Digital payments attract investor interest

The expanding fintech sector offers considerable growth opportunities as more Indians start using internet for daily activities

September 29, 2017

The fast-growing digital payments space has seen burgeoning foreign interest

Government of India’s new FDI guidelines has further stroked investor interest

The payment industry’s growth pattern shows sectoral growth opportunities

The room to achieve financial inclusion efficiently enhances investment interest

International interest in India’s burgeoning digital payment space can be explained with Google’s recent launch of “Tez”, an India-focussed mobile payment application. Inaugurated by Union Finance Minister Arun Jaitley, Tez is powered by UPI, or unified payments interface. UPI is a payment protocol platform developed by the National Payments Corporation of India, a payments infrastructure branch set up by the Reserve Bank of India along with a wide clutch of state-run, private and cooperative banks. Following Tez, Facebook’s WhatsApp and Amazon are reportedly planning to launch similar UPI-based payment apps.

Rising FDI interest in digital payment sector

Some of the UPI companies are already recipients of foreign direct investment (FDI). For example, PayTM (which also has a licence to set up a payments bank) has received investment from both Japan’s Softbank as well as China’s Alibaba.US-based software company Ebix recently invested in digital payments provider Itzcash. Some more digital payments companies (such as, Mobikwik) are currently in the midst of negotiating with potential investors.

The growing interest in India’s financial technology (Fintech) is being driven by the industry’s potential for future growth. A study by Boston Consulting Group estimates that e-payments will become a US$500 billion business by 2020, contributing almost 15 per cent of total national gross domestic product (GDP).Growing number of smartphone users, improvement in mobile and Internet connectivity and the rising popularity of digital payments owing to its ease of usage have led to an increasing number of the population moving to online platforms of payments and transactions.

According to the RBI, the total value of digital transactions jumped by 13 per cent to US$1.68 billion over January to August 2017

Fast-growing fintech sector

According to the Reserve Bank of India, the total value of digital transactions jumped by 13% to US$1.7 billion in August 2017 from around US$1.5 billion in January 2017. Meanwhile, the volume of digital payments increased from 861.07 billion transactions to 883.3 billion transactions, registering a modest growth of 2.6 per cent. This indicates that the value of each transaction saw a considerable increase during this period.

Digital payments mainly includes real time gross settlement (an online mode for high value transactions), national electronic funds transfer, cheque truncation, immediate payment services, unified payment interface, unstructured supplementary service data, debit and credit cards, pre-paid instruments and mobile banking.

What makes Fintech—the marriage of finance and technology—doubly exciting is its ability to achieve financial inclusion at much lower costs than conventional banking processes. The government’s strategy to combine technology and financial inclusion was first revealed by Prime Minister Narendra Modi during his 2014 Independence Day speech, when he introduced the Pradhan Mantri Jan-Dhan Yojana, a national mission for financial inclusion. The scheme allows anybody to open a bank account even with a zero balance. Until November 15th 2017, Jan-Dhan Yojana had registered 310 million beneficiaries, with total deposit of around US$1.1 billion.

Technology to safeguard financial services

Subsequently, during his 2015-16 Budget speech, Finance Minister, Arun Jaitley outlined a technology-based inclusion programme, JAM – a combination of Jan-Dhan bank accounts with Aadhaar (biometric-based identity cards) and mobile banking, to further ascertain the financial inclusion goal. The Jan-Dhan platform is now being utilised for delivery of multiple financial services products, ranging from micro-insurance to micro-pension products, as well as for efficient transfer of payments under various social entitlement schemes. In a Facebook post on August 27, 2017, Arun Jaitley wrote that India was close to achieving the vision of 1 billion Aadhaar cards linked to 1 billion Jan-Dhan accounts and 1 billion mobile phones.

India today stands at the cusp of a banking revolution, one that’s predicated on technology. The Fletcher School at Tufts University, in partnership with global payments company MasterCard, prepares an annual Digital Evolution Index, or DEI. The index measures the evolution of a country’s digital economy, “combining more than 100 different indicators across four key drivers: Supply Conditions, Demand Conditions, Institutional Environment, and Innovation and Change”. Countries are then placed in four categories: Stand Out, Stall Out, Break Out and Watch Out. India was placed as a Break Out country in the DEI 2017 report, given its rapid pace of digital growth that is bound to attract strong investor interest.

Consequently, the Department for Industrial Policy and Promotion, under the Ministry for Industry and Commerce, issued new foreign direct investment guidelines in August 2017, further facilitating foreign investment in the burgeoning digital payments space.