Indian Payments Waves and Emerging Patterns

Fintech has been a hot sector lately because of the structural changes that the market is witnessing (India Stack - eKYC, UPI and more) and the massive untapped opportunity it provides.

The staggering growth and potential numbers have been put out by many now and need no repetition.

This is an analysis of patterns of past and patterns emerging now in arguably the most coveted part of Fintech - payments.

There are three waves of online payments that we have seen in India and we are currently in the third wave. While we explore them, it is important to view them with the economic and technological changes that have taken place in the backdrop. Through these waves, Indians have adopted new habits and their attitude towards online payments has changed drastically for the good. We have however just scratched the surface and there is still a long road ahead before digital payments permeate and touch Indians at a mass level.

First wave: 2008-2012

On a day in 2002, just 29 tickets were booked on a website for the first time. The website wasn’t one that instilled a lot of confidence in a user coming to make an online purchase for the first time. Yet, it had some credibility being a government website and the user had no prior expectation of what it is like, to transact online. This virgin territory was a web page of IRCTC. Urban Indian got a taste of the convenience of an online payment while the majority of the country took some time to get used to the idea of online ticket booking. Railways are a lifeline of the country and IRCTC set up a great foundation for Indians to get onto online payments. The ‘early adopter and time saving’ urban commuter slowly moved on to transacting online for air tickets as well when a year later in August 2003, India saw its ‘Southwest’ moment with Captain Gopinath’s Air Deccan ushering in the low-cost domestic carrier era. This was slowly setting up the first online payments wave of 2008-2012

The online payments remained largely restricted to time sensitive, low inventory use-cases starting from travel, later to verticals like movie ticket booking in this era (Bookmyshow).

They became an accepted norm for merchant payments and B2B companies like CCAvenue and BillDesk paved the way for facilitating many online payments.

Cash on Delivery by Flipkart instilled further confidence to make purchases online and a significant percentage of those users started making payments online once the trust of delivery was established.

While users were starting to get a taste of online payments on merchant sites, for peer to peer transfer, it was NEFT introduced in November, 2005 that allowed real time money transfer during a bank’s operating hours that provided Indians with a convenience like never before. Indians dropped cheques and NEFT became a standard to transfer money to each other, with businesses of all kinds and sizes adopting it.

This was followed by introduction of real time, 24*7 IMPS in 2010 by NPCI (National Payments Corporation of India).

Indian consumer was now spending more than ever and a good chunk of this spend was now happening online. Very soon, he was about to purchase anything and everything online.

Second wave: 2012-2016

Most of the transactions in the first wave took place on desktop but now Indians got introduced to 3G and low cost smartphones. As technology evolved, Indians got more used to transacting online easily and payments experience had to catch-up, especially on mobile.

In this wave, we saw the likes of PayU and CitrusPay make a mark in the payments ecosystem coming up with the proposition of making it easier for merchants to start accepting payments online, improve the conversion of online payments and improve the online payment experience.

Simultaneously, Indians had started doing more and more with their smartphones and consumer payment companies like PayTM, Mobikwik and FreeCharge found the killer use case in high frequency mobile phone prepaid recharge. It made young Indians more habituated to transacting online than any other use case and drove this second wave of online payments.

During this period, massive capital infusion in e-commerce sector acted as the ‘killer catalyst’ to incentivise Indians with discounts. To be a part of this frenzy, banks participated by offering their own discounts on e-commerce sites and online transactions went up.

The share of CoD went down during this wave and average online transaction size went up. E-commerce sites helped the digital payments ecosystem grow at a faster pace by educating users in parallel.

Amidst the rising bulge of this wave, a largely unnoticed phenomenon was staggering growth of IMPS volume which overtook even debit card transactions’ volume in the country.

The peer to peer payments were introduced by the wallets but the structural restrictions of the wallet - loading money into one, lack of interoperability, transaction limits and bank withdrawal fees were not conducive for it to grow. The MMID for IMPS was also not easy for the users to carry out a transfer.

This was about to change in the third wave of payments now with launch of UPI (Unified Payment Interface) by NPCI.

Third wave: 2016-2020

2016 saw 4G picking up, Chinese smartphones making the market ultra competitive like never before and Indian consumer transacting more than ever facilitated by high specs mobile phones, higher data speeds on the move and at homes with faster broadband connections growing at a rapid pace.

Now, there are apps to keep a check on expenses to apps that will help users invest online and Payment Banks present a great opportunity to bring many more Indians to transact online.

In this wave, we have seen more B2B companies come forward to further enhance the payment gateway products, to enable payment collection on platforms like WhatsApp and so on.

Alongside this, with introduction of UPI, we will now see the second set of B2C payments companies dominate this wave going after an opportunity bigger than ever before. They will either compete head-on with incumbents and perish or carve out a white space for themselves.

In the end, a common theme across these waves is that the Indian consumer is evolving rapidly and so are their expectations from payments products as technology improves. They are now seeking value beyond basic functional aspects of a transaction.

PM Modi’s bold move of killing black money in the country with recent demonetisation will further boost digital payments in an unprecedented manner. While overall GMV of many businesses will reduce, the share of online payments in the new overall transactions for these businesses will rise drastically. Government is also coming up with incentives for cards usage to changes in Payments & Settlements Act and Banking Regulation act. Next six months will see a dramatic push towards online payments as 22 billion notes worth USD 217 Billion are replaced in the economy. While wallets will act as a temporary resort for few to carry out offline payments where they used to pay in cash, majority of card users will increase card usage or start afresh as loading money in a wallet is cumbersome.

For settlements and transfers among citizens though, a massive opportunity emerges now where cash settlements among friends, relatives and acquaintances can be carried out instantly and conveniently with UPI instead of handing out cash.

A recent study by BCG and Google estimated the payments opportunity in India to be worth USD 500 Billion by 2020. Now it might be projected to push past this huge number too. Past two waves have set things in motion but a payments tsunami in this third wave is imminent and its time has come.