-hours-a-day-on-smartphones-but-are-they-paying- big-bucks-for-apps/articleshow/62866875.cms) 34 Economic Times (https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/amazon-pay-gets-rs-195-crore-more/articleshow/63182332.cms) 35 South China Morning Post (http://www.scmp.com/business/companies/article/2130400/china-moves-further-towards-cashless-society-payment-giants) 26 27 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Conclusion Entry of global players is likely to affect the emerging payments landscape in India due to their significant capabilities, platform play and existing user base. While the global players have advantages, there is significant headroom for the fintech ecosystem in India to grow in multiple areas and provide growth for all players. It would require early opportunity identification, and accelerated execution. Local players may need to consider carving out niches for themselves or even play at scale. The approach taken by these global players suggests their focus on urban and semi-urban markets. Local players could consider exploring growth options in rural and semi-urban areas, which lack focused solutions. Further, language is still a challenge when it comes to India. Incumbents could look at delivering multilingual rural payments focused solutions to capture that market. Offline retail payments, mass transit payments are potential opportunity areas. However, these require concerted effort for acquisition due to a fragmented market. Further, the payments solutions till now are focusing on solving the payment use case. Incumbents could customize this for various user segments in terms of the user experience and in terms of additional services, on top of payments. This is where incumbents could have an edge over global players and should play it to their advantages.

28 29 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Increasing Merchant Payments Acceptance- the Journey from 3 million to 30 million How Alternative Digital Payment Products can assist in addressing India’s Merchant Acceptance Conundrum?

Indian payments landscape has seen digital payments and find themselves path-breaking developments, creating trapped in cash ecosystems, as they earn exciting possibilities for the future. Very as well as pay for inventory in cash. Low soon, consumers may have the option of consumer demand for digital payments being able to pay money to neighborhood also inhibits their interest. While the grocer while messaging the grocery list traditional, asset-heavy PoS business through a chat app or pay for flight ticket model driven by banks began almost via another payment service provider 20 years ago, the country still has only a app while searching for travel options little over 3 million PoS terminals, leaving on a search engine which also owns the a vast majority of estimated 50 million payment service app. However, there merchants37 out of the digital payment still are significant barriers to overcome ecosystem. when it comes to stimulating merchant acceptance for digital payments. Generally, the consensus seems that just like the mobile telephony growth A Stubborn Problem to Solve - story; India has the potential to leapfrog Defining India’s Merchant Acceptance from cash payments to paying through Conundrum a mobile or a smartphone. However, for The euphoria over explosive digital digital payments to scale up in a country payments growth seems to get tempered of such massive size- acceptance of when it comes to India’s retail merchants. such payments at merchant outlets – in There can be no gainsaying that rural and urban India needs to increase merchant adoption will be the key for dramatically. While banks did respond the economy to experience the broader with alacrity by crossing the 3 million networks effects of digital payments. mark in PoS installations, this growth Although USD 630 billion in size36, about does not seem to be enough. It still fails 90 percent of the retail merchant sector to catapult India into a group of countries is highly fragmented, unorganized like Brazil, China and Russia that have and characterized by low margins, low far higher number of PoS terminals per investments and poor tax compliance. million population. Merchants find it expensive to adopt

36 Kaalari Capital- India Internet Opportunity, May 2017 37 Source: Confederation of All India Traders 30 31 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Exhibit: POS Penetration – India vs Other Key Markets Exhibit: Key Merchant Pain Points

Number of POS terminals/million population Lack of essential documents as High ongoing cost of adopting required by the bank/acquirer digital vis-à-vis cash Australia 39,338 Canada 38,892 UK Cost of 32,858 Documentation Sweden Brazil digitization France 25,800 24,657 22,322 China 17,744 Russia Security and safety Infrastructure issues : concerns around no smartphone, poor 12,122 India misuse and fraud data connectivity and 2,369 Lack of infrastructure electricity supply Security

Source: BIS.org

Failure to grow the merchant acceptance Decoding the Merchant Acceptance High incidence of Doubts about relevance infrastructure in line with increase in card Puzzle cash in supplier Cash Insecurities of the digital solution to a economy issuance has been one of the key reasons To unravel the offline merchant payments business of small size why digital transactions have not grown acceptance conundrum, it is important on expected lines. Banks have issued 861 to remember that a one-size-fits-all million debit cards, but most are used approach to merchant digitization has at ATMs to withdraw cash rather than severe limitations among small and Perceived Technical to pay at POS terminals38. Getting the micro-merchants across all geographies, as complex support Perceive digital solutions as Lack of reliable technical existing debit cardholders to use their especially in Tier-2 to Tier-4 population complicated to understand support and grievance redressal debit cards to pay merchants can alone centers. Merchant acquiring business have a huge impact on digital transaction models that may have demonstrated Source: Deloitte Analysis volumes. However, with just over 2300 success in Tier-1 centres are unlikely to PoS terminals per 1 Million population39, achieve similar results across geographies card transactions at PoS have just failed and merchant categories due to variation to take off in the manner required. This in merchant business context and Micro and small merchants in high payments often act as deterrent. Lack of merchant acceptance space will not just merchant acceptance conundrum needs supporting infrastructure. volume low margin businesses find it consumer demand for digital payments remain confined to technology- Fintechs urgent answers. Failure to accelerate the challenging to understand the value and doubts around the ability of banks who have innovated in devices will also rate of merchant adoption may result proposition and benefits of digital to provide timely on-field support also lead in dismantling the traditional POS in the ignominy of missing the 30 billion payments, especially when the incentives hinder adoption. Many merchants hold business model. Some years back, a digital payments target for second year to switch from cash-based behavior are the view that the run-of-the-mill standard few merchant aggregators introduced in a row. next to nothing. Onerous documentation payment acceptance solutions do not merchants to light POS devices-small and activation process, high merchant address their unique needs. They want enough to fit into a palm and customized fees, concerns around incremental a solution that deftly balances cost, per-use pricing plans. New as they might tax liability and lack of motivation complexity and functionality. be, these players still did not drastically or rationale to jettison cash based alter the merchant journey map or the ecosystem hold back merchant adoption. Mobile Payment Innovations – UPI, underlying business model. Merchants While network connectivity and power Aadhaar Pay, QR Payments can still had to undergo lengthy onboarding supply have improved, several other Catalyze Offline Merchant Acceptance process and open a new current account barriers remain. Small size merchants feel The launch of alternative mobile payment with the partner bank of the aggregator. that given their small size of transactions, technologies like QR codes, Bhim Aadhaar Barring some changes in the cost digital payments is not a relevant Pay and UPI has already begun the shift structure, most of the merchant user option for them. Further, transparency away from the traditional POS. What experience remained the same. and audit trails associated with digital is also certain is that the disruption of

38 RBI concept paper on Card Acceptance Infrastructure, April 2016 39 RBI Payment systems data as on Mar 2018, Deloitte analysis 32 33 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

The growth in adoption of mobile one, puts it in the pole position not only superior user experience of these mobile Exhibit: BHIM Case-study on Merchant Self-Onboarding payment applications such as UPI, Tez, for P2P payments, but also for small size applications is likely to facilitate addition Aadhaar Pay, Bhim, Bharat QR, wallet every day (P2M) merchant payments, of large incremental users to the digital QR codes and more recently WhatsApp especially when the ‘collect’ feature is payments bandwagon on a continuous dramatically alters the gamef, as the launched. Already, platforms such as basis. On the other hand, fintech 1 2 3 4 smartphone now is also able to function Paytm, MobiKwik, and Google Tez also providers will like to ring-fence customer as a merchant acceptance or POS device. have merchants using their payments. loyalty by aggressively extending their Download the Launch app and On right side Enter merchant At once, all cost line items that made POS These merchants accept payments in platform to include merchants of every BHIM UPI app complete registration of app tap ‘I details : Business business unviable for market participants P2P mode using these apps. After all, size, category and geography. This from the play- steps- choose language, am merchant’ name, Business have either been whittled down or been customers and merchants are agnostic two-side network effect of platform store verify mobile number, option in the type, address, PIN eliminated. Installing a POS at a typical to industry terms like P2P or P2M and e-marketplaces has the potential to drive set passcode and menu code and press merchant was a costly affair – it would eventually evolve their own unique digitization of offline merchants in India. validate bank account confirm cost anywhere between Rs 1,200 to 2,500 ways to communicate, buy goods and in just acquiring a merchant, INR 8,000 – pay for them. Very soon, integration of What the Future Holds for Merchant 10,000 towards cost of the POS machine UPI QR and Bharat QR will also create Acquiring in India and an average monthly spend of INR 250 an interoperable standard QR code While the exact form and shape of per terminal towards its maintenance. for merchants. Strong policy support disruption in the merchant acceptance In return, acquiring banks would earn for digital payments – in the form of space will only be unveiled over time, the a paltry 5 to 8 basis point. Merchants merchant cash backs, incentives and crystal ball indicates seven key trends would pay anywhere between 1-2 percent proposed GST tax breaks, and the that are likely to facilitate evolution of the 5 6 7 8 fees on digital payments, besides a host government’s push to meet the 30 billion landscape over the next five years: of other monthly and annual charges, digital payment transactions target are all 01. Self-onboarding or Do-it-Yourself Merchant Tap ‘merchant’ on the Take print out Customer scan depending on merchant type and likely to hasten digital payments adoption (DIY) methods are likely to gain registration is app and again tap on of QR code QR code of the geography. by offline merchants. traction over traditional ways successful right hand side icon to merchants to to onboard merchants on digital download QR code make payments Fast forward today, any small merchant However, the wheel of change will not payments with smartphone, mobile internet, just stop moving here. Both, global and Several studies40 have highlighted finger print reader, Aadhaar number Indian fintech and technology players, the high friction experienced by and Aadhaar linked bank account seem to realize that real value creation merchants to enroll for a PoS can just download the Bhim Aadhaar lies in building platforms at a scale, device, in the traditional model. Pay app of any bank, follow a simple with rich ecosystems that enable the Going forward, do-it-yourself or DIY registration process to start accepting offline merchants to sell more-through method of onboarding for a merchant biometric based payments. Supply chain improved physical discoverability (i.e. payment system are likely to become Source: BHIM app distribution partners can now be paid offline to online, O2O) and helping to the new normal among merchants. using UPI and if required, the merchant sell more by taking them online. These Aware and interested merchants will can withdraw cash from an ATM, Business platforms, while mining merchant data use their smartphones to discover Transitioning from assisted to excluded from the formal sector is likely to bring a new category of Correspondent nearby or a bank branch. are also likely to link up with fintech alternative payment acceptance self-mode involves several aspects Key to building a digital payment informal and unorganized merchant lenders, banks and insurance companies applications from the play store. They around product, pricing, and infrastructure is to determine how segment (e.g. home repair services, A Perfect Storm in the Making – to provide customized financial products could fill up Aadhaar and existing interface simplification that were not to scale up digital penetration drivers, milk and paper suppliers, Role of Large Digital Platforms in (e.g. credit lines, insurance packages, bank account details, and print their adequately addressed by acquiring among small and micro merchants doorstep laundry services, tutors, Digitalization of Offline Merchants investments etc.) to this merchant base. own integrated QR code that enables banks. Most merchants do not adopt beyond Tier-1 centres. Alternative carpenters etc.) into the digital Without doubt, the stars look perfectly them to accept multi-form factor digital acceptance, as they do not payment acceptance methods such as payments fold. Consumers, in their aligned for the shake-up of the existing A perfect storm, with mobile payments at payments on a single QR. Merchants’ find it worth their time and money to integrated QR codes (UPI plus Bharat growing desire for convenience order in offline merchant payments, as its core, is therefore in the making. With needs for assistance, if any, will invest in it, due to unclear benefits. QR) and Aadhaar Pay underpinned by will nudge, influence, educate, for the first time several tailwinds are more than a dozen UPI payment apps, be minimal and will be fulfilled by DIY method through its simple DIY or self-onboarding mechanisms and handhold this often-invisible blowing in the right direction. Just using Aadhaar Pay etc., QR codes the consumer youngsters in the family or a key onboarding journey, intuitive UI / UX are likely to drive new-to-digital offline merchant segment to download WhatsApp as an example, a ready user payments experience has significantly influencer in the peer group. interface and inherent low pricing has merchants into the digital fold on a suitable P2P mobile application base of 250 million active users on day improved. The ease of access and potential to remove a great barrier mass scale. Sustained awareness, and start accepting payments in in merchant adoption and catalyze education, government incentives a safe and secure manner. Key merchant trails on a larger scale. and supply push are expected to digital enablers like the universality induce the merchants to initiate trail of Aadhaar, Aadhaar linked bank 02. Alternative digital payment and adopt digital payments. accounts, rising smartphone technologies could drive digital penetration and falling data costs acceptance among new merchant More importantly, the simplicity of could assist in propelling this change. segments, that have been hitherto mobile P2P payment applications 40 RBI : Paper on Card Acceptance Infrastructure in India 34 35 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Exhibit: Propensity of various merchant segments to switch to digital payments 03. Proprietary, closed loop, QR code- digital merchants. The differentiated based payment modes are likely MDR41 regime for QR code payments Potential segment for to fade away to make way for an will further fuel the adoption cycle. It digitization in unpenetrated interoperable, UPI based QR code is also possible that card associations markets like Tier-2 to Tier 4- both standard POS or asset payment acceptance mode can be the member of UPI, if the light POS can be used. Value During the difficult days following card number can be used as an added services on POS key to demonetization, proprietary, closed identifier like the UPI ID, and if MDR acquisition loop QR code-based payment rates between the two systems are modes powered by mobile wallets harmonized42. Educational Electronics & gained popularity among small Mobile institutes Fuel & LPG merchants, especially in the urban If UPI saw a boom in the year gone Jewellery and peri-urban areas of the country. by mainly driven by peer-to-peer Restaurants As UPI raced ahead in consumer payments, this year could see more adoption due to its simple and merchants starting to accept UPI Luggage & Apparel superior user experience, closed payments using integrated QR codes leather goods Home furnishing loop mobile wallets struggle with downloaded in the self-mode on their Chemists strict KYC regulations and lack own smartphones. Kirana Footwear stores of interoperability. Bharat QR, High Salons Tutors launched by NPCI in collaboration 04. Fintechs with large ecosystems with MasterCard, Visa and American covering a full spectrum of Doctor Carpenters Telco Express, further increased the clutter merchant value chain needs seem clinic Unorganized recharge Taxi/ Auto from a merchant perspective. to be better positioned to hold agents Kitchenware Auto & Hardware sway over other players Transaction value potential Toys & plastic Going forward, merchants using The clear distinction among fintech Parking goods Micro merchants and Mobile closed loop QR code payments companies such as payment Fruit & Vegetable Food & Tea stalls domestic service providers a accessories are likely to transition to an open, companies, lending platforms, loan vendors Laundry potential segment for self- interoperable and integrated UPI- and insurance aggregators are Stationery onboarding on alternative Cybercafés' Milk vendor digital / asset-light modes- based QR payment acceptance starting to blur. Inherent low margins Paper vendor UPI QR codes, Aadhaar Pay method that allows them to accept in a payments only business model etc. in all tiers. Small home payment from any mobile application is triggering a horizontal expansion Low repairs (UPI or bank owned mobile banking) and is turning Fintechs into financial Low High and any underlying form factor such supermarkets. On the other hand, top Ease of penetration of digital payments as UPI or debit and credit cards. e-commerce behemoths are not just Source: Deloitte Analysis Integration of various QR codes- content by simplifying the payments closed loop, UPI Bhim QR and Bharat experience for their customers, but QR into a single integrated QR code are going a step further and building Influencers or digital payment a sustainable behavior change. could result in a greater likelihood of up their fintech footprint as a growth evangelists are likely to play a Merchants have peer-to-peer adoption, especially among new-to- engine for the future. critical role to realize both the above informal networks and associations. scenarios. The criticality of creating Key opinion leaders or influencers awareness and user behavior change in those informal networks may be cannot be understated. Consumers tapped and incentivized for creating and opinion leaders among merchant awareness, growing adoption, and networks could play a meaningful role sustaining digital transactions. Mobile in nudging other merchants to adopt money agent networks operate on alternative payment acceptance the same principle-master agents’ modes. Current incentives provided handhold and oversee sub-agents. by the government, although well A similar master merchant model intentioned, may not result in underpinned by a suitable incentive sustainable behavior change among structure could be explored as merchants. The incentive programs an alternate approach to assist in could be reworked to align them to sustained inclusion of merchants in the right drivers required to effect digital payments. 41 Small merchant (turnover < INR 20 lcas) will pay MDR of 0.3 percent (max of INR 200) per transaction. Other merchants will pay 0.80 percent MDR (capped at INR 1000) per transaction. UPI and Bharat QR have different MDR rates for merchants. For payment through UPI, NPCI charges MDR of 0.25 percent for payments below INR 1000 and 0.65 percent MDR for payments exceeding INR 1000. 42 https://www.medianama.com/2017/08/223-official-banks-merge-upi-qr-bharatqr-implications/ 36 37 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Exhibit: Opportunities for Collaboration between Traditional FI’s / Banks and Fintech/e-commerce Platforms Another prominent, Bengaluru-based accelerate merchant digitalization, expanded universe of merchant data. lending fintech, has collaborated the Government could also consider These include savings and current •• Large asset base •• Access to existing customer base •• Limited funding with almost a dozen PoS and allowing fintechs to start and run the accounts, to accounting software, & markets PG aggregators as well as large TReDS platform44. Connecting GST payment processors, e-commerce •• Perceived stability and trust •• Lack of trust/ brand recognition e-commerce platforms, to offer IT network with TReDS and allowing shipping data, and other online data

•• Access to data to test innovations Disadvantages •• Large customer base •• Limited experience in risk merchant cash advance – a collateral- fintechs to run TReDS will allow them sources such as GSTIN, TReDS, credit • Funding management •• Brick and mortar presence • free line of credit solution that offers to also participate in bill discounting bureaus and several other alternate • Branding and trust • Limited exposure to regulatory funds up to 200 percent of the for large merchants and service data sources like social media likes •• Experience in risk management • • compliance merchant’s sales from card payment providers. for the merchant. Fintech players •• Distribution channels •• Wide product suite machines and payment gateways. could also partner with accounting Advantages •• No membership to card •• Risk management expertise With increasing levels of merchant software players like Tally, Zoho, •• Links to government and associations regulator •• Regulatory cover It is expected that the Government digitalization and supply side Intuit and Quickbooks to pick up •• Poor access to regulators will collaborate with fintech players innovation are likely to result in granular merchant business data with •• Member of card associations •• Card scheme association to provide access to them access to evolution of more matured merchant appropriate user consents. GST invoices filed by merchants. To lending business models to tap an Fintech and e-commerce Banks and traditional FIs Collaboration platforms

•• Slow innovation •• Innovation focused Exhibit: Rethinking Merchant Cash Advance- Kabbage Case Study •• Low cost, tech driven solution •• Legacy technology, systems and •• Large customer base processes •• Customer-centric, solutions and •• Nimble and responsive journey based approach Apply Underwrite Disburse & Usage •• Slow decision making Advantages •• Customer-centric •• Segment driven customized •• Low customer centricity solutions •• Specialized offerings •• Silo-based organization •• High quality talent workforce •• Latest digital technology, •• Underleverage data analytics improved algorithms Disadvantages •• Nimble and agile approach •• High cost structures •• High quality tech-talent •• Business model innovation •• Laggard attitude to business •• Creative and design oriented model innovation •• Frugal solutions •• A small merchant needs •• Kabbage analyses and •• Merchant gets notified about immediate funds to stock up underwrites application basis approval through a app push Source: Deloitte Analysis the store traditional data and alternate notification data •• Accesses Kabbage website or •• Can start using credit line mobile app for a line of credit •• Interprets multiple data instantly or withdraw from Going forward, we can expect that partners and work collaboratively to comprising 30 million enterprises43. sources such as business bank account as per business large incumbent e-commerce players, solve merchant pain points. Traditional lenders typically grapple •• Enters basic business volume, time in business, need banks and fintechs will compete with several hurdles while evaluating information, links his business transaction volume, social as well as collaborate with each 05. Alternate lending is likely to become the credit-worthiness of small checking account and other •• Flexibility to use only that media activity, credit score, other to fill gaps in the market, drive a default offering to merchants merchants, due to lack of proper online accounts like Paypal, much amount that is actually shipping data etc. efficiencies, and collaborate with accepting digital payments documentation and invisible cash- Accounting software package needed, and whenever existing players through innovative With growing digitization in the flows. A number of PoS aggregators, etc. •• Also leverages “Social needed. Klimbing” – an inhouse proxy merchant business models. As listed payments space, the largest either on their own or through •• Pays no interest charges, score for borrowers, which in the exhibit, there are a number of beneficiaries could be the digital partnership with fintech lending only a simple monthly fee. No is utilized like a social media opportunities for all the three players lending startups. Trends such as startups, are increasingly seeking to penalty on early repayment to collaborate and solve merchant digitization of offline merchants due leverage the card transaction data credit score problems. Increasingly, banks in India to a growing PoS base, e-commerce to assess merchant cash-flow and •• Real time decisioning on Merchant empowered to take are opening up their Application offline-to-online (O2O) push and repayment capacity and lend them request within 7 minutes advantage of business opportunity Program Interfaces (APIs) to fintech growing formalization of the retail on that basis. A prominent merchant companies, allowing them to test merchants are being seen by lending aggregator in the mPoS space has so Kabbage unique‘techfin’ business model focused on product bundling, speedy underwriting and customer centric innovative new products on the bank’s startups as a next growth opportunity far disbursed merchant loans totaling underwriting limits are its USP customer data. The key challenge for to extend the lending offering to the over INR 71 crores with an average all sides is to find the right strategic hitherto unaddressed MSME sector ticket size of INR 60,000. Source: Kabbage website resources

44 It is an electronic platform that allows auctioning of trade receivable. A financier (typically a bank) buys a bill (trade receivable) from a seller of goods or merchant before it’s due or before the buyer credits the value of the bill. In other words, a seller gets credit against a bill which is due to him at a later date. The 43 Website: Capital Float discount is the interest paid to the financier. 38 39 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

In the short term, PoS acquirers (mainly to use new payment products, micro non-bank acquirers) are likely to use and small merchants continue to be working capital finance or credit lines wary of digital payments. Industry calculated on the basis of the merchant’s participants will need to redouble their digital payments volume, as a hook efforts to create merchant awareness to attract them to digital payments. and education in order to dislodge a However, in the longer term, Fintechs well-entrenched cash behavior. Although have the opportunity to redefine use the government initiative to fund digital of varied type of merchant business incentives in laudable, it is equally information, to provide them an easier pertinent to ensure that good money is access to working capital using real-time not spent on transitory benefits. Going data models, tapped from multiple forward, it would serve well to recognize external parties. Either way, alternate the role of opinion leaders or influencers lending is expected to become a default in the merchant network and consider offering to small and medium size re-targetting the promotional schemes at merchants in the near future, as they them in order to effect a long-term and shift their business on digital platforms. permanent behaviour change among the broader merchant network. Conclusion The launch of alternative digital A lot is happening in UPI space, but payments underpinned by the mobile now the focus needs to shift on how to represents the single biggest opportunity catalyze the offline merchant payments in recent times to digitize India’s vast adoption. It is imperative that fintechs merchant landscape. While newly focus their attention to innovate and launched payment innovations such build new and multiple use-cases as the UPI, Aadhaar Pay and integrated for proximity offline payments. The QR codes show much promise, it would interoperable QR code (Bharat QR+ still be fair to remember that the battle UPI) seems to be a step in the right against cash will take many more direction. Going forward, fintechs need measures than just innovating on low to innovate on bigger value propositions and asset-light cost merchant acceptance for merchants like loyalty, post-sale solutions. It requires a concentrated and analytics, and merchant ratings, on top coordinated action by all stakeholders of the UPI platform. Incumbents will do in the digital ecosystem. It is quite well to remember that only by having encouraging to see policy-makers set an la sharp focus on real merchant value ambitious and forward-looking agenda proposition, awareness creation, and a for a ‘less-cash’ digital society, in such a well-engineered market delivery model, comprehensive manner. While industry they are likely to make tangible progress players may have found a way to trigger a towards conquering this last frontier for strong adoption wave among consumers digital payments.

40 41 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Moving Beyond: Capturing Value from Payments Data

With the proliferation of digital payments The key to unlock and monetize the in the country, the industry is witnessing payments data would depend on how an a striking shift in the way payments organization uses transaction-level data companies operate. The reasons in conjunction with other external data, attributed to this range from increasing converting raw data into composite and customer preference for digital offerings, transformed data, coupled with right industry’s push towards customer granularity and dimensions. For instance, experience, and cost optimization supplementing the raw transaction efforts, and enabling factors such as the data with contextual data such as government’s push towards digitization, location, product-wise, channel-wise, demonetization, India stack and segmentation, weather data and insights indigenous initiatives such as RuPay and from social media could strengthen UPI. In order to expand their portfolio the use cases, and provide actionable of offerings, and, thereby, enhance their insights for the companies and its value value proposition, these companies are chain participants. This would require increasingly exploring ways to move from companies to either develop strong a pure play ‘transaction-led’ business analytical capabilities in-house, or build model, to a ‘data-led’ model. strategic partnerships.

These companies are finding ways and Data, Everywhere, Every Time means to monetize the large swathes Today, most businesses, even the of data assets that they have managed ones, which are using cutting-edge to generate, while facilitating payments data science, and big data factories transactions aligned with their changing that churn out insights, generate more business strategies and objectives. data than they can process. A look at They are increasingly leveraging these the transactions processed via various assets to derive meaningful data insights payment modes show a steady increase and application, and creating unique in the value and volumes, where newer experiences and use cases for their users, instruments such as UPI and USSD are customers as well as other participants growing leaps and bounds, led especially in the payments value chain for both by the retail segments. internal as well as external consumption: As illustrated in the exhibit, there has •• Internal use cases involve new been a phenomenal increase in the product development, customer digital payments, especially in emerging segmentation, targeting, generating digital channels. The ‘Cashless India’ push personalized offers and rewards, from the Government and setting up of loyalty programmes, and credit risk platforms such as UPI has contributed assessment, among others extensively towards this growth. This •• External use cases refer to payments has led to digital players such as Google companies providing data to external (Tez) and WhatsApp to enter this entities including both their customers, space, and launch their own payments suppliers as well as other value chain services. This also translates to more participants – selling raw data or data being generated through payments, insights or a new offering altogether. and therefore, more opportunities for monetization of data.

42 43 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Exhibit: Growth in Digital Payments (Volume) Exhibit: Data Sources & Channels in Payments Ecosystem

Card Issuers, Card Networks Payment Payment Wallets Merchants Merchant Acquirers Processors, 54.1Mn 1,097 Mn 83% (Banks, Wallets, Gateways, 41.6Mn 171Mn 10% etc.) PSPs

46.6Mn 23% •• American Express •• VISA •• CCAvenue •• MobiKwik •• Flipkart 22% 63.1Mn 42.5Mn 4.7Mn •• ICICI Bank •• MasterCard •• MobiKwik •• Paytm •• Amazon.com 672 Mn 2.8Mn Emerging channels for Digital Payments 76% 9% 16% •• Bank of Baroda •• American Express •• Paytm •• FreeCharge •• DMart Traditional channels for Digital Payments •• SBI •• RuPay … •• Citrus •• OLA •• Big Bazaar 31% 18% 68% •• HDFC Bank •• Tez •• JioMoney … •• Reliance Retail •• Paytm … •• BHIM •• Croma … 23% 63% 9% •• PhonePe 5% Overall growth 8% 13% 24% •• EBS 32% 18% 15% •• PayU … 1% 1% Nov-16 RTGS NEFT CTS IMPS NACH UPI Debit and PPI Feb-18 Source: Deloitte analysis Credit Cards at POS & RTGS NEFT CTS* IMPS* NACH* UPI* Debit and Credit Cards at POS & PPI # As illustrated, banks and networks are customer data and transactions, would &: Card transactions of four banks. in an advantageous position in terms of give a broader view of the payments #: PPI issued by 8 issuers for goods and services transactions only information about the customer profile value chain. For instance, customers

Source: RBI / NPCI and behaviour, which the retailers and spending patterns coupled with geo- merchants typically lack. However, spatial information from transactions understanding of the customer, and can be used to push offers to a targeted The challenge for organizations now houses, Payment wallets, and finally his/her behaviour, and spending customer base based near a merchant. seems to be to convert this raw data the Merchants (exhibit). All payment patterns, are crucial for the retailers and into information that can be leveraged transactions touch one of these or merchants to predict demand, target Therefore, monetization opportunities meaningfully. This would involve multiple ‘payments companies’ in offers, and customize experiences. are likely to be dependent on how well identifying other types and sources of the ecosystem who capture, store Similarly, geo-spatial and supply chain a player forges relevant partnerships data – both internal as well as external, and process data. In this competitive related information that provides context across the payments value chain, so as to capture data from these disparate environment, each of these players and relevance to the transactions are generate meaningful insights, and curate sources, centralize the storage, and use it are fighting for a slice of the payments abundant with retailers and merchants. offerings to augment experiences and to their advantage. pie, and thereby the attention of the Combining merchant side data with use cases for the participants. customer. While each of the players At a high level, the payments ecosystem have the underlying data around the can be broken down into Issuers, payments that they have processed, the Acquirers, Banks, Payments networks, opportunities to monetize this data is Payment processors including payment limited by what data they possess. gateways, aggregators and clearing

44 45 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Exhibit: Data across Payments Ecosystem Online retailers such as Amazon and behaviour, transaction and social media, organization is what Data Monetization Flipkart differ from their brick and and network information all residing is about. Monetization of this asset is a Banks & mortar counterparts, since they have in-house. This information asymmetry business problem that needs a sound Issuers far more customer context. Customer strengthens the need for strong strategy, effective execution to create profiles created on these websites, partnerships for traditional payments value, and a business model to realize Customer Demographics coupled with transactional information companies to make the most out of the the business gains. Answering some and social media networks, provide payments data. essential questions on how value from Payments Preferences these players with superior depth and this asset can be delivered and to whom Purchase Pattern breadth of information that each of the Combine. Collaborate. Win the value can be delivered to, would traditional players cannot match. Digital Data is the ever-growing new asset enable these companies to understand Economic Status players such as Facebook and Google in today’s organizations, and using the opportunities better. are probably at the farthest end of the this asset to make profits and Digital Risk Information spectrum with customer information, deliver competitive advantage to the Wallets Customer Geo-Spatial Information

What is the data that payment companies intend to monetize? Merchant Profile & Performance Exhibit: What is the data that payment companies intend to monetize?

Industry Information Simple •• This involves providing internally sourced data feeds to other parties in an aggregated or raw form, directly for their consumption. Supply Chain Information •• Payment transactions intrinsically can provide information about ‘What’, ‘When’ and ‘Where’ which could be of value for select use cases. •• The recipients including customers, merchants and aggregators may in turn use this raw data directly or transform by combining with own data into data forms that are more valuable for them or their value chain participants. Data across Transformed •• The value of the data and, thereby, the money that it can generate drastically increases when data Payments present across disparate systems are processed by the payments companies and the output is shared Ecosystem Card with other parties. Networks •• Processed data, in this form, can provide more context to the behaviour and patterns in the payment transaction. •• Though this may force the payments data provider to set up analytical and technical capabilities within the organization, it produces far more value than sharing raw data. Enriched •• Enriched data feed pertains to the data and analytical insights that can be provided combining payment companies' data along with external data sources. The result is a ready-to-consume feed(s) and associated services that results in maximum value creation from the payments data. •• Data from external sources, covering what triggered or influenced the payments, can provide context and answer the ‘Why‘ aspect. Payments •• This not only generates new revenue streams but also encourages the payment providers to think of Using Loyalty Programs Processors, new business models based on open platforms and APIs that may be used to provide these services (brick & mortar) & Gateways & seamlessly. Customer Accounts PSPs (Online retailers) Source: Deloitte analysis

Retailers & Merchants

Source: Deloitte analysis

46 47 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Who would see Value in Payments Data? Leverage: Targeting Immediate when the data starts talking, which needs combining it with, and, thereby, enriching Exhibit: Who would see Value in Payments Data? Opportunities processing and building analytical models the in-house data in the process, In a market crowded with similar on the data, to derive unique insights generating much more value. Self A good point to start with is oneself. Enterprises must first look inward to start the journey to monetization of players, a leading coffee chain has for the companies using the payments data. This would enable payments companies to understand the current silos of data that they possess, their made payments its business, in order to data. This requires the payments data To serve these partnerships, payment processing abilities, technology shortcomings and process changes required to leverage the existing data. differentiate itself and offer personalised providers to evaluate and augment their companies are developing platforms customer experiences. By offering technical and analytical capabilities so where other parties can directly provide This would also present opportunities to tap into new sources of data, which can bring greater value to the discounts on its own wallet payments, the as to provide transformed data to other and/or access information through APIs, enterprise. Banks along with card networks have already started using enterprise data to engage with the coffee chain has shifted up to 27 percent ecosystem participants. which would allow deeper integration customer, develop new products, increase cross-/upsell, target marketing messages and increase usage of its of its customer base from cash payments with the services and applications of offerings among others. to its wallet. This approach has allowed A leading supermarket chain in the third parties. A robust service based on the chain to know its customers through United States uses a data ecosystem to providing data and analytical insights to Adjacent Opportunities to monetize data exist both in horizontal and vertical value chain delivery. In the age of the the enormous data generated and at monetize - for a subscription fee, the both, customers and third parties would Participants experience economy, personalized experiences are key to higher degree of customer engagement, better the same time simplify the ordering and retail chain provides suppliers with an go a long way in generating the most brand recall, and hence, increased top and bottom line. Spend data with analysis on trends and categories are payments process for the customer. analytical platform where they can access value from payments data. This would being shared with customers through enterprises’ own and external applications. Tools for budgeting, financial retail transaction data, understand not only add a new revenue stream, but management and prediction of spend, are being offered by these enterprises that have gained in popularity in the Leveraging data for internal use is the product category movement and develop also force the providers of data to think last few years. first step to monetization of data and targeting strategies. The platform of innovative business models based on Others Cross-market value delivery to other sectors and industries need a very mature data factory where payment requires the minimum amount of time. anonymizes the data shared with the platforms and Application Programming providers can identify data that can be valuable to others. The key focus for enterprises under this is to sell data Data generated, housed and used suppliers thereby protecting customer Interfaces (APIs), which can be used to external parties that are not a part of their value chain for their consumption. For example, a cab aggregator within the organization, is the first step privacy. In another case, customers to access these services on demand. sharing the payments data with banks for credit assessment of its drivers. in constructively using data generated have been delighted with information Advanced technical expertise would

Source: Deloitte analysis in-house in the journey to monetization. about their spend patterns by the banks, facilitate generation and delivery of Many banks and card companies have which allow setting budgets, tracking information in real time. What can Payment Companies do with model that is best suited for its broad The exhibit below shows the various already started using this data to make expenses and provides key highlights and Data: Putting the ‘Who’ and ‘What’ vision, goals, and objectives. This would areas where payments companies can better decisions, chasing both bottom recommendations. An innovative platform developed by together? translate into putting together the operate, based on their current maturity, line and top line growth. While not one of the leading banks in the United Every organization that has ambition to answers to ‘who’ and the ‘how’, which as well as their ambitions to build data contributing directly to the top line, As the organization extends in-house States, provided access to merchants and leverage data monetization opportunities shall help the organization clearly monetization capabilities. This provides process inefficiencies can be plugged data to other parties, regulations on data marketers to identify targeted audience would need to meticulously chart out spell out the scale and scope of their us with three steps in the path to by studying enterprise data within the sharing and privacy concerns would have for marketing. The platform’s underlying a roadmap, and design a business envisioned strategy. maturity – Leverage, Extend and Scale. organization, solving business problems. to be addressed, to ensure compliance advanced machine learning capabilities Additionally, using the enterprise’s own with all extant regulations. This may even predict future buying behaviour of the Exhibit: Maturity Model for Monetization of Payments Data data to develop services and products include taking express customer consent partner’s desired audience based on would not pose any issues related to data for data sharing. payments data transactions with context More privacy regulations. added through external data from Scale Scale: Striking Strategic Partnerships merchants. Customer data is anonymized Extend: Transforming Data, Benefitting Taking the monetization efforts to the and aggregated before being used by the Adjacent Participants next stage involves the development of analytical models and any information Others The next stage in the path to attain strategic partnerships with other parties. that can identify the customer personally data monetization maturity is to Various organizations are exploring is not exposed to the partners. start extending data generated in partnerships with other value chain Extend the organization to the advantage of participants such as merchants, retail others starting with the customers and chains and supply chain participants, suppliers. Real value can only be tapped to source data from these players, Suppliers Customer / Ecosystem Participants Leverage Self

Less Simple Transformed Enriched Less Data for Monetization More Source: Deloitte analysis 48 49 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Exhibit: Value Generation through Data Monetization Exhibit: Illustrative Journey of an e-Tailer (as it goes higher in the maturity model for monetization of payments data) Scale Leverage Extend Scale

Summarizing... An e-Tailer moving up the maturity ladder •• Preserve valuable customer •• Generate new business using •• Develop new business-cum-operating Extend 3 data and context within the transformed data for both model using integration with other •• Opens up platform for targeted organization internal use cases as well as participants through use of platforms marketing and advertisements for •• Enable internal teams to provide actionable insights to •• Integrate with third party partners to other players perform better – sales, service actors adjacent in the value provide on-demand real time insights 2 •• Shares payments data with Banks and operations chain •• Enrich insights by overlaying data from Leverage facilitating credit profiling of sellers other sources to provide context and •• Shares product-wise payments data •• Leverages credit history from credit relevance to payments data with sellers for their: ––Sales & Marketing Strategies bureaus along with own payments data •• Requires basic analytical and •• Requires understanding and •• Requires focused Data Organization 1 ––New Product Development for providing ‘Buy Now, Pay Later’ option big data capabilities ability to tap into other data facilitating development of APIs and ––Inventory management to customers •• Identifies and targetshigh sources along with an in-house platforms to integrate with others •• Leverage techniques such as •• Shares location-wise payments data value micro- segments based setup of analytical and big data classification, clustering and with logistics partners as an input for on payments data capabilities propensity modelling and ascertain locational analysis for hub-and-spoke •• Tracks purchase behaviour and product recommendation for up- creation Value Generated… pushes one-time offers as well sell / cross-sell •• Collaborate with Telecom providers to •• Increase in revenues •• Partnerships & New •• Integration with 3rd party as offerssubscription services •• Shares insights on spend pattern leverage location details and create business models businesses •• Process efficiency & Cost with customers targeted offers for specificmicro-markets optimization •• New business through use of

•• Better decision making APIs and open platforms Source: Deloitte analysis •• Better customer engagement & retention Similarly, exhibit below highlights the journey of a bank as it climbs the data monetization maturity ladder.

Indicative Pricing Model… Exhibit: Illustrative Journey of a Bank (as it climbs the data monetization maturity ladder) Scale •• Chargeback based models •• Transaction based •• API Marketplace - pay per use/call •• Subscription based •• Revenue sharing •• Rebate / cashback models •• Transaction based A Bank navigating its Data •• Freemium model •• Subscription based Monetization journey Extend 3 •• Chargeback based models •• Rebate / cashback models •• Develops and shares Platforms / APIs •• Freemium model with others along with payments data Source: Deloitte analysis to sell their products, co-selling its own 2 products (e.g. loans, cards, etc.) Leverage Early success for data monetization While internally, payments data can be more traction in the recent few years •• Enriches existing payments data with data •• Develops new products and would primarily lie in online and mobile used from targeting new customers, – in terms of number, complexity and from bureaus for credit assessment of optimizes pricing for various channels. Brick and mortar counterparts developing new products, increasing value – with the prevalence of APIs as potential customers would need to build in-house usage of products and lowering prices financial institutions are collaborating customer segments •• Leverages payments data from capabilities coupled with more enriching among others, external use cases range with and leveraging the capabilities of 1 •• Conducts payments-linked aggregators such as cab aggregators for partnerships to compete effectively from providing tools or insights to end- other organisations to deliver value to marketing and targeted campaigns •• Identifieshigh value customers offering loans to drivers or from e-Tailers in this new-age data-led business consumers for their consumption in customers. For example, banks work •• Uses payments data to optimize and offerpersonalized products to offer loans to sellers effectively. providing the data to value chain partners together with membership rewards channel strategy and distribution across different channels •• Works with money management service and others for their consumption. program managers, to allow customers to models for its customers •• Triggers alerts to customers for providers to offer payments data based Opportunities Galore, All Around, All accrue and use rewards points to pay at •• Offerssolutions to merchants bill payments, recharges, etc. to spend insights, budgeting and expense the Way Aspects such as enterprise-wide select partners. covering tailored payments increase its payments platform tracking With the surge in digital payments, data data strategy, maturity of analytics reporting, tracking outstanding usage •• Consumes triggers from geo-spatial has become conveniently accessible for programmes and the nature of The exhibit below shows the journey payments, cash management, easy •• Leverages payments data to and payments data from self and card decision-making and analysis. Payments complementary partnerships that an of an e-Tailer as it goes higher in the integration with latter’s accounting trigger early warning signals for networks for fraud detection data amassed by any organization organization builds, would be key in maturity model for monetization of systems collections can be leveraged for either internal or generating value from payments data. payments data external consumption, or even for both. In fact, partnerships have gained even Source: Deloitte analysis

50 51 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

The Way Ahead It is imperative for all the payments value chain participants who intend to expand and differentiate beyond their core area of operations, to gain an ‘early’ foothold in this space. They can attain this by planning ahead of time, setting goals and objectives, and, thereafter, by developing capabilities and deploying resources, and seeking complementary partnership opportunities, aligned with the vision of the organization. Further, the companies need to take cognizance of the heightened expectations and clamor around data privacy and data security, especially related to financial information of a customer, to stay ahead of the curve in terms of regulatory and compliance requirements. We live in a data-led economy and the business of data monetization is set to grow with far reaching implications for the industry. How much value an organization is able to generate out of this would define the long-term success or failure of that organization.

52 53 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Abbreviations About Banking Frontiers

AEPS Aadhaar Enabled Payments System Banking Frontiers is a focused magazine and many other countries and is strongly API Application Programming Interface for the Financial Services targeting the expanding into these regions. ATM Automated Teller Machine Captains of the Industry discussing BBPS Bharat Bill Payment System the business, products, processes and Banking Frontiers empowers bankers BHIM Bharat Interface for Money technologies that power the sector. to share their views with the fraternity BC Business Correspondent Banking Frontiers has a legacy of over through its contents as well as through C2B Consumer-to-business a decade in the area of publishing for the various blogs, seminars, roundtables, DIY Do-it-Yourself this sector and has enrolled several discussion forums and large conferences GST Goods and Services Tax leaders from the industry to share and is also available in the e-paper GOI Government of India their experiences, thoughts, issues and version for the benefit of the digital IAMAI Internet and Mobile Association of India concerns through this platform for the audience which can be viewed at http:// IFSC Indian Financial System Code benefit of the sector as a whole. Starting www.magzter.com/IN/ IMPS Immediate Payment Service with India, Banking Frontiers has also glocal-infomart-pvt-ltd/Banking- IoT Internet of Things covered banks from the entire region Frontiers/Business/# KYC Know your Customer including Sri Lanka, Africa, Middle East MST Magnetic secure transmission MDR Merchant discount rate MeitY The Ministry of Electronics & Information Technology NPCI National Payments Corporation of India NFC Near-field communication OTP One Time Password O2O Offline to Online PoS Point of Sale PSP Payment Service Providers P2P Person-to-person P2M Person-to-merchant PPI Prepaid payments instruments PoS Point of sale QR Code Quick Response Code RBI Reserve Bank of India SBI State Bank of India SMAC Social, Mobile, Analytics, Cloud TRAI Telecom Regulatory Authority of India TReDS Trade receivables discounting system UPI Unified Payment Interface USSD Unstructured Supplementary Service Data YoY Year-on-Year

54 55 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

About Deloitte

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56 57 Innovate.Collaborate.Elevate | Paynext 2018 Innovate.Collaborate.Elevate | Paynext 2018

Acknowledgements

Kalpesh J. Mehta Monish Shah Vijay Mani

Authors Sandeep Sonpatki Anurag Kumar Saurabh Mishra Aniruddha Surve Divyansh Gupta, Shweta Gupta Akhilesh Ganesh Divyadeep Modi Guneet Chatrath

We would also like to thank Nikhil Kumar (iSpirt), Rajiv Agrawal (Innoviti), Abinash Kumar (AGS First Transact), and Piyush Singh (A Delhi-based fintech expert and payments consultant) for spending their valuable time and sharing insights while developing this report.

Contact us [email protected]

58 59 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.

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