<p>The Indian banking system has been historically conservative when it comes to retail payments innovation. The adoption of Internet banking, credit and debit cards, and phone based payment solutions has been gradual. Statistics released by the Reserve Bank in India (RBI) on its website show that India had 571 million debit cards and 21 million credit cards in use in May 2015. The debit card numbers have increased significantly after the government push for the financial inclusion program, Jan Dhan Yojana (JDY) but the use of these instruments remains low. The month of May 2015 saw 726 million debit card and 60 million credit card transactions. The average comes to 1.27 debit card and 2.86 credit card transactions per month. Commensurate with the hard slog in issuing plastic money, banks are still grappling with a cash heavy usage behavior in India. A combination of regulatory and business factors may finally stimulate the Indian payments market, if all the pieces of the puzzle fall together.<br><br>Indian businesses are fast moving towards a mobile first approach. India has around 300 million Internet users, which leaves a huge market of 1 billion prospects. Of all the new users, 65% achieve Internet access for the first time using a mobile phone, an unusually high figure, germane to India. Compare this to developed countries that have a robust broadband backbone who see only 20%-25% of first time adoption via mobile. India never had the luxury of a great, wired infrastructure, and this may well prove to be a blessing in disguise for a range of consumer based industries, including mobile payments.<br><br>This mobile driven approach to consumer businesses has already attracted a number of players in the mobile wallet space. This includes a range of players: large telcos, private banks who are ahead on the technology curve, and a number of start-up firms currently burning cash to drive adoption metrics. Large players have claimed a user base of up to 25 million, which is a huge number when compared to outstanding credit cards, a product that has been in the market for over 20 years. So what is driving this change? Mobile wallets are being used not just as a store of value, but also as a loyalty and discounting channel, providing a range of merchant alignments and even e-commerce options. Even if the average wallet balance remains low - leading players report between Rs. 125 and Rs. 200 on average - the product adoption itself seems to be on a much steeper S-curve than the bank driven credit cards were. Right now users are putting these wallets to use for utility and mobile bill payments and charging Direct To Home (DTH) subscriptions. But the possibilities know no bounds, especially with zero offline merchant integration in place today.<br><br>Another thrust that retail payments are primed to realize over the 2016-2017 time frame, are the banking sector reforms, which the RBI is putting in place. RBI is issuing licenses for new universal banks, new lending banks, and new payment banks in a gradual fashion. Of these, two universal banks started operations in 2015 and 10 new payment bank licenses were granted, expecting operations to launch by the end of 2016. This is a big development for two reasons. First, these new banks - universal or payment - will be highly technology driven. This is already evident by the approach taken by Bandhan Bank and the IDFC Bank. Just a few weeks into their existence, the banks are heavily relying on mobile connectivity to open new accounts and process day-to-day business. Secondly, the payment banks will be governed by strict RBI rules on the float, which they command, and almost all their competitive advantage will be derived by creating a large network of remittance centers, offline merchant payment products, and correspondent business for existing private banks. Given the wafer thin margins by which these banks will be constrained, it will make great business sense for them to adopt mobile payments. In fact cooperation with existing wallet providers or an outright acquisition will be highly featured on a payment bank's launch strategy.<br><br>Finally, the Finance Ministry is currently considering a proposal to incentivize cashless payments in India via methods such as tax credits and a direct transfer of incentives to users. It is a concerted push for greater adoption, and to make it easier and cheaper for merchants to accept cards. These proposals are currently being drafted and can be expected to surface in the Union Budget for 2016-17, in a few months time. If the users do a see a real benefit via these measures, a whole new set of semi-urban and large rural towns will become the focus of cashless payments activity. The depth and the reach of banks or wallet providers attempting to tap this market will be a function of their mobile friendliness.<br><br>If we put all these trends together, a big picture emerges for the future. Imagine the scenario in 2020: A farmer from Khandesh, an area rich in cash crops in Maharashtra, may have a Rupay denominated debit card issued by a regional rural bank. Using this card, he can transfer money to his preferred mobile wallet at the start of each month. This farmer can then come to Pune to shop during the festive season without actually carrying either cash or even his debit card. Armed with his mobile phone, he can go the leading apparel shop in the old town to buy new clothes. In turn, the single shop merchant may be accepting cash transfers to his payment bank account, which enables him to remit money to his household in Rajasthan expeditiously. The farmer can scan a QR code at the point of sale and add the payment details to his wallet, which may be connected with this payment bank. In one click after the payee addition, the transaction may be done. The wallet may be able to send SMS notification to the farmer and his wife on pre-configured numbers for the purchase, and the farmer's wife may get instant confirmation that clothes were indeed purchased in Pune. The family may get a credit of 0.2% of the transaction value in their regional rural bank account instantly for using the electronic route.<br><br>Given the current boundaries and operational restrictions, this sounds farfetched. But it may well be a reality in the not too distant future. Technology is changing the behavior at the edges of retail payments in India right now, and given the convergence of various enabling factors, a tipping point may not be very far off.<br><br>As with most technology innovations, a large part of the economic surplus generated in this rationalization of payment supply chain will go to the end consumer. This puts a lot of pressure on the commercial banks that today operate under strict RBI oversight in terms of the scope of activity as well as product innovation. They may now be expected to move faster and create new products at different stages of the payment value chain. If not, parts of the chain will be claimed by start-ups with deep funding from venture capital and private equity players. The good news is that most of the private banks have already woken up to this new reality and are already active in the mobile wallet space.<br><br>The tailwinds disrupting the retail payments business in India are real. The acceleration towards a modern cashless economy will be even more rapid if the regulatory forces combine with market participants to bring about a whole new payments customer experience.<br><br><em><strong>Disclaimer:</strong> Opinions expressed on this column reflect the writer's views and not the position of the Capgemini Group</em><br><br><em>The author, Aashish Chandorkar, is director at Capgemini Consulting</em><br>Follow Ashish: @c_aashish and LinkedIn: https://www.linkedin.com/in/aashish<br><br> </p>
