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Cashless India: Counting down to a digital revolution.

Summary: The story of India's digital payments revolution has an unlikely hero -- its government

Nilang Mehta, Special to Gulf News

With guidance from the Reserve Bank of India and supported by the spirit of national service among private technocrats, India's political leadership has leapfrogged the country's digital payments landscape in recent years. Governments in the developing world are usually associated with bureaucratic red tape, and rarely with spearheading major technological innovations, making this achievement particularly noteworthy.

The National Payment Corporation of India (NPCI) was set up by the government nearly a decade ago as an umbrella institution for all the retail payment systems in the country, with the core objective of consolidating and integrating multiple systems into a standard platform.

Where there's a will, there's a way to pay

By 2022, India will have world's second largest mobile, smart phone and internet user base, which makes this an ideal time to speed up penetration of ecommerce and adoption of digital payments. But with cash usage at around 80%1, compared with 20-25%1 in developed countries and 50%1 in China, the concept of a "cashless" economy may seem more than a tad unrealistic at this point. Other impediments include low penetration of smart phones, patchy internet coverage and relatively high cost of digital transactions.

But the NPCI has developed innovative solutions that can work around some of these challenges, such as facilitating digital payments using basic mobile phones without any internet connection to overcome the issue of relatively low smartphone and internet penetration. It also created Unified Payment Interface (UPI), an integrated open architecture system that allows peer-to-peer, person-to-merchant and business-to-business payments using a basic mobile phone, making it the most revolutionary development we have seen in the global payment landscape.

However, it is still challenging to scale up usage to cover a sizeable portion of India's vast populace. Cue Aadhaar-Enabled Payment System (AEPS), which in our opinion, is likely to emerge the biggest game changer in India's digital payments revolution. The AEPS is equipped to overcome the dual challenge of a payer without a mobile phone and a merchant who does have a point-of-sale terminal. A regular smart phone at the merchants' end can be transformed into a fingerprint and iris scanner by attaching a $10 digital reader, and the payer can use his biometric ID, which is linked to his/her bank account, to make the payment. We have dubbed this "Aadhaar Pay" - a uniquely Indian solution to address uniquely Indian challenges.

Cashless revolution catalysed by currency ban

Though India has traditionally been a cash-driven economy, there is a gradual but significant change under way. Cash payments, which had accounted for 92%1 of the total payments in 2005, declined to 78%1 by 2015 - a decline of around one percentage point each year. Digital payments got a big boost last year when the Indian government demonetised its high value currency notes representing 12%2 of GDP and 86%2 of currency (by value) in circulation. This one action forced a large percentage of the population to adopt digital modes of payment while they waited for new notes to hit their banks and cash machines.

During this period, the government was able to leverage on the UPI backbone, and launch its own unique payments application called Bharat Interface for Money (BHIM) which enabled instantaneous, one-click transfer of funds for anyone with a bank account and a mobile phone. In June 2017, the BHIM app scaled 16 million3 downloads, and government has set itself an ambitious target of 400 million3 downloads by March 2018.

More 'likes' and followers

Unsurprisingly, India's digital payment space has lured in global players, with China's Alibaba pairing up with leading mobile wallet company Paytm, and more recently, both Facebook and Google trying to piggyback on UPI to integrate payment services into the WhatsApp messenger and various Google applications. WhatsApp had over 200 million subscribers in India as of early 2017, while nine out of ten smartphones sold in the country operate on Google's Android system, so the entry of these companies could be a big catalyst for the digital payments revolution.

As India makes bigger strides towards digitalisation, there would be less friction in executing transactions, more transparency and more digital footprints. The cost of cash to the Indian economy is estimated at around 1.7%4 of GDP. With increased adoption of digital payments, over the long run, this cost will come down. We also expect businesses and individuals to benefit from their digital footprint as financial services companies use this consumer behaviour and demand data to understand their customers and improve their access to finance at a reasonable cost.

India has begun its countdown to a digital payments revolution, and given its size, economic growth trajectory and the government's commitment to this initiative, this may be a story worth clicking into.

- Nilang Mehta is Portfolio Manager, Indian equity, HSBC Global Asset Management

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Publication:Gulf News (United Arab Emirates)
Geographic Code:9INDI
Date:Nov 7, 2017
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