I made my first visit to China a couple of months ago on business. The couple of weeks I spent there were an eye-opener for me and helped me understand the country and its unique economy and people better.
I went to a local flea market one day after work, to pick up souvenirs for folks back at home. Not once did I have to take out my wallet to pay the local vendors. All I had to do was scan a QR code or barcode with my smartphone and I was set. Everybody accepted WeChat Pay or Alipay, and I was surprised at how deep the technology has penetrated within the population. The smallest of vendors transact digitally, via smartphones.
The economies of scale that China derives from the high penetration of the internet, forms the base for the advanced payments technology.
To put this in perspective, China is a 1.3-billion-people economy with 668 million active internet users and 594 million mobile internet users. The digital payments revolution in China happened way before the rest of the world.
The economies of scale that China derives from the high penetration of the internet, forms the base for the advanced payments technology. The high level of digital literacy in turn, has supported this move. These factors and developments come together to make China the largest e-commerce market in the world, with average annual sales of $672 billion. China's dominance in smartphone and electronics manufacturing has contributed to this digital payments revolution. Local manufacturing of course makes the ecosystem more conducive than any other place globally, by reducing barriers for all stakeholders—from payment service providers to consumers. Therefore, it is not surprising that the volume of mobile payments in China is a whopping 50 times that of the US and the mobile transaction volume is expected to exceed $22 trillion in 2017!
How mobile payments work in China
Speaking to business partners, friends and the people I met during my travels, I figured that the cost of mobile payments is pretty low in the country. The average transaction cost is about 0.2%. This is probably attributable to the low interchange network fees. Having a homegrown network like UnionPay makes it possible. Also, people are more comfortable keeping their money in wallets. This provides great incentive to merchants to accept digital wallet payments. Low TDR rates for merchants and access to smartphones for consumers makes China a happy, open and potent breeding ground for mobile payments.
China's early adoption of digital payments has created a huge opportunity for the global fintech industry. It is no surprise that everybody wants a slice of the Chinese pie. UnionPay is now accepted in about 150 countries around the world. While it may not be the go-to payments processor, its reach is wide and is reflective of China's expanding economy.
China vs. India
The steady growth that China has made in the digital payments space serves as a lesson for India. India too has a large population and a government that is rooting for digitalisation on several fronts, especially banking and finance. Our country, as of today, is teeming with opportunity.
I recently paid a momo-seller on the street via my smartphone. For a moment, I was taken back to my days in China.
The recent demonetisation exercise brought the focus of the discourse to the need for improving the digital payments ecosystem in the country. We are seeing banks and other financial institutions seriously examine how they can move towards a lighter and friendlier mobile-based interface. Digital payments saw a sharp spike of up to 300%. Wallet usage went up significantly, making way for more PPIs (Prepaid Payment Instruments), as more people shopped online and used digital wallets to pay utility bills and transfer money online. Card usage also shot up by 50%. However, when compared with the number of internet users in the country (440 million), India still has a long way to go.
The scope for improvement is huge
About 60% of urban India and 17% of rural India is online. The number of smartphone users in India is upwards of 22 crore. The government has been working on laying the foundations for digital payments. The launch of BHIM app, UPI and Bharat QR are just initial steps to simplifying payments in the country. The introduction of programs like the Pradhan Mantri Digital Saksharta Abhiyaan (PMGDISHA), which aims to educate six crore rural households about the digital ecosystem, is also encouraging. The National Payments Corporation of India (NPCI) and RBI have also joined hands to promote digital payments, and as a result, e-wallets will soon become interoperable.
We are also seeing a whole lot of innovation from startups in the fintech space. For example, Flipkart's PhonePe app uses UPI to enable payments. There is also Zeta Pay that allows you to pay via instant generated codes—no remembering complex PINs or punching in OTPs. There's been considerable buzz about WhatsApp and Hike payments, which could be powered by UPI too. Essentially, it is possible today in India to make payments while chatting with your friend on the app, without having to open another e-wallet or bank app on your smartphone.
The core idea is to create and keep adding value that doesn't end with building a payments system. Having something more to offer is an attractive proposition. India should definitely take a leaf out of China's digital payments book, not only because we are similar in scale but also because the technology is available and is becoming cheaper by the day. I recently paid a momo-seller on the street via my smartphone. I punched his phone number and transferred the money. For a moment, I was taken back to my days in China.