Driving Payment-India as pioneer
Financial inclusion is critical to the Central Bank of Nigeria’s desire to expand the country’s financial ecosystem.
The country continues to experience challenges in advancing financial inclusion that stem from various physical, regulatory, and cultural challenges. The CBN is keen to minimise the rate of exclusion. One of its key strategies is a dedicated focus on national payment systems to drive digital transactions.
The licensing of Payment Service Banks is one of such strategies. PSBs hold great potential to advance financial inclusion through their inherent strengths: large amounts of capital, strong brand presence, technological advancement, market presence, effective marketing and communication strategies, and ability to scale, among others.
Telco-owned PSBs are perceived to have the financial muscle, agility, and technological capabilities to advance financial inclusion.
India as Pioneer
According to the EFInA Access to Financial Services in Nigeria 2018 Survey, the most commonly cited reasons to use financial services or would use financial services, was to open a savings account and to withdraw money when needed respectively. Of all adults, 59% reported saving money through formal and informal means. Among active users of financial services, 96% reported carrying out savings. This indicates a need to create attractive savings products tailored to the cash flows of individuals to encourage the use of formal financial services.
Globally, payments systems are a key concern, not only among traditional financial institutions but also among other key stakeholders within the payments ecosystem. The existence of non-bank and informal financial institutions requires a concerted effort by regulators to evolve. This is key to ensure that the national payment system supports innovation in payment products and services without compromising the safety, effectiveness, and efficiency of the payments ecosystem.
India pioneered the adoption and deployment of PSBs in the world. The lack of sufficient banking infrastructure, especially in rural locations, played a key role in the emergence of PSBs in India. Over the past decade, India’s government has worked to expansively scale up the digital banking and payment infrastructure of the country. ‘Digital India’ has been the platform through which the government has worked to create a digitally empowered society. Various initiatives pertaining to digital payments in the areas of infrastructure and services have been undertaken under this programme.
Payments banks in India are considered a step forward for banking systems and digital payments at large. From the very beginning, India’s government focused on creating a cohesive ecosystem for digital payments that the payments banks could use with ease. The aim was to provide banking services in a reachable and affordable manner through technology.
A trinity of bank accounts, biometric identity and mobile phones have turbo charged financial inclusion
A 2020 EFInA report noted that a host of initiatives under the Digital India project have succeeded in creating a digitally inclined socio-economy. These include; Building ecosystems around digital payments: The launch of systems like Aadhaar Payments Bridge (APBS) for transfer of government benefits through Aadhaar biometrics authentication acts as a core platform for a payments bank to transfer government subsidies to people. Aadhaar, a biometric-based identification system has been extensively used for social and financial inclusion, and public sector delivery reforms, among others. Out of the 1.3 billion population, 1.2 billion Indians have enrolled under Aadhaar systems as per its database.
PayTM, an Indian Telco owned PSB offers payment services, commerce and cloud services, and financial services to 333 million consumers and over 21.1 million merchants, as at March 31, 2021.
PayTM derives a majority of its revenue from transaction fees it collects from merchants for its payment services. In FY 2019, FY 2020 and FY 2021, revenue from our payment and financial services accounted for 52.5%, 58.1% and 75.3% of its revenue from operations. “Our efforts to expand our payment services depend on among other things, our ability to broaden the scope of the products and services we offer, develop new technologies, enhance the functionality of our products and services and respond to the needs of our merchants and consumers. Our failure to broaden the scope of payments services that are attractive may inhibit the growth of our business, as well as increase the vulnerability of our core payments business to competitors,” it argued.
The PSB identifies the fact that the attractiveness of its platforms to customers and their willingness to engage with them depends on the variety and quality of service and product offerings, payment options offered to consumers, the size of merchant network, degree of consumer penetration, “the strength of our brand and reputation; the amount of fees that we charge; our ability to sustain our value proposition to merchants for consumer acquisition by demonstrating higher conversion at checkout; the attractiveness to merchants of our technology and data-driven platform; our competitors’ offerings; and our merchant satisfaction”.
It further noted that its growth substantially depends on its ability to maintain and grow “our relationships with existing merchants and increase the volume of transactions processed on our platforms. We rely on the continuing growth of our merchant relationships and our distribution channels in order to expand our GMV and our operations. We derive revenue primarily from the fees earned from merchants for the payments, commerce and cloud, and financial services we provide through our platforms”.
Its success, the PSB posited, depends on its ability to generate repeat use and increased transaction volume from existing consumers and to attract new consumers to its platforms. “We generate revenue when consumers use the products and services we offer on our platforms, such as, transact and pay for products and services, make bill payments and recharges and transfer money, among others,” the firm noted, adding, “if we are not able to continue to grow our consumer base, we will not be able to continue to grow our merchant network or our business. Our ability to retain and grow our consumer base depends on the willingness of consumers to use our platforms, products and services. The attractiveness of our platforms to consumers depends upon, among other things: the number and variety of merchants and the mix of products and services available through our platforms; our brand and reputation; consumer experience and satisfaction; consumer trust and perception of our solutions; technological innovation; and products and services offered by competitors”.
The digitisation of government and social payments has played a key role in driving uptake of digital payments in India. PSBs have focused on tailoring products to the financial management needs of the target customer segments, with key product offerings for PSBs in India including; Small savings account and current account that helps low-income individuals and migrant workers among others to access funds, and current accounts to small merchants, grocery stores, and traders, for their deposits; Although current accounts do not earn any interest, PSBs earn money through the charges on the transactions conducted.
In addition, Demand deposits serve as an opportunity to earn a margin on deposits, as these are enforced as part of the statutory liquidity ratio (SLR). PSBs are restricted mainly to investment in government securities, which can give a return of 8-9% per annum; There is an opportunity to earn revenue from the time or fixed deposits held with other scheduled commercial banks for liquidity purposes.
Distribution of third-party services, domestic remittance as well as utility bill payments and other opportunities such as mobile recharges, and ticketing services offer a huge market potential with an annual growth rate of 20-22% for bill payments and about 8-10% for mobile recharges. These payments are especially important for the target segments, as aspirational products are converted to daily use.
India can provide a learning opportunity for both regulators and operators. For the operators, while establishing a sustainable business strategy and model through low cost operations dependent on digital delivery channels and effective agent networks, they will need to drive market acceptance through financial literacy and intensive awareness efforts. This will be key to drive low value high volume transactions characteristic among the financially excluded segments.