From being a 95% cash-based economy a couple of years ago, India has made a tremendous progress by setting itself a target of 30 billion digital payments in FY19 (and is on track to achieve it). While demonetisation could be the initial trigger for people to experiment with and experience digital payments, what really worked in favour of digital payments adoption was continuous innovation by the players and supportive policies by the government and regulators. The operational guidelines for interoperability between different kinds of pre-paid instruments (PPIs), including meal vouchers, e-wallets, and gift vouchers, issued by the Reserve Bank of India in October 2018, is another step in this direction. These guidelines aim to make PPIs an integral part of the larger financial services ecosystem in the country.
According to RBI, for the month of July 2018, number of transactions using PPIs (including both, mobile wallets and prepaid cards) increased by 30% to 351.8 million as compared to 270.2 million in July 2017. The amount transacted grew 78% year on year. This shows the growing acceptance of PPIs among consumers and merchants alike. Interoperability provides reasons to cheer not only to PPI players but also to consumers and merchants. Here are some of these:
Consumers are the biggest beneficiary as the ease of payments increase manifold. They can easily transfer money between different PPI instruments, rather than being restricted to a particular provider. They will also be able to make small-value person-to-merchant payments such as over the counter medicines, cabs, grocery purchases, and utility bills etc. more easily, as PPI payments become platform agnostic. More importantly, they can directly access most of the payments ecosystem, even if they do not have a bank account. The interoperability guidelines will most likely put a safe and secure network card in their digital/physical wallet and increase their comfort in using the card across multiple merchant categories.
There are multiple benefits to PPI Issuers once card based interoperability kicks in.
Interoperability will encourage PPI issuers to explore alternative revenue streams as they can issue their own branded prepaid cards which can be used by consumers at merchant outlets as well as for online shopping. This makes PPI issuers a quasi-bank for payments. However, the consumers will not be able to use these cards to withdraw cash or for international transaction. This will be possible through partnerships between PPI issuers and major card networks for implementing interoperability. Interoperable cards will be EMV chip and PIN compliant, barring the gift cards. This adds another layer of security for small payments.
Until recently, PPI issuers were permitted to issue prepaid cards only in partnership with banks. An important concern about this model is that from RBI’s perspective, prepaid cardholders belong to the licensed bank, and not to the PPI Issuer. The KYC ownership and associated challenges also lie with the bank. After enabling interoperability, PPI Issuers will on board the consumers directly, and own the portfolio.
Additionally, PPI issuers will also be keen to venture into areas like e-commerce, utility payments, insurance, wealth management and micro-lending. Basis the payments habits of their users, they will be in a position to customise these services more effectively and create a niche for themselves. Another positive for PPI issuers is that the consumers may develop increased loyalty towards one or two players, since they can pay to different wallets from a single wallet.
Merchants often hesitate to accept digital payments due to preconceived notions about complexity. However, now customers using any PPIs will be able to make payments at merchants acquired by another PPI issuer/bank. In other words, merchants do not need to sign up with multiple PPI issuers to accept payments. This makes accepting digital payments simpler for merchants, and will provide the much needed boost to digital payments in small towns and villages. Even for the network enabled merchant acceptance system through POS/Bharat QR, PPI Interoperability provides a boost to the acceptance partner with more transactions per terminal, thus improving economics.
There could be some bumps ahead
However, these are still early days with PPI interoperability. There will be some hiccups before the system becomes fully functional. The biggest challenge for PPI players is to obtain KYC (know your customer) details, which is mandatory to make the wallet interoperable. After the Aadhaar verdict to discontinue e-KYC, the PPI players have to look for alternative ways for customer on boarding. Hopefully, there will be further policy discussion in the coming days to address the challenge and strengthen the momentum. The way government and regulators have emphasised on the importance of digital payments and brought our supportive policy interventions, there is every reason to believe that interoperability will be the next game changer for the payments industry.
(The author is director, market product management, South Asia, Mastercard. Views expressed are personal.)