It is estimated that 1.15 billion people in India currently own mobile phones, which equates to almost 89 connections per hundred members of the population. Although India’s smartphone penetration is slightly less extensive, there are still around 300 million owners of smartphones (as at April 2017), which amounts to just over 22% of the population.
These high mobile phones take-up rates and an increasingly affluent population, combined with a number of other unique circumstances resulting in poor banking infrastructure means that we can expect to see mobile payments playing an increasingly important role in the Indian economy. You only have to look abroad at first world economies to see the different uses in ‘paying by mobile’ and its enormous potential for India’s digital economy.
India’s leading mobile networks
Part of the reason why mobile use is so high in India is that of the highly competitive carrier market, meaning there is extensive coverage in all the major population centers. Network coverage is generally a combination of 2G, 3G, and 4G services, with some limited 4G+ coverage available as well.
There has recently been a merger of the two biggest network carriers — Vodafone and Idea Cellular — to create the largest telecom company in the country. There are also a number of other significant players in the market who ensure that competition nevertheless remains fierce — for example Airtel, the second biggest carrier in the country, and Jio the only Voice over LTE provider.
India also has a number of smaller, regional carriers with more limited coverage than the biggest names, like Aircel, RCOM, Tata Mobile and Telenor.
This extensive coverage, plus high rates of mobile phone use, means that there are enormous opportunities for mobile payment providers, as significant numbers of both merchants and consumers in almost all regions of the country are able to access the necessary technology required to make mobile payments both viable and a generally accepted form of payment.
Why mobile payments are growing in India
Aside from the high rates of mobile phone penetration, a number of other reasons have combined to make mobile payments a growing phenomenon in India.
Firstly, the move towards a cashless economy has been strongly encouraged by the authorities. In late 2016, Narendra Modi’s government declared that higher denomination banknotes i.e., INR 500 (US$7.5) and INR 1,000 (US$15), were no longer to be considered as legal tender in India. This was done as a means of further developing the country’s digital economy through reducing transaction costs in the hope of encouraging innovation and growth (it also had the aim of reducing the number of counterfeit notes in circulation).
Secondly, a significant proportion of the population in India remains unbanked — the figure in 2017 stood at around 19%. This could be the result of not having sufficient cash to warrant interacting with a bank, illiteracy (which remains a widespread issue in much of the country), not having the necessary identification to meet KYC (Know Your Customer) requirements, or simply the fact of living in a remote area of the country which makes accessing a bank difficult.
A large unbanked population has proven to be a double drag on economic growth — many small businesses are unable to grow because they are restricted as to the types of payment they can accept, while consumers are likewise limited in the type of purchases they can make. However, the growth in mobile payment solutions has made it easier for retailers to accept a variety of different payment methods, while the technology also allows consumers without bank accounts or credit/debit cards to nevertheless make the purchase with methods other than cash.
India has also seen the introduction of the Aadhaar Unique Identity Number (UIN), which is a means of citizens proving their identity more quickly and efficiently. This has also facilitated mobile payments, as it has streamlined the process and created a universally accepted proof of identity.
Mobile payment methods in India
Mobile wallets and proximity mobile payments (where a mobile is used to scan, tap, swipe or check in at a POS) are therefore providing an increasingly accessible solution for both retailers and consumers in India, and it is anticipated that the industry will grow to around USD$500 billion by 2020 and contribute 15% of the country’s GDP. Non-bank service providers like Paytm, MobiKwik, PayUMoney, Vodafone M-pesa and Oxigen are expanding rapidly as more merchants are able to accept payments through these systems, and more and more people have access to smartphones.
Indian banks are also increasingly creating mobile apps that facilitate digital transactions, and it’s estimated that 30% of Indian smartphone users will use their phone to pay for goods and services at least once per month in 2018.
Consumers can currently take advantage of three types of mobile payment systems in India. Closed mobile wallets can only be used with a specific retailer or service provider, and there is no provision to withdraw cash or use them at other merchants. Semi-closed wallets, currently the most popular category, can be used at a variety of different merchants or service providers, although they do not facilitate the withdrawal of cash. Open wallets allow consumers both to shop or pay for services, but they can also be used to make cash withdrawals, including at ATMs.
Challenges to mobile payments
Despite the initiatives instigated by the Indian government that has led to demonetization and the greater emphasis on the digital economy, non-bank mobile wallet providers are nevertheless facing some potentially serious legislative challenges in 2018 and beyond. Most notably, these concern KYC, or Know Your Customer rules.
In short, people whose KYC credentials have been established solely through a mobile wallet provider are not considered valid in the same way as those who have done so via a bank. These customers are therefore required to submit their details again and go through the KYC accreditation process once more. This also means that mobile payment providers will need to upgrade their KYC operations in order to comply with Reserve Bank of India rules on KYC so as to be able to certify their customers’ credentials.
India is ideally placed to transform its economy through the provision of mobile payments, as the use of this technology allows its citizens to overcome many of the problems associated with traditional banking in the country. However, the implementation of KYC rules could, in the short term at least, severely inhibit the growth and take-up of mobile payments.
Therefore, this is a critical issue to be resolved if India’s merchants, retailers, and consumers are able to capitalise on the rapid growth of technology and the increased access to payment methods that have hitherto been beyond the reach of many of its citizens.