Spicing up payments

How the jewel of Asia is turning up the heat in terms of what’s possible in payments, according to Rüdiger Vogt of G+D and Aveek Chaudhuri

If you were seeking a bellwether for the future direction of payments, one country stands out. With 25.5 billion real-time payments logged in 2020, India leads the world by volume, processing 9.8 billion more than second-placed China.

For industry watchers, India also offers valuable insights. The country is vast and diverse both geographically and socially and for years its government has used digitisation to modernise and level-up its urban and rural poor. Now that it, like the rest of the world, is looking to rebuild from COVID-19, it has an even more vital role to play.

Products are launched in India on a scale unmatched in the West, and, as Rüdiger Vogt, head of payments 4.0 at Giesecke+Devrient (G+D), points out, ‘niches can be extremely large in India, with a population of 1.4 billion’.

And 2022 will see some big changes. From January 1, new rules around tokenisation arrive, which Vogt believes will make the technology near-ubiquitous. And Aveek Chaudhuri, a thought leader in digital financial services, says the payments space is now evolving so fast ‘it is not always possible for a common person to keep track of it’.

But the change we see today has been at least a decade in the making.

In the words of India’s prime minister, Narendra Modi: “If there is a strong force that brings a change in the lives of those on the margins, it is technology. It serves as a leveller and a springboard.”

A prime example of this is the Aadhaar card, created as a system to deliver social security services to the country, which was launched in 2009 and provides a means of identification enabling individuals to access services such as bank accounts.

From there, with smartphone in hand, a person can use the country’s other notable innovation – the Unified Payments Interface (UPI) – to electronically pay a merchant for goods, or exchange money with another individual.

The National Payments Corporation of India, which is overseen by the country’s central bank, developed Aadhaar so that it can be used for cashless payments by people with a linked bank account but no smartphone. And, during 2021, the government launched e-RUPI, an electronic voucher system whereby individuals can securely receive a QR code or SMS to access services such as healthcare or benefit payments.

Under Prime Minister Modi, the country launched the Digital India programme in 2015, and the potential smartphones and mobile communications that flow from it provide for leapfrogging older systems. It means people who were recently unbanked can switch from cash under the mattress to mobile wallets overnight.

Modi’s infamous demonitisation policy, launched in 2016, provided another shove towards a cashless system by removing 500 and 1,000 rupee notes from circulation at one fell swoop, with the aim of weakening India’s so-called ‘shadow economy’. Though the collateral damage of removing 86 per cent of currency in circulation was enormous – hundreds of thousands of merchants lost their businesses and it knocked off around one per cent off gross domestic product – Indians certainly learned they needed to be ready for alternatives to cash.

Then came COVID-19, and the need to transact remotely became as important in India as anywhere else.

Chaudhuri says: “There has been a fintech boom in India over the last decade, but recent events have led to the same being scaled up at an unprecedented pace.

“First, demonetisation caused an acceleration in adoption of digital payments, which also set banks and other organisations towards building relevant products, capabilities and infrastructure.

“When COVID came, people were unable to step out, interact in a normal fashion – that’s when contactless payments started scaling up and soon became embedded within our lifestyle. There are other factors, too – all this has been made possible by the arrival of a new breed of customers who are very tech savvy.

“Then there’s the growing penetration of smartphones, greater outreach by mobile networks and the government’s digital initiatives and policies.”

For Munich-based G+D, Vogt says payments growth potential in India means the research and development centre it opened in Pune, in 2006, is now the firm’s biggest, with around 300 staff.

“G+D India was a partner for major banks moving from the magnetic stripe to chip-card-based credit cards, and now we’re seeing the move from the physical card to digital services, be it host card emulation or wearables,” says Vogt. .

“We’re expanding our business here, with banks and payment institutions, and we’re now also entering into the fintech space with our first projects. India leads the real-time payments market and has long surpassed China and South Korea, and its digital payments industry is expected to grow 300 per cent by 2025.

“The Indian government has established a regulatory environment and encouraged the foundation of fintechs. As a result, we’ve seen more investment and funding, by both international and national banks, plus an influx of venture capital. We’ve had initiatives driven by the National Payments Council of India, the Digital India programme and financial inclusion programmes.

“Another standout initiative is encouraging non-bank finance companies to partner with banks to offer loans. The Reserve Bank of India has advocated this model as a solution to address the credit gap in priority sectors, so that’s agriculture, for example, and small-scale industries that otherwise might not get timely and adequate credit. So, there is a lot of influence, and a lot of good things coming.”

Both Vogt and Chaudhuri have been impressed by the central bank’s reforms of tokenisation to encourage its use, and the tightening of security that is due to follow in 2022, whereby only card issuers and networks can store card data beyond the last four digits of a card number and the cardholder’s name.

Tokenisation can both improve security and reduce friction, as a means of encrypting card data at point-of-sale, and both men see it as a way of rolling out new services at the checkout.

Vogt says: “We think that, in 2022, card-on-file network tokenisation will become the dominant payment method, with 95 per cent of e-commerce payments predicted to be tokenised. The Reserve Bank of India’s new tokenisation guidelines mean online stores can no longer hold actual card data – from 1 January, no entity in the card transaction or payment chain, other than the card issuers and/or card networks, will be able hold it, and data stored previously will be purged.

India leads the real-time payments market and has long surpassed China and South Korea. Its digital payments industry is expected to grow 300 per cent by 2025

Rüdiger Vogt,G+D

“That means that, even if online platforms use tokenisation today, the card-on-file tokenisation must then be provided by a network or issuer-based solutions. And merchants will simply receive the anonymised set of characters, the token, from a token provider. That’s a huge increase in the security level of payments – a real game-changer.”

Regarding friction, Vogt adds: “You can combine card-on-file tokenisation and strong customer authentication (SCA), and that means the customer experience will be more satisfying at the checkout.

“If SCA is completed when the consumer logs into the merchant’s app, the issuer can then rely on that authentication, and it will not ask for it again, making the payment process seamless. Another advantage will be automatic token refresh. It takes place at card renewal. So, when a card is stolen, lost or expires, there is no interruption to a user’s scheduled payments or discontinuation of the service. The consumer does not have to add their new card details themselves.”

Chaudhuri says: “In India, Google Pay was one of the first players to introduce tokenisation – and the experience you have while paying with a card over Google Pay is awesome. So, I think tokenisation will be a major driver when it comes to subscription-based products or services for consumers. I also believe that more than 80-to -90 per cent of players will adopt this model over the next year, or there will be no way to achieve the subscription inflows they hope to gain.”

An indication of where India stands now with regards to digital adoption was provided by the central bank’s National Payments Corporation of India survey in 2020, which concluded that adoption of digital payments was ‘well-entrenched’.

Its poll of 5,314 households in 25 states, found that a third were regularly using digital payments, including 24 per cent of people in the bottom 40 per cent of society by income, who were overwhelmingly (80 per cent) rural.

While there is still huge potential for growth, the report’s authors were heartened that digital payments were being used by poorer people, who had been financially dislocated in the past. It concluded that a push towards specific how-to-use knowledge, helplines for learning, as well as problem-solving and safeguarding features that help the user stay secure, ‘can make India race towards being a less-cash society’.

Chaudhuri says fraud is an inherent risk when payment systems are developing so quickly, and warns that people new to technology typically ‘lack financial literacy’. It leaves them prone not only to cybercriminals but also to making seemingly-simple mistakes.

Vogt adds: “In Delhi during the first lockdown, between April and July 2020, police received over 4,500 cybercrime complaints and 62 per cent of them were related to online financial fraud.

Growing market:

Indian shoppers are seeking more and different ways to pay

“I think it’s a safe assumption that, with the e-commerce boom, online fraud went up across India. But I am confident we will see a significant reduction in 2022, based on the changes, like the tokenisation reform that Reserve Bank of India is mandating. At G+D, we are currently reaching out to schemes and large banks, to understand their views and the impact it may have on the market landscape, and our solution offering.

“While I think device-based tokenisation, for example, with wearables, will have its own adoption curve, network tokenisation will become mainstream technology, securing e-commerce transactions from January onwards.

“Success depends on the country’s ability to prevent fraud and protect consumer information,” Vogt adds.

POS LOANS NEXT BIG THING

With tokenisation underpinning electronic payments from 2022, Vogt and Chaudhuri also foresee an explosion in India of trends that are already emerging in other developed countries, too – namely, buy-now, pay-later (BNPL), e-commerce, wearables and the increasing proliferation of marketplaces.

Chaudhuri says: “There comes a point when lending and payments converge and I think we’re at that place with buy-now-pay-later. E-commerce has become the arena where lending and payments crisscross each other with BNPL loans, which I consider a quasi-loan.

“This is an interesting space because multiple business models open up. Various players have the opportunity to come in and embed themselves in a way that becomes a key component of a consumer’s lifecycle. Then, slowly, these players bring the consumer into their own fold.”

Vogt adds: “BNPL is a major accelerator for the growth we’re seeing and, to give some numbers, the Indian e-commerce market is predicted to be worth US$110billion by 2025, compared to below $50billion in 2020 – and I think that’s a conservative assumption. "It’s also being driven by smartphone penetration, reaching more than 780 million internet connections currently. Furthermore, on the payments side we’re seeing constant enhancement of the user experience as a whole, with same-day delivery, omnichannel, digital services, personalised marketing and more and more subscription-based business models.

There comes a point when lending and payments converge and I think we’re at that place with buy-now-pay-later

Aveek Chaudhur

"Then, of course, social distancing and the shutdown of bricks-and-mortar shops have driven consumers to online channels, even for their day-to-day purchases. That has triggered the growth of e-commerce marketplaces such as Flipkart, Amazon and BigBasket in India. The digital marketplaces are opening up new possibilities – they allow a business owner to extend their product portfolio and customer reach with limited or no additional inventory risk.

“On the other hand, there is also the power of the marketplace operator that needs to be considered. They are in control of which brands they are onboarding, and they also set the rules. I think this will need more regulation, going forward.

“One more trend I see – wearable technology – is on the rise globally but especially in India where startups combine health tracking devices and contactless payment technology. We’re working with multiple providers in this field, with innovators offering everything from smart preventative health ecosystems, combining fitness trackers, apps and health strategies.”

Finally, Chaudhuri predicts further development for QR codes, payment wallets and tech giants trying to capture payment market share. While QR codes have been a payment option in Indian shops for several years now, the country is seeing the development of dynamic QR codes that include the bill amount alongside the merchant’s bank details and instantly close the payment loop.

Chaudhuri says: “More product offerings and journeys will move to QR. And the wallet interoperability space is yet to open up in India – it could change a lot of business models. The giant tech players are trying to capture this payments space. Google Pay and PhonePe is rapidly pushing adoption. We will also see players emerging with super spps, for example, Tata is coming out with its own super-app.

“Cryptocurrencies could be used in the wallets space, and can loyalty be commercialised? It’s an interesting space to watch.”