Digital payments: More to come

An efficient payment and settlement system is the backbone of any growing economy. The efforts of the Reserve Bank of India (RBI) under the Payment and Settlement Systems Act, 2007, have resulted in a substantial shift from cash to digitized payments during the last decade.

Having achieved some handsome performance in this regard, the RBI’s ‘Payment and Settlement Systems in India: Vision 2019-21’ aims to “Empower every Indian with access to a bouquet of e-payment options that are safe, secure, convenient, quick and affordable” by concentrating on a two-pronged approach: (a) exceptional customer experience, and (b) enabling an ecosystem which will result in this customer experience.” The vision aims at “enhancing the experience of customers; empowering payment system operators and service providers; enabling the ecosystem and infrastructure; putting in place a forward-looking regulation; supported by risk-focused supervision”. To achieve the above, the vision envisages four goal-posts (4Cs) – competition, cost, convenience and confidence.

Digital payments

During the last three years (June 2016 to June 2019), the digital payments commonly used by individuals have shown a substantial increase. The volume of Immediate Payment Services (IMPS) has increased to 171.33 million (from 29.68 million) and value to Rs 1,730.19 billion (from Rs 237.17 billion), at a three-year CAGR of 79% in volume and 94% in value. Mobile banking transactions have risen to 848.61 million (from 63.17 million) and its value to Rs 4,975.43 billion (from Rs 673. 48 billion), at a CAGR of 138% by volume and 95% by value. The m-wallet volume has grown to 334.7 million from 58.63 million and value to Rs 154.71 billion from Rs 27.74 billion. The average value per transaction is higher in case of IMPS (Rs 10,099) than mobile banking (Rs 5,863) and m-wallet (Rs 462), implying that m-wallet is used in very small payments. The average size of the transactions has improved in IMPS, but has not changed much in m-wallet.

Considering the trends in volume and value and the number of mobile users (117 crore connections), among these digital payments, mobile banking is going to be the most preferred mode under digital payments.

The number of debit cards in use is nearly 840 million, credit cards nearly 50 million and ATMs about 2.27 lakh. Considering the cost of operations and stagnant revenue (Rs 20 per cash transaction, and Rs 8 per non-cash transaction), banks are now not so bullish about installing ATMs. On the other hand, there is substantial improvement in PoS (Point of Sale) terminals to 39.91 lakh, as against 14.33 lakh three years back. The number of ATM card transactions at PoS has gone up to 406.53 million from 118.20 million.

Consequently, there is consistent increase in digital payment transaction turnover vis-à-vis GDP (at current price). It was 7.14% in 2016, 7.85% in 2017 and 8.42% in 2018. It is expected to be 14.8% by 2021.

Cash in circulation

With the rise in digital payments, one would expect a reduction in usage of cash. Using cash involves significant costs to the economy. People are encouraged to migrate to digital modes in payments to reduce cost to the economy and also to minimise issues involved in cash transactions. Despite handsome growth in digital payments, demonetisation of high value notes, restrictions in high value cash transactions, the volume of notes in circulation is growing at a CAGR of 10.21% – almost doubling during the last seven years. Notes in circulation increased by value to Rs 21.5 lakh crore (July 2019) from Rs 10.9 lakh crore (July 2012).

Consequently, the currency-to-GDP ratio went up. From a low level of 9.7% (2015-16, pre-demonetisation period), it went up to 11.91% (2016-17) and further to 12.5% during 2017-18 (this is still lesser than the 2012-2015 level). There are a few countries that have currency-to-GDP ratios above India’s level – Japan (19%), Hong Kong (15%). Besides, no specific target/limit is considered under the Vision 2021 for cash in circulation and it only expects that the spread of digital payments will reduce the demand for cash.

Individual retail electronic payment systems have accelerated, both in terms of number of transactions and increased availability. Payment systems like UPI/IMPS are likely to register average annualised growth of over 100% and NEFT at 40% over the vision period. The number of digital transactions is expected to increase more than four times from 20,690 million in December 2018 to 87,070 million in December 2021. Vision 21 can be achieved with customer friendly and affordably priced digital payment services, creating awareness among the masses, putting in place prompt complaint redressal mechanisms, cyber security, new innovations, standards prescribed for digital payment services, etc.

However, even with the growth in digital payments, consumers still carry large amounts of cash – not because of lack of confidence in digital payments services, but as a “cushion” to meet their payment requirements. Exciting experiences in digital payments are in the offing for the common man!

(The writer teaches banking at ICICI Manipal Academy, Bengaluru)