Ringside view – Key trends in the digital payments space
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The digital payments space in India has considerably evolved over the years. In the initial phase, the focus was on moving away from cash, enabling ease of transactions and a seamless payment experience. This was followed by the entry of multiple players that led to the launch of innovative payment products like Buy-Now-Pay-Later beyond the traditional card-based system. The current wave is geared towards driving growth through automated value-driven offerings with a customer-centric approach namely biller services, payment reminders and data analytics with detailed information of spending patterns, outstanding dues and merchants accepting payment modes.
Innovations take center stage
According to a KPMG report, the digital payments market in India valued at INR 1638.49 trillion in 2019 is expected to jump to INR 4323.63 trillion in 2024, clocking a CAGR of 22% (FY20-2024). In a survey conducted based on criteria namely 24*7 continuous service availability, higher acceptance levels and speed of completion of transactions, India was found to have a better digital payments framework and outperformed 25 nations including Japan, China and UK. The key drivers are the Government’s digital thrust – be it Digital India or making it compulsory for business enterprises with turnover exceeding INR 50 cr to transact via electronic payment modes and the deep technology integration amongst the relatively young population comprising mobile-friendly, internet-savvy digitally inclined consumers, that are naturally inclined towards digital payment modes over cash. Digital payments are witnessing innovation both by way of products as well as infrastructure, largely driven by technology. We shall look at some of the key trends that are making waves in the digital payments space in India.
1. Contactless payments are expected to gain traction in the coming days
i. Contactless payments across multiple merchants enabled through Buy-Now Pay-Later via an OTP-based registration is a key product offering.
ii. For transactions through a POS machine based on the tap and go concept – this is facilitated through Near Field Communication (NFC) along with Magnetic Secure transmission technology that enables contactless payments. The transaction limit is expected to be enhanced from INR 2000 to INR 5000. A PwC study indicates that currently, 20% of PoS terminals have an NFC feature.
2. Multiple options in payment gateways
Merchants and e-commerce players have rolled-out multiple payment modes for end-customers with the need to do away with remembering passwords for Internet Banking or card authentication details. For example, Simpl’s BNPL feature approves purchases carried out by customers across multiple merchants based on the customer-specific pre-determined credit limit. Thus, merchants are able to conveniently carry out voluminous transactions in a safe manner with assured payments.
3. Pre-paid payment options
Pre-paid modes can mitigate the risk of absolute monetary loss and curtail overspending by limiting the liability to a pre-set limit. Prepaid modes include cards that are loaded with a certain amount that may be utilized towards purchases made online or at retail points. However, often customers find carrying cards to be a hassle. An Infosys report reveals that 52% of Gen Z and 60% of millennials are keen to explore payment methods other than cards to finance e-commerce transactions. Alternative POS financing options like Buy Now Pay Later(BNPL) is a more viable option, without the need to carry multiple cards. An IBIS study estimates that the BNPL industry will grow at a CAGR of 9.8% between FY2020-25 to touch $1.1Bn. Simpl’s BNPL option offers a pre-determined amount of credit to select loyal customers of our partner merchants. Simpl’s AI-ML based credit-decisioning tools allocate credit limits to customers based on past spending patterns, prompt payment track record, and other risk factors.
4. Tightening of security controls
With digital payments emerging as the preferred payment mode, the risk of security breaches and cyber threats including loss of confidential data has heightened. Accordingly, RBI has issued several prudential norms aimed at enhancing the security of the digital payments ecosystem.
5. Merchant focus
Along with a customer-focus, it is expected that several industry incumbents would focus on providing a suite of product extensions for merchants, namely customer relationship management, data analytics related to customer spending patterns and purchase behavior, credit facility, budgeting tools, and similar services. These would help merchants, especially SMEs to better manage their inventories and working capital.
6. Technology is the enabler
Payments have transitioned from a deferred system to a real-time settlement mechanism. A report by Infosys pegs the number of real-time payment schemes globally at 54.
7.Robust credit risk management
Mitigation of credit risk would be a key differentiator and factor impacting competitive advantage, especially for credit-backed payment modes like BNPL. Simpl applies advanced analytics and machine learning, along with credit history, private data, and publicly available data towards credit decisions, eliminating human bias. This results in improved credit risk assessment, access to quality customers, and enhances customer satisfaction.
8. Sound- wave-based payments
Another upcoming trend is the use of ultrasound waves to process contactless payments with details of merchant name, transaction amount, and account number being transmitted via a mobile phone to a tag or similar software at the merchant’s end.
9. Wearables-driven payments
This entails a customer can carry out a purchase transaction through a smartwatch or band, as against a mobile phone. The devices have the payment details ingrained in the system and work along similar lines as near-field communication technology.
A survey conducted by KPMG and ET in 2020 reveals interesting trends related to digital payments:
An RBI report opines that digital payments exceeded 200 billion transactions per year in India registering a CAGR of 11% in the last 5 years until 2020. The digital payments space is expected to witness several changes attuned to the interests of customers, merchants, and ecosystem players towards rationalization of costs, giving priority to convenience, ensuring a secure framework for all participants, and building trust between customers and merchants.
*Simpl is a convenience and trust-building feature that merchants offer to their best customers. This builds loyalty and trust along the way, functioning as a powerful tool for building a strong relationship between merchants and consumers.