The economy in India is in the middle of a period of strong growth. However, the young population is still unbanked or underbanked. How can the financial providers of the region make use of this large gap in the population to its advantage? And how can it keep sustaining this period of prosperous growth?
India’s economy has been characterised by strong growth. Despite the country’s economic progress during the past ten years, the penetration of financial services is still relatively low, indicating untapped potential.
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The central bank has undertaken a number of initiatives to increase financial inclusion and expand banking operations to unbanked areas. Changing lifestyles, the rise of a young and employed population, increased per capita disposable income, and the growing popularity of online shopping all supported the growth of the cards and payments industry.
Low banking penetration levels suggest growth opportunities for banks, financial institutions and card issuers in India. As a result, banks have introduced a number of cards targeted at the unbanked population. While leading card issuers aimed to grow by offering improved products and services, the government encouraged electronic payments through its financial inclusion programme.
In terms of the number of cards in circulation, Indian payment cards – comprising debit, credit and charge cards – registered significant growth over the past five years, at a compound annual growth rate (CAGR) of 18.55%, increasing from 246.2 million cards in 2010 to 486.4 million in 2014. In terms of transaction value and volume, payment cards registered respective CAGRs of 20.78% and 14.41%, with a similar trend expected over the next five years.
Payment cards increasing their presence
Although cash is the most popular payment instrument, use of payment cards is gradually increasing.
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By GlobalDataCash continues to be the most popular payment instrument for the majority of Indians, primarily due to a limited public awareness of other payment instruments, or little to no access to banking infrastructure. Cash is primarily used to make small-value payments at retailers, for the payment of utility bills, taxes and transport fares. Use of cash is particularly high among the rural population.
Consumer acceptance of payment cards gradually increased from 2010, as the government and banks began to provide basic financial access to the unbanked population. This included the expansion of infrastructure such as ATMs, the appointment of banking correspondents, the launch of new branches, and specific efforts to change Indian consumer payment habits.
Domestic card scheme RuPay to compete
The National Payment Corporation of India launched the RuPay domestic card scheme in March 2012, to increase payment card penetration and competition among card scheme providers. Public sector banks such as SBI, Bank of Baroda, Bank of India and Union Bank of India launched RuPay debit cards in the same year.
Last August the Indian government announced the Pradhan Mantri Jan-Dhan Yojana programme to provide basic affordable financial services such as banking, savings and deposit accounts, remittances, and credit to the unbanked population. An unbanked Indian citizen aged above 10 years can open a new bank account with a zero balance at any bank branch or through a branchless bank specially designed for the purpose of opening accounts under the scheme. Account holders are issued a RuPay debit card for use at ATMs and retailers.
As RuPay’s processing fee is 40% lower than its competitors, it is expected to gain significant domestic market share and increase penetration rates. It will also make it more viable for small retailers to accept cards, increasing overall acceptance.
Mobile payments are emerging in India and new systems allow merchants to process credit and debit payments via smartphones and tablets. Younger consumers in particular are extremely comfortable with electronic payment methods and typically use smartphones to make payments.
Although mobile payment systems have been available in the Indian market since 2010, many of the companies had to close down due to lower adoption and technology issues. For instance, Beam Money Private Ltd, which was offering Beam Money prepaid wallet, wound up its wallet service in June 2013 because of low adoption by consumers.
A growing preference for electronic payments offering enhanced security, coupled with a spurt in the young population and smartphones, saw new companies enter the Indian market. For instance, mobile operator Vodafone partnered with ICICI bank to launch M-Pesa in December 2013.
Another mobile payment solution provider, PayTm launched a new service called PayTm Cash Wallet in January 2014 and users can pay for different services. Likewise, Ezetap and Mswipe are offering mobile payment services.
