Innovative solutions to digitize payments in India

Aabhas Aeran Manjot Singh Saini Mukesh Ranjan Team Name: Forerunners XLRI, Jamshedpur

Cash Trends

Characteristics of Rural market

Rural Character

istics

Informal channels preferred

Low value

transactionsLess

comfortable with digital

transactions

Inadequate digital infrastruc

ture

Low literacy levels Identification of root causes for low adoption of Digital payment solutions

•Non-acceptance of E-payments•Lack of awareness•Low utilization, not pull product

0 1000 2000 3000 4000 5000 6000 7000 8000 90000

0.5

1

1.5

2

2.5

3Fruits and vegetables

Milk and milk products

Processed foods

Durable goods

Clothing and footwear

Personal care toiletries and Sundries

Tobacco

Market Size: INR Billions

Non

-cas

h Ex

pend

iture

per

-ce

ntag

e of

tota

l in

Urba

n re

-gi

ons

Opportunities for improvement

•low volume transactions•Use for Elders and women•Security and scalability

Demand side challenges Supply side challenges Key requirements

•Restricted to G2P market•Absence of wide agent networks •Technology adoption barriers

Cashless solutions are much less in high value sectors of Fruits and vegetables and processed food

Industry Trends and Adoption Challenges

Only 3.6% of households make cashless transactions. The share of Urban region is 11% while rural figure is 0.43%

The top 5 items with the highest non-cash component are rent( 11%) Electricity, clothing and footwear, Education, Beverages

Cashless penetration is greater in services sector than in physical goods

Industry wise Penetration

Sources: Cash Trends-Road to less-cash, Research report by VISA and IMAI Industry Data: Euro monitor, IBEF reportsAppendix 1 for data

Offline Mobile Payment Solutions-C2C and C2B Transactions

What is mobile payment?- Payment services under financial regulation via a

mobile device.- Being adopted all over the world in different forms- Existing forms as mobile money, m-wallet, m-paisa

etc.

Why will this work ?- The reach of mobile >>> other other digital mediums

An integrated mobile and Bank account - Real time interlinking of the bank and mobile accounts based on customers/retailers choice- Day to day transactions via mobile - The B2B or other higher amount transactions via internet banking or credit/debit cards.

Benefits

Benefits

Mobile Wallet

Bank linked Component Directly linked to Bank via 3rd

mobile operators

Cash like Component (with upper limits)

Same as Cash (Digital Cash)No 3rd party involvement

during transaction

Payment Options• Net banking• NFC

Payment Options• NFC• Bluetooth• SMS Payment• M-Payments

Instant Money Transfer

Sense of Owner-

ship

Money Flow using Cash like component

of wallet

Money Transfer from bank account to bank linked component of mobile wallet via 3rd party (mobile operator)

Internal transfer from bank component to cash component of wallet by customer as per his choice

Payment to store from cash like component of wallet and recharging it using bank linked component from bank account

Existing models

Mobile WalletSMS paymentsDirect mobile billing

NFCNet Banking Card Payment

Simultaneous Linking & Delinking of Mobile & Bank Accounts

Easy Recharge Cards – Inclusion of children, women, less educated and old people

Solution Proposed

Mechanism

Key Benefits

Challenges and Risks

Back ground

Moving towards cashless society will be difficult unless solutions for all the user segments will exist simultaneously.

Only 1 or 2 members in a family are cardholders

The rest mainly transact in cash for daily expenses

Easy recharge cards ( similar to metro cards) of low value(Rs. 500-2000) to be issued by banks. These cards can be recharged online or on recharge shops.

A modern form of pocket money ,would help in inculcating cashless mindset

Involved in low value transactions for daily shopping, where debit/credit are inappropriate

Good spending power. Cards would reduce the risk of losing money

Earn and spend in small amount. Do not want to link bank accounts with mobile or use cards

Bank issues easy recharge

cards at nominal charges

Recharges it online or at retail shops and gives to family users

Payment at POS at retail shops. Would work with normal Debit/credit swipe machines or easy to use touch and pay machines

Online or physical relinquishment of cards with money transferred to bank account

Infrastructure requirement

Bank Accounts The final user does not needs to have a bank account. Even if one of his relatives has, cards can be used by him on issuance

Installation of card readers or touch and pay solutions at low value shops.(Grocery stores, Mom and pop retail outlets)

Loss of cards•Can be linked to a pass-code generated by the card issuer•Less quantum of loss since low value with an upper limit

Recharge Points Can be online or facility can be provided at retail outlets by providing cash or Bank account No with a OTP password

Finding opportunities in B2B space

Share Estimates of B2B Spend Value

Source for graph: Bank for International Settlements Data, MasterCard Advisor Estimates(Data)Appendix 1 for a comparison of B2B with P2P

B2B payments Environment-Where does cash comes into picture

Cash accounts for only 4% (global scale) of B2B transactions, while check payments for more than 23%. This shows that the usage of cash in B2B segment is very less

Drawbacks of Existing System

Solution

Success Factors

Small sized Contractors, Vendors or other partners

Business The employees of contractors, vendors

While the B2B transactions for small sized partners are cashless(mainly checks), the final payments done by these contractors(or partners ) to their employees are mostly in cash

Cash-less (through online accounts or checks)

Mainly in cash

Business Small sized partnersEmployees of Contractors

The business splits the amount transferred into 2 parts

Only account transferable-No cash

Cashable part Can be withdrawn by contractors

Transferred to Aadhar linked bank accounts of employees

Cashless

Corruption

Low utilization of Bank

accounts

Cash Promotion

The contractors tend to charge more money from Businesses or Government organizations, but pay less to employeesThe contract employees mainly belong to low income group. Since they receive their final income in cash(which is meager), it leads to less utilization of their bank accounts

It renders the financial inclusion initiatives ineffectual, since cashless products are not pull products

Banks: Effectual enablement of such functionality

Business: Maintain appropriate proportion of account transferable and cashable partEmployees: Awareness among the employees to receive payment in bank accounts

Regulatory Challenges & Reforms

Mobile

Money

Account

Bank Account

• Cancellation of 3% transaction cost on electronic payments

• Rebate on Sales Tax for retail merchants.• Waiver of charges, convenience fees and

even tax breaks for consumers using cards/mobile money to pay for utilities.

Tax Rebates

• Increasing collaboration of IMPS with all the banks so as to enable real time transfer of funds.

• Improved Infrastructure for Internet banking• Withdrawal of currency notes or high denomination notes

of over Rs 100.

Increased Coverage of IMPS

Interest on value stored in an e-wallet

Increase in POS machines

• Charge on high value cash transactions and cash on delivery

A part of digital wallets can be linked to bank accounts so as to enable the customers to earn the interest.

• For electronic payments to become the modus operandi, increasing the number of PoS terminals is a prerequisite.

• Self-checkout can be encouraged to promote the usage of electronic transactions.eg. NCR self checkout machines in Walmart stores

• Customer Verification can be burdensome, costly and dissuades mobile operators from expanding.

• The KYC procedures for SIM card, Bank Account ( Jan Dhan Yojana) to be similar & sufficient to activate a new e-wallet.

• KYC procedures to be filled one time and linked to Aadhar Card. RBI has authorized Aadhaar-enabled electronic KYC (e-KYC)

Harmonizing the KYC requirements of RBI and TRAI

• The switching of sim cards and hence of wallet service

providers can withhold a customer from taking up

mobile payments for his day-to-day transactions.

• A fastened procedure enabling 2 day max

transferability must be set up for transfer.

• Removal of discrepancy between P2P transaction limits for fully KYC’d mobile

money accounts by non-bank BCs (Rs 5,000/transaction & Rs 25,000/month)

and fully KYC’d accounts by bank BCs (Rs 49,999/transaction & Rs

1,50,000/month).

• No differentiation between the different kinds of service providers for a

similar service but the differentiation can be on the basis of service.

Harmonizing transactions between mobile money accounts & bank accounts

Pre-approval requirement for wallet-to-wallet interoperability

Mobile Money

Account

Bank Account

Technological Solutions: Global

Individual bank accounts used through bank-managed branchless

channels. CAIXA (Brazil) XacBank (Mongolia)

Individual bank accounts accessed through

nonbank networks/technological

platforms EKO (SBI India)

SMART (Philippines)

Bank issued electronic value distributed by

nonbank to customers. Orange Money (Cote D’Ivoire, Senegal and

Mali)

Nonbank issued electronic value holding matching value in bank

Safaricom (M-Pesa Kenya)

Globe (GCASH Philippines)

Banks Involvement in Branchless Banking Models

• Telesom Somaliland has migrated cash-based P2P customers into digital channels by offering digital payment transactions for free.

• Telenor Pakistan has recently eliminated its digital transaction fees as well.

• In most Swedish cities, public buses don't accept cash - tickets

are prepaid or purchased with a cell phone text message.

• The churches in Sweden installed card readers to make it

easier for worshippers to make offerings.

.

• UK: City buses have stopped accepting cash as a valid payment

rather a "Oyster Card" or a prepaid ticket is accepted.

• Amsterdams’s parking meters have banned the use of cash

Digital Currency

• Since 2013, Canada has stopped minting & distributing pennies.

• Digital cash initiative based on an integrated circuit called MintChip lets people make small transactions by exchanging information from those chips via their smartphones

• M-PESA allows microfinance-loan repayments to be made by phone, reducing the costs associated with handling cash and thus making possible lower interest rates.

• M-PESA has been extended to offer loans and savings products, and can also be used to disburse salaries or pay bills

• Bitcoin–is a decentralized public ledger of debits and credits that no one person or company owns or controls. It lets people transfer money without a bank. Write simple, enforceable contracts without a lawyer.

• MIT Media Lab has launch of the Digital Currency initiative.

• Belgium & France have disallowed any cash transactions over 3000

Euro.

• “Sixdots” mobile app allows users to set up digital payments wallets

supported by Belgian banks and the mobile operator Proximus.

APPENDIX

Comparison of B2B and P2P

P2P B2B

Bill is optional Invoice nearly always required

Immediate payment Credit period may be provided

Payment of one bill at a time Payment of multiple invoices at a time

Complete payments Can be partial

Payment description not required

Payment description required

Invoice

Timing

One-many

Payments

Data

Appendix 1

Source: http://traxpay.com/2014/02/delighting-and-de-risking-b2b-transactions-for-the-digital-age

Industry Industry Size(INR billions)

Non-cash expenditure percentage of total in Urban region

Fruits and vegetables 8527 0.36

Milk and milk products 603 0.54

Processed foods 2247 0.27

Durable goods 5293 1.4

Clothing and footwear 3390 2.65

Personal care toiletries and Sundries

732 1.24

Tobacco 620 0.5

Source: Non-Cash Expenditure were obtained from Road to less-cash, Research report by VISA and IMAIIndustry data was obtained from Euromonitor. Cases were industry size was available in terms of only units, suitable assumptions were made to arrive at the industry size in INR