With the explosion in mobile telephony, it was often considered that mobile payments would overtake cash and card based transactions in a similar wave. With large customer and retail footprints, customer acquisition and account management expertise, competence in managing large transaction volumes, having redefined global norms of running expensive and complex networks profitably at phenomenally low billing rates and ARPUs, the mobile ecosystem appears to have the ingredients for redefining the payments space in India.
From a customer’s perspective, the omnipresence of the mobile device in her daily life coupled with her increasing familiarity and disposition towards accessing a wide bouquet of service offerings via the mobile, has made the argument even more tenable.
In the context of transactions, mobile phones have been used in a wide variety of end uses including mobile banking, fund transfers and retail payments. Several service offerings have been initiated leveraging the portability and convenience factor, spanning financial inclusion to purchasing coffee. But, very few of these initiatives have evolved scale or universal acceptance.
The reasons have been attributed to economic viability, regulatory restrictions, technology limitations and consumer apprehensions or even the absence of relevant value propositions. However, the success of mobile transactions is closely linked with a mix of factors that also determine the long-term viability of any retail electronic payment system.
Retail electronic payments refer to those transactions made by individuals for retail payments, in which there is no physical exchange of cash. Hence, payments made via debit, prepaid and credit cards or electronic fund transfers such as NEFT and RTGS would qualify. Mobile transactions would hence refer to those transactions routed via the mobile channel with funds originating from credit, debit, prepaid and bank accounts.
The 180 million debit and credit card base in India today with an estimated Rs. 80,000 crores of retail spends, is nascent yet significant in its scope and opportunity. Payment cards, largely issued by banks and financial institutions today, enable both face to face and remote transactions, having fueled the over Rs. 10,000 e-commerce market in India today.
Impact of Retail Electronic Payments
Electronic payment allow accessibility, portability, safe storage and “ownership”, providing clear audit trails, which are distinct lacunae in cash based payments. They have also provided mechanisms for recourse in case of disputes and made remote transactions a reality. In effect, they have provided a cost efficient means for transactions.
The broader impact of electronic payments lies in its influence on triggering economic growth, reducing the costs of cash management and in deterring the large grey economy (that is rumored to equal the Indian GDP).
Global studies have established that electronic payments have stimulated GDP growth in excess of over 200 basis points. Combined with the actual cost of cash management (including printing, disbursal, collection, reporting and theft), estimated to be as high as 5%, a need for a clearer and broader policy and framework to stimulate electronic payments clearly emerges in India today.
As India enters the next decade, it is faced with the challenge of sustaining and further accelerating its GDP growth. Key growth drivers include initiatives in infrastructure development, financial inclusion, micro lending to stimulate commerce and healthy retail spending within the banked and un-banked populations. The viability of initiatives as disparate as financial inclusion to transit payments hinges on efficient payment mechanisms.
The economic viability of business correspondents (BCs), driving financial inclusion today lies in their efficiencies in managing cash transactions and in stimulating usage post account opening. The NREGS, perhaps the primary stimulus today for opening bank accounts amongst the unbanked, has facilitated electronic credits to bank accounts accessible via mobile phones & smart cards, thereby reducing transmission losses. However as consumers continue to withdraw cash from BCs, the larger cost and risk of cash management prevails.
The availability of a wide-spread retail electronic payment infrastructure to these consumers would allow them to purchase goods and services with the funds credited to their bank accounts thereby reducing the need for managing cash in the system.
In the arena of infrastructure and public transport, there are already millions of prepaid instruments that have been issued to commuters to make payments on metro rail, bus services and toll roads. With a quantum growth outlined in new and modernized transport services, the volume of transactions within these operators itself is projected to exceed Rs. 100,000 crores in the next decade. With costs of cash management constantly increasing, the viability of these projects would be significantly influenced by the methods adopted for payment acceptance.
The impact of card payments on enhancing average ticket sizes, purchase of big-ticket items and catalyzing segment level spends including travel, has also been established. As banks and issuers aggressively promote card usage, consumers also see increasing value in using their card accounts. However the benefits of electronic / card payments is yet to penetrate the larger segments of retail and consumer population in India.
Dimensions & Challenges
The six key dimensions and respective challenges for a retail electronic payment system as follows:
1. Transaction Sizes : Traditional card based payment systems cater to transaction sizes in excess of Rs. 250. With over 98% of retail transactions in India being below Rs. 250, any payment system seeking to expand penetration would need to cater to this segment.
2. Banked & Unbanked : Payment cards have been primarily available to the banked population in India. The unbanked have over the last couple of years been accessing prepaid cards, though in relatively smaller proportion, to make transit payments, Internet based purchases and store level purchases. The opportunity lies in enhancing the banked penetration and in bridging transactions between the formally banked and unbanked.
3. Face to Face & Remote Payments: Card based payments have made both possible, and with the debit card base also being gradually opened for remote payments, the opportunity basket would expand multifold. But face to face payments would remain crucial. The existing card & POS based design approach would be prohibitive for low transaction sizes and volume throughputs per customer and retail outlet respectively
4. Standards & Customer Convenience: As an example, with millions of prepaid cards being issued by transit operators today, following multiple technology standards, customers would soon require to load several cards in their wallet, only to make transit related payments! Hence the need for a common set of standards to be adopted early is crucial to achieve scale and consumer usage across a wide basket of services.
5. Interoperability : If it is mandatory that both buyer and seller need to have a relationship with one bank or operator, it would typically restrict both scope and scale.
6. Transaction Costs : The key challenge for globally adopted electronic payment systems have been in the high costs of issuing plastic, transaction cost management and managing these payment acceptance networks. Coupled with settlement costs and fraud risks, these have typically been expensive and complex businesses to operate and restricted to transaction sizes only in excess of Rs. 200.
The viability of payment networks are dependent on achieving transaction volume scale. This is one of the primary reasons for the relatively low POS acceptance infrastructure in India today and hence acceptance of electronic payments.
The Road Ahead for Mobile Transactions
There have been several mobile based payment systems that have emerged across the globe over the last five years. Mpesa, in Kenya, managed by a leading mobile operator, has revolutionalized the payments and transfers market. It has however developed in an economy, where the formal banking system had marginal penetration and controls in place. Other models in the Far East and South Africa have focused on the remittances & transfers market and targeted the unbanked populations. South Korea, with a high penetration of banked and mobile populations has evolved into levels which most nations would aspire to reach in this decade.
Much has been written on the elaborate opportunity and proven impact of mobile telephony on the Indian economy, stimulating entrepreneurship and trade. However, coupled with payments and fund transfers, the mobile phone could perhaps address these challenges and provide an exponential impetus to the Indian economy in the next decade.
Growth of electronic transactions in India can follow the conventional linear path of installing POS machines and issuing cards to consumers. Alternatively there is a confluence of forces and actions that could possibly emerge to catapult electronic payments into a trajectory similar to that achieved by mobile telephony in the decade gone by.
The existing card and cheque based payment systems were designed and established in an era when the first Internet or mobile connections had not even been issued to customers. These systems had also been designed to cater to high-ticket urban purchases and related transactional costs. A lot has changed since then.
The challenge for banks, financial institutions, mobile operators and payment processors would lie in evolving a new approach to payments. The key would lie in creating an ecosystem that offers a foundation of high frequency payments including grocery, bill payments etc. with a blend of high impact transaction opportunities such as fund transfers and P2P payments. The mobile ecosystem possibly holds the key.
Potential Business Models & Their Evolution
The business models and economic value chain that could emerge for a mobile payment ecosystems would be defined by the following factors:
1. Who holds the funds?
2. Who would own the customer relationship?
3. Who would service the merchant?
4. Who would acquire the customer?
5. Who would own the brand?
6. Who would manage the core transaction system?
Reference a report published by The Mobey Forum, two broad categories of models would emerge, the first would morph from the existing bank centric business models and the second would be more “transformational” in nature.
In the bank centric models, the mobile channel would possibly play the role of carrier and user inferface as in the case of mobile banking today.
In the transformational category, there are three models that have emerged till date:
1. Partnership Model : The bank and mobile operator jointly manage the business
2. Independent Service Provider Model : wherein a non-banking or telecom entity would set up a mobile payments ecosystem &
3. Operator Centric: Wherein the mobile operator takes the lead, with the banking entity servicing evolving regulatory requirements w.r.t fund storage, clearing & settlement.
The Tipping Points for Mobile Payment System Evolution
1. Source of Funds :
The recent circulars by the RBI on prepaid cards, allowing non bank entities to create prepaid payment accounts, is a critical step in expanding the funnel of customers who can be brought into the electronic payments fold, and potentially redefining the traditional role served by banks in India.
Hence virtual mobile wallets, Internet payment accounts, potentially issued by mobile operators, manufacturers and service providers along with banks, would allow both banked and non banked customers to have a prepaid payment account. The loading via cash could be undertaken at 3rd party agent networks or the banked may choose to transfer funds from their existing banking accounts.
As open-ended prepaid cards still remain under the ambit of banks, partnerships could emerge for the creation of co-branded offerings between banks, operators and service providers.
2. Segmented Product Offerings & Value Propositions
Students, migrant workers, housewives, micro-entrepreneurs, marginal farmers and a host of other customer segments, could be targeted with well defined and positioned “packages” bundling content and services linked with mobile payment products.
Eg : For migrant workers, with limited access to the formal banking channel but high mobile penetration a suite of remittance related offerings clubbed with “safe storage” for cash is an arena that is likely to be exploited quickly
3. Use of funds :
a. Remittances & P2P Payments
As operators and other retail players seek to leverage their retail and consumer reach, they would go straight for the jugular in the estimated Rs. 20,000 crores domestic remittances market. This would be an ideal entry strategy for acquiring new and retaining large and existing customers, offering sufficient economic value propositions for the customer and retailer communities.
The first set of services have already rolled out, and several more poised to enter shortly in 2010.
The next layers of use would emerge from the balance two categories, but would take much longer to evolve.
b. Remote (Non Face to Face) Payments :
The challenge here lies more on the supply side of the equatiion. Ecommerce, conducted via pcs / laptops using browsers, has been dominated by high ticket, complex selection, high involvement items such as airline & railway ticket purchases followed by books, music, flowers etc. Hence the need to build a basket of products and services that could be seen and purchased via the mobile is crucial.
The turning point would be in making payments towards utilities, government levies and taxes in a user-friendly manner. These offer wide appeal, relevance and frequency. But the incentive to adopt a new mode would need to be substantial to move away from the confidence and habit of making cash payments. The agent would possibly hold the key here, as noticed globally as well.
c. Face to Face Payments :
The holy grail of electronic payments, would require speed, ease of use and security to converge profitably.
The battlefield is currently strewn with a myriad of acronyms and pilots. The challenge has remained in finding a solution with limited adoption or entry barriers for consumers matched with an inexpensive payment acceptance model.
A pure mobile phone transaction play, used by both consumers and merchants, as in the case of Mobipay using USSD possibly still offers a ray of hope.
The other options include NFC or issuing new contactless payment cards stuck to the mobile phone instrument, both of which would require significant investments for large roll outs.
The inflection point in this space would possibly arrive with the ability to make transit payments with your existing mobile!
4. Usability : Asking customers to remember short-codes and key words to access information and enable payments would always hinder scale. The key lies in offering a user interface with extremely low adoption barriers ( no downloads etc.), ease of use and good user experience.
Web interfaces will improve the user experience exponentially. The 3G rollout may hold the key to truly creating a payment experience that matches the classical card based payment process in time and security.
Also, access to the Internet will enable providers to offer solutions that do not depend on the security environment offered by the SIM, the heart of the mobile relationship today.
5.Payment Convergence, Standards & Interoperability : The 2007 payments bill by the RBI permitted third parties to perform clearing & settlement, opening up the field for different models to evolve.
It may take several years or decades for dominant universal standards to emerge as in the case of card and cheque payments, unless banks and operators can quickly converge organically and create a new payment association for these “new” or “alternate” payments.
This might also be a market with several closed group service offerings that co-exist and link with the existing payment franchises, bridging the banked with the unbanked, and the low ticket size with the high ticket size transaction sets.
A key turning point however could be if a third party or even the regulator were to recognize the opportunity and define a set of standards, as in the case of cheque clearing, which is then followed by all.
6. The Regulatory Opportunity
Though the government and regulator may not be in a position to directly participate in the establishment of an electronic payments infrastructure, it can play a more influential role in catalyzing and spurring innovation in new payment mechanisms including mobile-based payments.
Governments and financial regulators across the world have influenced the usage and acceptance of electronic payments with positive impact on their economies. The most influential and noteworthy has been the initiative of the South Korean government. With the primary objective of curbing the large flow of cash in the underground economy and huge losses in tax collections, consumers were incentivized with tax rebates to make purchases using cards along-with threatening retailers not accepting card payments with tax audits.
This has resulted in electronic payments in excess of over USD 250 billion (compared to around USD 18 billion in India), comprising over half of all private consumption related payments, being settled via credit card payments in South Korea. Similar incentive approaches also adopted in Argentina, Uruguay and Colombia where rebates are offered against VAT for card payments.
Hence the potential avenues for the regulator:
a. Extend the purview of electronic payments to include non bank issued accounts
Electronic payments are currently dominated by payments emerging from bank issued credit & debit cards, where the source of funds include the funds held in the bank account or credit lines extended by issuers.
With an explosion in mass transport projects spanning toll, metro, taxi and bus services, and the RBI circular of August ’09 having laid the foundation for widening the scope for issuance of prepaid instruments by non-banking entities including transit operators, service providers or even mobile operators, requires the expansion of the term electronic payments
Considering their vital role played in converting cash to an electronic mode, related cost savings and audit trails, the case for their inclusion is sound. Hence payments via multiple modes issued by non-banking entities such as transit or mobile operators should be considered for inclusion within the ambit of electronic payments.
b. Extend Tax rebates to consumers for all payments made via electronic modes
A tax rebate may be extended to consumers, proportionate to the value of electronic payments made on an annual basis. This would create a compelling and universal incentive to for migration from cash.
c. Identify focus sectors for electronic payment acceptance
Payments towards utilities, government taxes and tourism could be three sectors in which additional focus and incentives may be explored
d. Incentives to retailers and service providers accepting electronic payments
Though the South Korean and other International models have focused only on incentivizing consumers, the coupling effect of extending benefits to retailers as well would only be exponential. Tax rebates via VAT or GST could be options that could be examined.
e. Expand The Payments Ecosystem
The Reserve Bank of India has made significant strides in expanding the stakeholders that can participate in the payments ecosystem, beyond traditional banking institutions.
The regulators initiatives in opening out critical elements of the payments value chain over the last couple of years is encouraging and affirmative.
The foundation has been set for a new wave of payment systems to emerge and grow in India. As India enters the new decade, the 180 million cards and 500 + mobile phone connections offers a unique opportunity to mould the payments landscape and stimulate growth. A greater focus and stimulus at this juncture would only provide a stronger platform to fuel growth in the formal economy in the next decade.