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How India is outpacing the world in digital payments

Jun 03, 2022

NEW DELHI: The value of digital payments in India will grow three-fold to touch $1 trillion by financial year 2026 compared to $300 billion in financial year 2021 thanks to the government's initiative to increase financial access by combining no-frill bank accounts, the Aadhaar card and mobile connection, according to a report by CLSA. 

"UPI comprises 60% of total payments by volume and digital payments have risen from $61bn in FY16 to $300bn as of FY21. Given increasing online purchases and digital adoption, we expect this to grow to US$0.9-1tn by FY26, or 30% of Indian consumption," said the report. 

Since its inception in 2016, the value of monthly UPI transactions took four years to cross the Rs 3-lakh-crore mark in September 2020. And in a year, it more than doubled to Rs 7 lakh crore. 

Cheap internet data, high smartphone penetration and India’s biometric identity card fuelled the rapid scale up of online payment systems over mobile platforms, said the report. 

Currently, 250 banks are live UPI members, which means they allow interbank fund transfers using UPI. There are over 50 UPI apps with, Phone Pe leading the space. UPI is the single largest retail payment system in the country in terms of volume of transactions (14 crore transactions per day, October 2021), and one of the initial objectives of UPI was to replace cash for low-value transactions. 

Transaction data analysis shows that 50 per cent of transactions through UPI were below Rs 200. The RBI has proposed to offer a simpler process flow by enabling small value transactions through an 'On-device' wallet in UPI app, which will conserve banks' system resources, without any change in the transaction experience for the user. 

India has outpaced the world in digital payments 

The country registered over 25.5 billion real-time payment transactions in 2020 - the highest in the world and 60% higher than China. 

UPI transactions almost equalled all debit and credit card transactions

In the overall value of payments made to merchants, UPI transactions almost equalled the debit and credit card transactions. According to CLSA estimates based on transactions in the first half of FY22, UPI transactions at $187 billion are close to surpass $83-billion debit card transactions and $102-billion credit card transactions. 

UPI transactions have recently increased to $16bn monthly, which is almost equal to merchant payments that happen through debit and credit cards together

Google Pay and PhonePe dominate the UPI App market share

Fintech players such as Paytm, Phonepe and Google Pay have built dominant market shares in UPI payments, which are clearly on the rise and have already surpassed other payments forms like credit cards and debit cards. In fact, Paytm, Phonepe and Google Pay have been active on both the issuing and acquiring sides. As a result, they have built strong customer and merchant bases. In some cases, the number of users materially exceed the customer base of large banks. 

However, UPI payments are not profitable as UPI payments is free of charge while there is a merchant discount rate on debit/credit cards and POS/ gateways companies also charge a fees for the service, which is why UPI-based issuers and super apps are now diversifying into being full financial service platforms including lending, distribution and non-financial related services as they intend to capitalise on large customer/merchant base they have built. Examples include Paytm, Phone Pe, Mobiwilk, Google Pay, Bharat Pe, Pine Labs, RazorPay and CRED. 

With the substantial rise in UPI volume, CLSA estimates that digital payments (debit cards + credit cards + UPI) from consumers to merchants increased from 5% in FY16 to more than 15% in FY21 and is likely to cross 20% in FY22. 

Around 47 per cent of all payments by customers in FY22 are estimated to be made through UPI, and only 6 percent through mobile wallets. 

CLSA expects that in FY26, around 44 percent of payments will be accepted through payment gateways and aggregators, followed by 34 percent through QR Codes and 22 percent through Point of Sales (PoS) machines. 

BNPL market to grow 10%

Currently, at $15-20 billion, buy now pay later (BNPL), equated monthly instalment (EMI) and purchase lending represent just 5-6% of digital payments. CLSA expects this market to jump five fold to touch $100 billion by FY26, or 10 per cent of all digital paymnents.

Remind me, what is BNPL again?

 Buy-Now-Pay-Later (BNPL) is a short-term micro credit model, where consumers have to pay little to no interest for online and offline purchases. BNPL start-ups are tying up with food delivery companies, travel booking players as well as grocery and other essential delivery platforms. There are two types of BNPL products offered:

A deferred payment model wherein the customer has to repay the amount after 14-30 days. These are typically smaller-ticket loans offered for convenience of payments to low-risk customers. 

A Regular EMI model with a tenure of a few months. This may or may not be zerocost. 

CLSA said that affordability-enhancing features and ready availability of credit will help fintechs to stay at the forefront of growth in personal loans in India. Fintechs in the digital BNPL space include Simpl, ZestMoney, PayU’s LazyPay, Capital Float and Mobikwik Zip. 

Interestingly, India is ahead of the global average in usage of BNPL in ecommerce purchases (3% share vs global average of 2.1%) 

As per industry estimates by Redseer, only 10-15 million people in India have availed of BNPL credit from digital-only players. In FY21, disbursements by such players amounted to $3.5 billion, representing 5% of total online sales in India. This market can grow to 10% of total online sales over the next five years. As per Lizzie Chapman, co-founder and CEO of ZestMoney, India will be the largest BNPL market in the world. 

Over FY18-1HFY22, BNPL companies raised nearly $2.6 billion in equity funding. Additionally, ZestMoney and Capital Float raised $50 million each while ePayLater raised $10 million in Sep 2021. 

Loan size

 As per a CIBIL report, 97% of disbursements by fintechs in 2020 were of a ticket size less than Rs 25,000, as compared to 60%/16% for NBFCs/Private Banks. This is because a typical BNPL customer is younger and of a lower earning capacity. Secondly, shorter duration of loans implies that the ticket size has to be smaller to keep EMI relatively comfortable.

“With the rapid expansion, small-ticket personal loans contribute 60 percent of the overall personal loan volumes, while fintechs contribute 45 percent by number. More than 70 percent of personal loans are originated outside tier-1 cities,” CLSA said.  

India is evolving into one of the world’s largest fintech markets and is ranked No.4 in number of fintech unicorns valued at $50 billion. "While many factors are contributing to the nation’s digital successes, we believe the role of the government, regulators and industry bodies in developing the India Stack provided the foundation for rapid digitisation and innovation," said CLSA. 

India currently has 14 fintech unicorns; 6 of top 8 are payment companies

CLSA sees fintechs leading the expansion of the credit market in India and driving penetration with a 50 to 60 percent share of new to credit and sub-prime customers. 

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