View from India: Digital disruptions

The journey from physical to digital financial transactions is a fascinating one. Lessons have been learnt as innovative models have been rolled out.

Digital transactions have brought transparency into the system and made lending-borrowing accessible and hassle-free. A case in point is the Unified Payment Interface (UPI), which enables people to transfer money between bank accounts using a mobile device.

In May 2023, UPI transactions reached 14.3 trillion rupees in terms of value and 9.41 billion in volume, according to the system’s creator, National Payments Corporation of India (NPCI). In comparison to the month of April, this is a 2 per cent rise in value and 6 per cent in volume (from 14.07tn rupees and 8.89 billion transactions).

Clearly this digital payment system is a phenomenal success and probably needs to be elucidated. UPI tops the charts for convenience. Money can be transferred between multiple accounts without separate profiles. And it is not just confined to India. By its operations, UPI has accelerated and lowered the cost of cross-border transactions. From the perspective of forex (foreign exchange) this could be a money-churner for the country. Apart from that, UPI is paving the way for a cashless economy.  

Digital payment gateways are being adopted rapidly and across economic sections of society including the Millennial. Be it their food or clothes, their payments come through cards and mobiles.

Digital transactions also take into account digital banking. This has had a mass adoption as it can be operated from anywhere. Digital banking extends to wealth management and fintech services. Banks are also offering services through apps like YONO SBI, whereby customers shop, travel and pay bills. SBI is State Bank of India. Other innovative digital services roll out. For instance, HDFC Bank offers a digital car loan facility through HDFC Bank Xpress. “The market is promising. Digital banking is projected to grow from ₹2 lakh crore to ₹8 lakh crore by 2026. Worldwide, India has an adoption rate of 86 per cent in terms of digital banking,” said Praveen Khanna, vice president, Scoreme Solutions, at Resurgent India’s virtual session, Unlocking New Frontiers: Exploring Growth Opportunities in Digital Lending. [1 lakh crore = 1 trillion; 1tn rupees is about £10bn]

Urban consumers of digital banking are joined by rural consumers, given the availability of internet with low tariff rates. The smartphone could also be a growth driver. Smartphone prices have softened and have proliferated into smaller regions of the country. “The compounded annual growth rate (CAGR) of rural internet users is at 30 per cent since the last five years,” added Khanna.

While it gets a tick mark for convenience, digital banking-online payments may not be free from challenges. Fraud mechanisms and cyber threats loom large. Financial data transmitted through the internet raises concerns over data privacy. Tech tools for data security will need to be upgraded from time to time. Data erasure processes could also be adopted, whereby the data is erased upon serving its purpose.

When we talk about digital transactions, digital lending is another facet of it. “Digital lending has disrupted the traditional form of lending. It has also given rise to fintech companies, which contribute to about 50 per cent of the growth of the digital lending ecosystem. Conventionally, in the days of yore, households borrowed money from pawn brokers by pawning their jewellery,” observed Dr G Ramesh Kumar, director general, MSME Bharat Manch, vice president and national business head, Rupeeboss Financial Services.

There may be still some households that scout around for pawn brokers, but they are few in number. Today individuals can get loans from non-banking financial services companies (NBFCs) and banks. These are organised borrowers and form part of the digital lending scenario. NBFCs and banks offer gold loans online and they are becoming popular with the people. Gold loan, also called loan against gold, probably gained momentum during the pandemic. Economic uncertainty and income loss compelled people to pledge their ornaments as surety and get immediate liquidity to meet professional-personal requirements. To think of it, the online gold loan probably brings a sheen of advantage. Being online, processes are faster. And being organised, it is a secure loan that perhaps offers a lower interest rate than the traditional one.

In a nutshell, India is globally acknowledged for its digital initiatives. This includes payment mechanisms, digital identity, fintech adoption and urban-rural internet access. The government is probably planning to set up digital banks.

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