When it comes to payments, the Reserve Bank of India's mission is 'to ensure payment and settlement systems in the country are safe, efficient, interoperable, authorised, accessible, inclusive and compliant with international standards.' And its vision is 'to proactively encourage electronic payment systems for ushering in a less cash society in India.' Even after years of efforts by the banking regulator and the financial services industry, nearly half the transactions are done through cheques, and cash deals in the system are still high. What the behemoths could not usher in after years may be well be delivered by the startups, Flipkart.com or Snapdeal.com.
From purchasing toilet paper to a piece of land on the moon — lunarembassy.com promises to deliver the deed at your doorstep — online companies offer solutions for almost everything you ask for. And, Indians are increasingly hooking on to the internet to buy everything from provisions to electronic gadgets.
India, a country of one-and-quarter billion people, has just 19 million credit card users, while the number of debit card holders is many times more, at 350 million. However, the value of electronic transactions using credit cards is disproportionately large — 21% of all transactions compared with about 32% through debit cards, according to an internet and Mobile Association of India report on digital payment. The balance is through internet banking, mobile wallets and prepaid cash cards.
"Banks, under the man date of the Reserve Bank of India, have made significant efforts to improve security. Therefore, while cash-on-delivery continues to be a significant portion (50%-60%) of the mode of payment chosen by customers, usage of debit cards and net banking have also gone up steeply," says Ankit Khanna, senior vice president for product management at Snapdeal.
But when innovations in the e-commerce space are promising to deliver the 'vision and mission' of the RBI, its conservatism and sticking to the rule book seem to be the hurdles in realising the vision.
"If there is a rule in the book, we don't allow it to be violated simply because the innovation is cool," governor Raghuram Rajan said in response to the RBI's stance on enforcing the two-stage authentication of online payments after complaints on cab-hail company Uber.
Of course, the central bank's concern relates more to frauds in the online space and the loss to customers. In fact, online frauds in the country seem to be very low, thanks to the security measures being enforced.
But as the debate about the RBI stance continues, electronic payments are gathering steam, with the private sector and international banks grabbing a huge share of the market.
The top two private-sector banks, HDFC Bank and ICICI Bank, are miles ahead of other home-grown lenders in supporting online purchases, right from providing payment gateways to offering financing options to credit card users. E-commerce spending has been growing year on year with the online retail, or e-tail, segment more than doubling this year as compared to last year, says Parag Rao, HDFC Bank's business head for card payment products and merchant acquiring services.
"We're witnessing an increase in purchase of mobiles and consumer electronics online this year. HDFC Bank is a market leader in this space and online retailing is a growth driver for the HDFC Bank payment business," Rao says. According to him, customers prefer credit cards over debit cards for large online purchases.
Credit cards are the most preferred mode of payment globally, as customers don't have to first carry out an authentication process and it is generally more simplified, unlike in India.
The online payments market size (on the basis of net transaction cost generated) is estimated to be in the range of $700-800 million in 2013, growing at a CAGR of 50% over 2007-13, according to the India e-commerce industry outlook to 2017, although market estimates significantly vary. Half the online purchases are carried out via private banks' payment gateways.
Banks also earn a fee for linking the payment gateway. The transaction discount rate can vary between 1% and 1.8%, depending on the payment instructions. With a larger category of services moving to the online space, the market is expected to grow.
A bigger opportunity is from offering EMI options to finance online purchases. In the case of online retailers, many banks have introduced EMI schemes, especially for high-value electronic durables and mobiles. According to market estimates, India's online credit market is worth about Rs 6,500 crore in terms of loan value and is growing at a CAGR of 200% over 2010-13.
"This rapid increase can be attributed to increasing tie-ups between banks and online retail players and significant promotion of EMI options. Most of these options are cheaper than credit card or personal loan interest rates," says Monish Shah, senior director at Deloitte in India. "The exit of a few retail financiers from durable financing at points of sale has created a gap in offering a point-of-sale loan option to consumers and banks can fulfil this need."
This augurs well for banks at a time of tepid credit growth. Customers prefer the online EMI option when it comes to big-ticket purchases like mobile, electronics. Retail loans have risen faster this year at 12.8% as of end August, compared with loans to industry at 7.6% and loans to the service sector that expanded by 8.9%.
Meanwhile, a new concern is on mobile payment, even as online companies see increasing traffic from mobile handsets. With fast-growing smart phone usage —smartphone sales in India are set to double this year to 80 million units — e-commerce firms are likely to see traffic from such devices increase manifold.
"Dropouts are more on the mobile than on the desktop," said Rajesh Magow, chief executive of travel booking site MakeMyTrip. The online travel booking site gets about 30% of its user traffic from mobiles. "This is primarily because of the two-factor authentication as the redirection happens to a bank's page and a lot of banks are not mobile-friendly."
Although the central bank has taken a rigid stance that it might not give up on its two-stage authentication, it may be ideal for it to insist on security and put the onus on the seller to promote an economy that is less dependent on cash, rather than slow its own march.