Payment systems in accelerating financial inclusion

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The establishment of a strong payment and settlement framework and associated enabling institutions has enabled a conducive environment for financial inclusion in India.

We live in a country of stark contrasts. While India has a well-established and profitable banking system, it also is home to millions who are denied access to basic financial services. This knowledge paper provides a fresh perspective on what it will take to catalyze explosive growth in electronic payments and accelerate financial inclusion.

Retail electronic payments in India

The adoption of electronic payments in India increased from 27% in 2008 to 48% in 2012. Electronic Payments are superior to paper-based systems – they are faster, safer and provide much desired traceability. Electronic retail payment options include:

  • ECS (that allows for multiple and periodic credit/debit transactions)
  • Card based payment options (including credit, debit and prepaid cards)
  • P2P electronic payments like the National Electronic Funds Transfer (NEFT) and the Inter-Bank Mobile Payment Switch (IMPS)

Prepaid instruments

As per RBI, Prepaid Instruments (PPI’s) are defined as payment instruments that facilitate purchase of goods and services against the value stored on such instruments. Applications of PPI instruments today range from popular uses like payroll and travel cards to emerging uses like m-wallets. Within this segment, prepaid cards are the fastest growing product at a staggering CAGR of 50%.

While growth rates are high, PPI’s form a very small part of the Indian financial product landscape today. EY estimates that the size of the prepaid market was INR700 billion in 2013 almost all of this was due to prepaid cards. This represented just 3.62% of the Indian card market.

Mobile money

The past 10 years have been the “Mobile Decade.” Advances in mobile technology have revolutionized almost every facet of society. In India, penetration of mobile phones is even higher — almost 83% of India’s population is expected to own and use mobile phones by 2014.

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.

However, despite the hype, roll out of mobile money and its adoption has been anemic. The key issue constitutes lack of adequate incentives for stakeholders and their unwillingness to change their long-established practices to make the transformation from physical to mobile money. We strongly support the case for electronic money issued by the RBI, which can catalyze this transformation.

The electronic rupee

Electronic currency could be secured, monitored and managed by the RBI in the same way as paper currency, and enjoy all the advantages of a digital medium that can be more effectively governed and monitored. This electronic currency will not dis-intermediate the banks- they will process and distribute the electronic currency in the same manner as they do with traditional currency.

POS landscape in India

POS infrastructure in India is woefully low by global standards. Barely 10% of the total physical merchant locations of more than 10 million retail touch points, 1 in India have POS acceptance infrastructure in place. As financial inclusion gathers momentum, there is an urgent need to enhance acceptance infrastructure in these locations. While technology will play an important role with the implementation of new POS capabilities, there is also a need to look at other relevant interventions around the world.

According to the RBI’s payment system vision (2012–2015), it is committed to expand the reach of electronic payment systems to the majority of people in the country. It has also set up the National Payments Corporation of India to facilitate this initiative.

If our assumptions hold true then over INR 8743 billion in payments is likely to be made through PPIs in FY2020. This will be more than 12 times the volumes in FY2013.

Evolving payment systems

As they attempt to increase their reach and penetrate new customer segments in a profitable manner, banks are establishing payment ecosystems that work across organizational boundaries to deliver innovative payment services. Fuelled by the RBI’s aggressive guidelines on increasing penetration, we see several emerging models of competition and cooperation in these areas. However, as banks learn to adapt and work with these “shared” models, they will need to be careful about ensuring their continuing focus on keeping their core strategic payment functions in-house while aggressively sharing their noncore ones. They will also need to learn to define and manage complex service-level agreements while monitoring associated costs and risks.

Factors driving the growth of payments in India

  • Enabling regulations
  • Evolving technology
  • Changing consumer behavior
  • Rise of internet and mobile devices
  • Innovative business models

Growth drivers that have led to transformation of payments landscape in India

EY - Growth drivers that have led to transformation of payments landscape in India


Growth drivers that have led to transformation of payments landscape in India

EY - Growth drivers that have led to transformation of payments landscape in India

Source: EY analysis


Innovation in payment systems will be critical as we seek to accelerate financial inclusion. Organizations that address financial inclusion as an opportunity and commit themselves to making it their strategic priority will find themselves well placed to win the battle for the Indian consumer in this century.