Mobile payments are a top investment priority for banks. In fact, the world’s biggest banks continue to focus most of their announced IT initiatives on mobile financial services (including payments) and online banking. Mobile wallet providers are emerging as mini banking institutions and it won’t be surprising if they start providing banking solutions in the near future. E-wallets or M-wallets have been around for some time and their popularity is rising exponentially. A decision to scrap Rs.500 & Rs.1000 denomination notes and a friend of mine who is living ‘cashless’ (in India!) from more than 200 days grabbed my attention towards this topic and I decided to dig more into this phenomenon.
Cost of Using Cash
The median life span of a note across all denominations is about 3.6 years. As a result, roughly one-third of the current currency stock of 83.6 billion pieces gets replaced every year at a huge national cost. In 2014-15, the Reserve Bank reportedly spent ₹38.6 billion to print 23 billion currency notes across all denominations, entailing an average cost of ₹ 1.7 per piece.
Current Situation in Metro Cities
The four metros—Delhi, Mumbai, Kolkata and Chennai—contribute about 60% of the total digital payment gateway market size, followed by Bangalore, Hyderabad, Ahmedabad, Pune which together contributed 25% in 2013. Many companies have started offering their own wallet service, M-wallet companies are doing tie ups with different service providers. Paytm has already partnered with retail chain of Aditya Birla Group, MORE and is planning to partner organized retail chains, local kirana shops and create app-cash points. MobiKwik has also tied up with Big Bazaar and Sagar Ratna franchises enabling mobile payments. Freecharge and Oxigen are also aggressively trying to attract more customers
Types of Wallets
As per the RBI, there are three kinds of e-wallets—closed, semi-closed and open.
- Closed wallet-
A closed wallet is one that a company issues to its consumers for in-house goods and services only. Several portals such as Flipkart, Jabong and MakeMyTrip offer such closed wallets. It is basically an account where money gets credited in case of a refund due to cancellation or return.
Firms such as MobiKwik, PayU and Paytm offer semi-closed wallets. As per the RBI, a semi-closed wallet can be used for goods and services, including financial services, at select merchant locations or establishments that have a contract with the issuing company to accept these payment instruments. Semi-closed wallets do not permit cash withdrawal or redemption by the holder as well.
- Open wallet-
Open wallets can be used for purchase of goods and services, including financial services such as funds transfer at merchant locations or point of sale terminals that accept cards, and also cash withdrawals at automated teller machines or business correspondents. These kinds of wallets can only be issued by banks.
Utility of Cashless Services in Mass Transit
We can realise the potential of cashless transactions even if we just think about commuters using local trains in Mumbai. Mumbai Suburban Railway carries 7.5 million commuters daily with an approximate annual ridership of 2.64 billion. It’s that anchor solution which can trigger (being an utility item that touches Mumbaikars’ life daily) a cashless wave in Mumbai. Currently, we can buy train tickets using UTS payment gateway but it is a very tedious process. It should be like IRCTC, which allows us to pay through Paytm. Just think of how transformative it will be if the UI-UX is aligned with the current best-in-class apps. It will not just do away with the queue at ticket counter but also save approximately 300 million sheets of paper, leading to a cleaner railway station and contributing a bit to Swachh Bharat Abhiyan (Clean India Mission).
We can learn from some global success stories of Mass Transit Solutions-
- Octopus card system: More than 20 million cards in circulation, nearly three times the population of Hong Kong. The cards are used by 95% of the population of Hong Kong aged 16 to 65, generating over 12 million daily transactions worth a total over HK $ 130 million.
- Oyster (London): Latest figures (2015) 56.5 million cards issued till date.
Impact on Underground/Black Economy
Digitising payments and moving to a ‘less-cash’ society will bring a lot of benefits to the economy. Estimates of the size of black economy range from 30 % to 75 % of GDP. Just imagine the tax revenue and productive usage this money generated can be submitted. If even 25% ($550 B) of this is brought into the tax net, it has a potential (purely on account of blended tax income of $ 75-80 B) to bring millions above the poverty line. The flagship government schemes like NREGA, NRHM can be funded for over next 10 years by just 1 year of tax revenue generated from this initiative. Getting rid of the black economy will be one of the true manifestations of Swachh Bharat Abhiyan.
6 Thinking Hats
|-Out of a world population of 7 billion, over 5 billion or 70% have a mobile phone, whereas only 2 billion or 30% have a bank account
-90 Cr people in India are yet to shift from cash to digital
– In India out of 1.2 billion over 800 million have a mobile phone and only 250 million have a bank account. Consumers are increasingly using their mobile phones to make payments
-Wallet payment will bring ease and transparency in transactions
– The market for payments made through digital media has grown at a compounded annual growth rate (CAGR) of 10% between 2010 and 2013
-As per World Bank estimates, only 35% of the Indian population has accounts with financial institutions.
|-It will be interesting to observe how many of independent wallet companies survive when the day to reap benefits of this transition will come.
-Retail kirana merchants have multiple questions to solve before embarking on this journey- Will it increase footfall? Will it increase more consumption from same consumer? What is the tax implication? Are the above benefits good enough to overlook tax cost?
– None of the current digital cash options are cost effective (Cost of Transaction + Cost of Instrument) enough to work with street vendors.
|– Not everything associated with a cashless environment is perfect. For e.g
-In India, debit and ATM cards are primarily used to withdraw money. RBI data for the year 2013 indicated that the use of debit cards at merchant outlets was less than 5% in terms of value transacted. Even to pay utility bills, the majority still withdraws cash rather than paying through net banking. People still want to hold and pay cash
Some obstacles in making the transactions cashless are-
-Older generation is not quite tech savvy
|– The latest Moody’s Analytics Report estimates that increased usage of electronic payment methods have added $ 6.08 bn to India’s GDP between 2011-2015, adding 3.36 lakh jobs in the same period
– As per Economic Survey released in Feb 2016, govt. provides approx. ₹ 3.7 lakh cr in subsidy via various programs like fertilizer, food, kerosene, diesel etc. And the survey further builds that a large percentage of this does not go to the beneficiary. This can be arrested if such wallets are linke with Aadhar card.
– Cost of Cash: With 76.5 B (2012-13 RBI data) pieces of currency in circulation, the operational cost of managing currency operations (to RBI and banks) is $ 3.5 B. Think of the need to re-issue currency due to wear and tear. However, even bigger is the loss on account of dead cash lying in wallets rather than in an income generating instruments. There is an additional cost in terms of time and effort submitted to withdraw cash. It further places the disproportionate burden on poor due to lack of places to keep and save it securely for future.
|-Linking Aadhar card to bank accounts with such wallets will make things easier
– Strong IT system and support from government to M-wallet startups will help India become cashless economy (or ‘less-cash’ economy)
– Investment in infrastructure and willingness of corporate is required for speedy and uninterrupted internet connection
|-Government can offer some tax incentive for consumers to pay digitally and outlets to accept digitally
– Mandating all government departments retail consumer payments using cashless means
-There is need to build segment specific use cases like transit, small business payments, P2P payments and then over the period of time making it Omnibus
India will require a significant amount of patience, investment and resource commitment to build digital payment use case, in collaboration with the private sector to support initiatives towards development of acceptance network. The belief is that the system will evolve in such a manner that it will have a robust business continuity and consumer grievance redressal plans to ensure that the benefits outweigh the not-so-gilded impacts. The government is already encouraging electronic payments acceptance both at consumer and merchant level as cited in recent white papers on the subject. Considering the pace of technology adoption, I hope that the goal is attained soon.
(Sources– TEDx, The Financial Express, The Hindu Business line, The Hindu, LinkedIn articles, Wikipedia)