Innovative payment systems for financial inclusion
- Over INR 8743 bn in payments to be made through prepaid Instruments in FY20
- India Point of sale terminals lowest amongst BRIC nations
- Overall business opportunity for business correspondents estimated at INR 567 bn per year and revenue opportunity for POS –related shared services at INR 16 bn per year
24 OCTOBER DELHI/MUMBAI: Disruptive game changing innovations in the payment systems will be critical to accelerate financial inclusion agenda of India, states a latest report on financial inclusion by EY, the global professional services organization. The report titled ‘Accelerating financial inclusion- The role of payment systems’, was released at a global conference on Financial Inclusion and Payment Systems in Delhi today.
The report aims to provide an outlook on India’s financial inclusion agenda, the growth drivers for its success and the supporting infrastructure that will be needed. As per the report, with current trends like growing urbanization, rising middle class and aspirations, this is the right time to tap the large unbanked population of India.
Mahesh Makhija, Partner – Advisory (Financial Services), EY says, “India is an exceptional country with unique consumer needs. To accelerate financial inclusion in India, we will need to understand what combination of payment products and services will work in the Indian context. Innovations in payment systems will occur at the intersection of different industries like financial services, telecom and retail.”
The report lists 6 key elements that make up the financial inclusion agenda of India:
New game, new rules — evolving prepaid instruments landscape in India
Prepaid Instruments (PPI) are at their nascent stage in India, but have the potential to play a vital role in the country’s struggle to reduce dependence on cash in its economy, says the report. EY estimates that although prepaid market represented only 3.62% of the Indian card market, this will increase dramatically over the next decade. EY recommends that the Government look closely at PPI’s as an option to disburse Government benefits (currently estimated at INR 4800 billion). Market growth in PPI’s will also emanate from the proliferation of m-wallets, money transfer and other new applications of the product. According to the report, these new segments are expected to collectively contribute 47% of the prepaid market in FY 20. Over INR 8743 billion in payments is likely to be made through PPIs in FY 2020. This will be more than 12 times the volumes in FY2013.
Rethinking mobile money — the case for electronic rupees issued by the RBI
Mobile money has the power to democratize banking in India by bringing large numbers of the country’s unbanked population into its formal financial system. As per the report, almost 83% of India’s population is expected to own and use mobile phones by 2014. However, for several reasons mobile money adoption in India has been low. Consumers and merchants are not incentivized to make the transition to mobile money and Banks and Telco’s have adopted a ‘wait and watch’ approach. According to the report, the challenge is to take a transformative step that will lead to a paradigm shift in the mobile money paradigm. One such step would be creation of electronic rupee. These would be issued by the Reserve Bank of India as legal tender, just as it currently issues currency notes and coins.
“We think that the creation of electronic rupee is a transformative solution to today’s issues with mobile money in India and in fact across the globe” said Mahesh.
Enabling payments — increasing Point Of Sales (POS) penetration in India
As financial inclusion gathers momentum, there is an urgent need to enhance POS acceptance infrastructure in India. India still has one of the lowest number of POS terminals (per million people) in the world. According to the report, penetration of POS terminals is only 693 per million of India’s population, compared to similar emerging countries such as Brazil, which has 32,995 terminals per million people and China and Russia, each of which has around 4000 terminals per million people. India’s POS landscape is characterized by a large skew in favor of urban locations-more than 70% of the POS terminals are installed in the top 15 cities contributing to over 75% of the total volumes at POS. Moreover, only 1.1 million of the more than 10 million retail touch points have POS installed for electronic payments acceptance. Technology will play an important role with the implementation of new POS capabilities. Large urban retailers seek technologies like Mobile POS (Mpos) which help them in “line-busting” whereas the smaller merchants seek a cheap and easy-to-use solution like a card-reader attached to a phone. Rural merchants on the other hand are likely to adopt biometric POS terminals, which enables them to accept Aadhaar enabled debit cards that are likely be issued in large numbers for financial inclusion. As per the report, there could be close to 3.5 million POS in the next five years if necessary initiatives and actions are taken to increase the POS penetration.
Evolving payment ecosystems – shared services models for inclusion and growth
The report states that to enhance their reach, banks are introducing payment ecosystems that work across organizational boundaries to deliver innovative payment services. The report discusses 7 different models of shared services that Banks are leveraging aimed at acquiring, engaging and retaining customers. EY estimates the overall opportunity for shared services like business correspondents at around INR567 billion per year in the next 2-3 years and an overall revenue opportunity of INR16 billion per year for POS-related shared services by 2018 at the present rate of growth in card-related transactions and merchant terminals.
Pathways to excellence — the transformation agenda for banks
Changing consumer behavior, the increasing urgency of financial inclusion and ubiquitous mobile telephony are powerful external factors that will transform the Indian payments industry over the next 10 years. In the last decade, India has witnessed significant achievements in its efforts to migrate from traditional payment methods through cash to modern electronic payment systems. In 2012 the percentage of non-paper based payments transactions was 48% up from 27% in 2008. While there has been significant progress made on various parameters, a lot still needs to be done in the next few years. According to the report, India is at an interesting point in its payments journey wherein the foundation is laid, but its future growth will depend on innovation in products, business models, consumer interfaces, security and infrastructure under the umbrella of enabling regulations.
Cashless in India – Government imperatives to promote electronic payments
From taxes to social welfare benefits, the Government of India cumulatively receives and disburses billions of rupees to and from its citizens. The Interbank Mobile Payment Service and Aadhaar Enabled Payment System platforms have the potential to integrate the payment systems of various Government to Public (G2P) schemes and enable mobile phones to be used as front-end technology instruments states the report.
By digitizing this flow of money, the Government can lead a strategic shift from the high dependence on cash to a more efficient, electronic payment system, which leverages online and mobile channels to cut costs and bring social benefits to millions.
The establishment of a strong payment and settlement framework and associated enabling institutions has aided a conducive environment for financial inclusion in India.
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