27/02/2016 8:14 AM IST | Updated 15/07/2016 8:26 AM IST

Budget 2016: Are New Digital Payment Forms Getting Left Out?


The year 2016 comes with great expectations for the evolving payments industry. A 40% quantum increase in the number of banks that will now operate in India has seen the birth of 23 new banks, all expected to start operations within 2016. There are more than 40 digital wallets and numerous PPI providers giving the consumer many choices as well as more products and services in the market. From the looks of things, 2015 was simply the curtain raiser while 2016 is when it will all translate to action on the ground.

Slowly but surely, there is a cashless and digital payments revolution underway in India and it deserves a lot more attention than it is currently getting. With the recent Supreme Court ruling, Aadhaar cards will be used in more schemes and will play a major role in financial inclusion. The Department of Post which has now obtained a license to open its payments bank, has an almost unrivalled reach across the length and breadth of the country, and could be the game changer.

The credit card has been around for a long time but is still struggling with penetration. Yet, newfangled services like mobile payments... have been welcomed...

In India, the credit card, a physical payment product, has been around for a long time but is still struggling with penetration. Yet, intangible newfangled services like mobile payments, digital wallets and payment apps have been welcomed with open arms, fast gaining popularity across demographic segments. Usage is innovative, ranging from in-app purchases to taxi fares, ticket booking and slowly P2P transfers.

There are two facets to be understood here.

• One, as opposed to credit cards, all these new services are debit instruments. Also, the number of debit cards has grown by leaps and bounds due to the PMJDY (Prime Minister Jan Dhan Yojana). As per Worldline data, debit cards have grown over the last three years to contribute to more than 57% of transactions at POS.

• Two, using these intangible services requires a sense of security. This is bolstered by the two-factor authentication diktat, due to which a user knows that every transaction from his wallet has to be authenticated by him. Until some years ago, credit cards did not even need a PIN which adds to the scepticism. All this points to a "pro-debit" attitude and behavior of the consumer. Hence credit cards, conventional in the West, may not be the right way to digitize India; debit cards and other debit-based instruments definitely seem the right path to walk down.

The government will be making a smart move by incentivizing card payments.

Taking cognizance of this phenomenon, the government is designing initiatives that will help people reap the maximum benefits. Focus on last-mile delivery in rural and urban areas, DBT (direct benefit transfers) and other G2P payments, withdrawal through POS etc. are all steps in the financial inclusion direction. This year has started off on a positive note with the government's plan to equip six lakh villages with 20 lakh POS terminals. Retail stores, fair price shops and post offices will be equipped to facilitate digital payments for small towns and villages. Currently India's bank branches, a little over 100,000, and close to 2.5 lakh banking correspondents (BC) are not enough to fill the gap, providing room for expansion and reach of core digital banking and payment services. There will be long-term benefits of reduced dependence on cash and curtailed black money generation. However, the most anticipated announcements are those expected in the Budget of FY 2016-17.

Anything new is best adopted when there is a reward attached. The government will be making a smart move by incentivizing card payments. Going by what is expected in the Budget, if merchants have at least 50% digital transactions, they could get a VAT rebate of 1-2%. Convenience fees might also be removed, which deals with the problem of merchants passing on the burden of MDR to customers. For customers, transaction limits might be increased and rebates may be expected.

The rise of cashless payments will tackle the hidden costs of cash. The industry will also benefit from higher investments in developing innovative systems and the emergence of more service providers. These steps will encourage customers to opt for card transactions at merchant outlets and is a welcome move indeed. But are these incentives a short-term measure to kick start the use of cards in rural India, after the success of the PMJDY?

Incentives should not be limited to physical manifestations but must benefit all form factors of cashless payments.

A closer look reveals that the proposition is limited to only card transactions as of now. Cashless transactions are not merely card payments but extend to the entire gamut of digital payments i.e. mobile payments, internet payments, mobile banking, wallet payments etc. used today.

Incentives should not be limited to physical manifestations but must benefit all form factors of cashless payments. If a traditional brick-and-mortar retailer creates a website and begins selling online, the same rebates should apply to payments made there. Also, the incentives must ideally cover all forms of electronic payments - through cards, wallets, PC, mobile POS, internet payment gateways etc. Though the upcoming Budget makes provisions for penetration of plastic payments, the benefits for other forms of e-payments like wallets, mobile etc. is unclear. To encourage cashless payments, it needs to go beyond cards. Worldline, for instance, provides SMS invoicing where a retailer can send the customer an SMS invoice with a link, which the latter then pays through. Such payments should also qualify for benefits.

Tax benefits are the proverbial carrot to make the transition from a heavily cash-led economy to a digital India. Even in urban areas, it encourages new influential segments like young adults, homemakers and dependents to shift from cash. A good starting point would be small value purchases, like we saw with mobile recharges which heralded the beginning of digital retail payments. Soon customer bases and transaction volume and value will grow, making it a successful initiative. However, it would be wise to reserve one's optimism till such incentives cover more than physical card payments.

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