The Smart Wallet by Mazars India

T h e S m a rt Wa l l e t Knowledge Report

Co-Organiser

Organiser

MESSAGE Rapid technological development in The Internet of Things (IoT) has cardinally evolved fundamental activities governing industries and individuals. Everything and supposedly everyone is going electronic. India had its revolutionary Demonetization Drive in 2016, which consequently gave greater headway into the Digitization spree, creating strong impetus for a cashless and transparent economy. One crucial advancement here has been the rise of "mobile money," which has facilitated an easy and user-friendly mechanism for payments to be made through intangible digital wallets stored in smartphones. India is quite upbeat over this platform, seeing as mobile penetration has surged from being 1% of the population to over 90%, over a span of 20 years. Meanwhile, financial inclusion also brings in a huge opportunity to cater towards the massive unbanked population. Mazars believes that while the amalgamation of technology with money brings endless options for the entire financial services domain, they can only be realized if the entire process is fully understood and welcomed by each and every stakeholder. Trust and Acceptability are key here, which come from sound awareness of these new instruments. We therefore explore to what extent mobile money has been embraced amongst growing economies such as India, along with any loopholes holding back complete adoption. I would like to thank the Exhibitions India Group for having Mazars as a Knowledge Partner for the 26th Convergence India 2018 Expo. We are delighted to present to you the report The SMART Wallet and hope it provides pertinent insights on how money is and can become truly mobile. Wishing 26th Convergence India Expo all the very best.

Bharat Dawan Partner Mazars India

Message The smart wallet revolution is well underway as India moves to a less cash-dependent economy. Increased adoption of smartphones, growth of mobile Internet users, introduction of United Payments Interface (UPI) technology, familiarity and comfort with online payments has led to the rise of mobile money. As a payment system, it is time saving, secure, makes life easier with enhanced customer convenience, etc. Consumers can store personal information in one organised, accessible location – the smartphone. Users enjoy benefits like cashbacks and discounts on their purchases, etc. For the nation, smart wallets generate economic benefits, cuts down on black money (largely used to finance illegal practices), minimise tax evasion enabling authorities to build sound monetary fiscal policies. With Digital India initiatives, it is clear that mobile money will grow rapidly in virtually every corner of the country. The Smart Wallet knowledge paper has been produced by Mazars, a leading independent and integrated international organization specializing in providing audit, tax and advisory services. The paper offers in-depth introduction to the digital wallet and its functions, takes a look at the driving factors, the acceptance landscape amongst consumers, the growing role of fintech, while exploring consumer willingness to use smart phones and best practices to counter security threats. It then examines how digital wallets are most likely to evolve. It is our expectation that the paper will provide new dimensions in the approach to mobile wallets. This knowledge partnership presents a superlative possibility, and both organisations have committed to share best practices and case studies. We hope to continue this collaboration to identify and catalyse new mobile wallet opportunities, while paving the way for India to become a cashless society.

Prem Behl Chairman Exhibitions India Group

T h e S m a rt Wa l l e t Knowledge Report

Table of Contents

1. Executive Summary

2. Introduction

3. Embracing the Fintech Drive 3.1 Fintech Penetration in India 3.2 Drivers Catalyzing Market Growth

3 3 6

Digitization across the globe is inevitable. Prime Minister Shri Narendra Modi has also envisioned to transform India in a knowledge-driven economy, built upon a cashless payment experience. In this regard, Mazars has partnered with the Exhibitions India Group to closely examine the future of digital payments, specifically focusing on the growth of “mobile money.” These mobile wallets (namely “smart” wallets) have gained much traction worldwide, with more than 0.5 bn mobile money accounts registered by the end of 2016. India hosts a promising market, given the surge in mobile users and internet connectivity, coupled with the drive to achieve massive financial inclusion. The report highlights the mechanics and key drivers leading to soaring mobile wallet adoption, positive regulatory developments in India, ongoing impediments, as well as the road ahead.

Driving Factors

4. The Move to Mobile Money 4.1 Core Components 4.2 The Perks of Digitization 4.3 Soaring Global Acceptance 4.4 The Indian Mobile Revolution

7 8 10 10 14

Ease and Convenience: Mobile wallets are relatively easy to access, operate and manage “on the go.” Coordination: Strong integration between stakeholders allows for greater transparency and reconciliation. Timeliness: Instantaneous payments help preserve time value of money. Innovation: Wallet providers are undertaking extensive R&D to bring diverse financial services in a single app. Rewards: Loyal customers can easily be tracked and rewarded for their usage. Safety: Encryption and authentication technology upholds confidentiality and keeps track of funds.

5. Commercializing On-the-Move Payment Solutions 5.1 Market Segmentation 5.2 The Mobile Operation 5.3 A Highly Integrated Business Model 5.4 Major Players in the Indian Transaction Landscape 5.5 The Recipe for Success

18 18 19 20 22 23

6. A Mobile Regulatory Backdrop 6.1 Vision 2018 6.2 Purview of the Payments and Settlement Systems Act 6.3 Key Compliance Parameters 6.4 Master Directions 2017 – Road Towards Interoperability 6.5 Way Ahead: Open Regulatory Arena with Increased Awareness

26 26 26 28 28 30

7. Security at Fingertips 7.1 Gaps Hindering M-Wallet Adoption 7.2 The Framework behind Contactless Payment Communication 7.3 Potential Threats and Counteractions 7.4 Emphasizing Security in Product Features

32 32 33 34 36

Financial Inclusion: Smartphone-enabled wallets can cater to not just the banked but also un-banked population – i.e. people who may not be able to operate full-fledged bank accounts.

Positive Developments in India Growing number of smartphone users

Emphasis put upon having proper internet connectivity across all geographic locations

Introduction of United Payments Interface (UPI) technology

RBI’s Master Directions 2017, highlighting greater credibility checks and interoperability for prepaid payment instruments (PPIs)

Hesitation Points “Stickiness to Change”: Cash has been the core payment mode across history; this habit needs time to change Lack of Skills: Inadequate knowledge or learning opportunities to understand how to operate payment apps. Interoperability: Transfers are not easy and rather costly. This can change with latest technology such as UPI. Security: Many believe cash to be the safest, even though mobiles make use of multiple identification channels from encryption/tokenization/biometrics. Companies must introduce and educate users on such mechanism. Financial Inclusion: Smartphone-enabled wallets can cater to not just the banked but also un-banked population—i.e. people who may not be able to operate full-fledged bank accounts.

Best Practices to Counter Security Threats • Ensure a strong firewall is in place (complex PINs, biometrics etc.) in both the device and app • Refrain from sharing personal/contact details without proper verification of the requester • Use private connections with encryption for sensitive data • Log out from accounts and wireless services when not in use • Download all apps/games from legitimate sources • Separate phones used for financial transactions vs. those used for other purposes

8. The Road Forward 8.1 The Past, Present & Future 8.2 Possibilities and Opportunities in Picture 8.3 India – Building a Data Rich Landscape

38 38 39 39

• Regularly run anti-virus cleaners • Keep the operating system updated with all in-built security controls in-tact

The crux lies in educating both consumers and merchants on the functionality of mobile payments and proper usage, as the mobile can prove to be one of the safest modes of payment. It also generates economics benefits, cutting down upon black money (which is largely used to finance illicit practices), preventing tax evasion and enabling proper data coalition that can be used to build sound monetary fiscal policies. The extent of success here depends on how well firms can build up Trust and Acceptability amongst users, encapsulate an intuitive experience and fill up the DELTA. This can lead payments to drive consumption in the long run. march 2018

2. Introduction

3. Embracing the Fintech Drive

Gone are those days when money restricted itself to simply traditional notes and coins. Rather, this definition has undergone massive transformation through the introduction of various electronic modes of payment such as debit/credit/smart cards, NEFT, RTGS, online e-commerce accounts etc. Even cryptocurrencies have created much buzz amongst users, with many investors choosing to systemize their funds in the blockchain. This stands in line with a growing adoption to cloud-based services and digital data processing, which has altered the nature of payment activity. A steadily rising number of buyers and sellers are choosing to go cashless for greater transparency, accountability and ease in sending/receiving money. In fact, as per the World Payments Report 2017, global digital payment volumes are expected to grow by ~10.9% over the next 3 years, reaching 726 bn transactions by 2020.

One core driver behind digitization of money is the growing Fintech space across countries, which looks at innovative ways to amalgamate technology with financial services, transforming the traditional BFSI industry framework. Globally, over ~12,000 start-ups have mushroomed in this sector, attracting a substantial investment, sizeable consumer base, as well as a long list of offerings that aim to reach both the banked and unbanked population. As per NASSCOM, the global Fintech software and services sector is expected to reach a value of USD 45 bn by 2020, growing at a CAGR of 7.1%. A myriad of parties from multiple industries are joining hands in order to capitalize on the Fintech drive, such as banks, universities/research institutions, technology experts, government agencies, industry consultants and associations. This has developed an integrated ecosystem that thrives upon ground-breaking technological solutions, based on the combined expertise, experience and facilities of a range of partners.

One key development in the sphere of digital payments has been the rise of mobile money. Technology has given the phone a new identity, making it become “smart” in the form of smartphones, and carry out a wide variety of functions such as clicking pictures, video recording, playing games, emailing, listening to music, browsing etc. Another one of such important functions includes enabling users to make mobile payments and manage funds through intangible accounts; namely “mobile wallets.” This means being able to store and utilize money “on the move.”

3.1 Fintech Penetration in India India is steadily transitioning into a dynamic and competitive ecosystem, offering Fintech start-ups a platform to potentially grow into billion dollar unicorns. In this sense, NASSCOM foresees the current USD 1.2 bn Indian Fintech software market to reach a market size of USD 2.4 bn by 2020. Given this activity, the transaction value of the sector will grow at a CAGR of 22%, reaching ~USD 73 bn by 2020.

Online Financial Services would develop to be a INR 15,000 cr market by 2020

However, mobile money is not just about convenience. It also about having an extended reach to a wide base of consumers, who may not have access to full-fledged bank accounts. This thereby leads to financial inclusion. It is this factor that has propelled emerging markets to lead the way in terms of digital payment transformation, with a wide variety of government initiatives, private participation and consumer adoption. In-fact, many nations have made a direct plunge from conventional payment modes to a mobile-based financial services framework. India, with a vibrant IT base and growing number of smartphone users, has also made a leap in the mobile money world, with a number of players such as Fintech startups, network providers, and financial institutions working to provide a range of different e-wallet services. The activity here has drastically ramped up post the cardinal Demonetization Drive in November 2016, with the intent to cut back upon black-money practices and make India a cashless economy. The government has taken various steps such as the imposition of monthly caps, stringent KYC/AML rules and a minimum operating net worth requirement, in order to create a stable field for these prepaid payment instruments. Meanwhile, the introduction of Unified Payments Interface (UPI) technology has opened up the stream for interoperability across banks, which can further spread into mobile wallets. A greater interoperability can popularize such wallets over typical card-based transactions. Nevertheless, the ultimate success of mobile-led wallets depends both on how well firms are able to deliver a wide range of services to the end-user and how well consumers & merchants accept them as valid payment modes. Unlike cash, which is monotonous in nature, users can be provided with a more personalized form of money in digital wallets, which adequately records their purchases, keeps a tab on their preferences, and rewards them for regular usage. Given the sensitive nature of financial transactions, users must also be provided with proper security features (i.e. biometric identification, fraud-prevention technology etc.) and made aware on how such features actually make mobiles one of the safest modes of payment. Proper knowledge and higher functionality of services will translate into a larger network base, which can eventually pan out into smartphones leading digital payments.

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181 45

1,890

179

150

5,793

2,837

CAGR 79%

205

484 4,597

2014

2020F

Wallets

Insurance

Loans

Mutual Funds

Others

Source: Assocham

In terms of placement, nearly 80% of Fintech firms are established in metro cities such as Mumbai, Bangalore and Delhi NCR. Being a financial hub, Mumbai absorbs a wide variety of talent from banks and other financial institutions, hosting a strong ecosystem of bank-led incubators and accelerators with a B2B focus. Meanwhile, Bangalore thrives on its start-up culture, emerging young founders and techies. While in such comparison Delhi shelters a considerably low number of Fintech organizations, it still bags the highest quantum of investment, owing to big names such as PayTM. march 2018

Key Segments The Fintech sphere can include a vast variety of services, ranging from facilitating payments (i.e. transfer of funds from person-to-person, person-to-merchant, government-to-person etc.), to creating big data technology that helps analyze financial transactions and build effective customer risk profiles. Players in this industry are encapsulated into B2B services (services to banks and other financial institutions) or B2C services (services offered directly to consumers). In essence, B2C platforms offer services that enable users to perform and monitor payment & investment services such as digital wallets and POS. Meanwhile, B2B platforms deal with solving technical issues that banks and NBFCs face, within their systems and applications.

The stream of digital payments stands at the fulcrum of activity, bagging a significant proportion of market share and VC funding. Meanwhile, activity in the lending/credit sphere - specifically retail lending - is also expected to gain momentum in the near future, despite there being a tightly regulated regime for all types of players such as P2P lenders and alternative credit scoring/crowd sourcing platforms. While MSME lending is exposed to structural amendments, with new Fintech players addressing concerns around information asymmetry and turnaround time for underwriting loans to small businesses, the â&#x20AC;&#x153;asset aspect of the banking businessâ&#x20AC;? remains open for further innovation. Some prominent names in this industry are as follows:

Fintech business models have changed the scope of lending, extending reach to a wider range of borrowers, who may not have the capacity to meet stringent collateral requirements from banks. This includes making use of crowdfunding platforms, peer-to-peer/retail lending, online funds etc. Alongside this, such technology can also be used to transform a whole range of processes and domains, such as personal financial management, investments, HR, marketing and security. A snapshot of such segments is shown below. These highlight processes where innovations are much needed, having traditional activities restructured through the use of cutting-edge technology.

Fintech Segment Spectrum Investments and Capital Markets Tech

Personal Financial Management

Ar ficial Intelligence

Digital Lending

Payments

Source: MXV Consuting and Company Reports

Data Analy cs and Credit Scoring

Insurance Tech

Security/Biometric Technology

E-Commerce Marke ng Tech

HR and Payroll Process Tech

SPIIntelligence Market Intelligence Source: SPISource: Market

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3.2Drivers Catalyzing Market Growth The Fintech segment has garnered much interest from the Indian society, backed by its features such as greater transparency, timeliness and intensive monitoring. In light of this, the Indian government has taken various initiatives such as “Aadhaar” and “Jan Dhan Yojana”, which have culminated into millions of new bank accounts, driving the rural population towards greater parity with the banked masses, as follows:

In light of such offerings, Fintech firms have bagged a significant share of FDI, from a range of investors as follows:

Investee PayTM MobiKwik

JAM Strategy is driving Financial Inclusion in India

BankBazaar PolicyBazaar

Pradhan Mantri Jan Dhan Yojana

Aadhaar

FINO PayTech

Mobile

70% of Indian Popula on is covered to reap benefits related to Pension, Provident Fund and Jan Dhan Yojana

Mobile connec ons include a wide sec on of banked and unbanked (rural) popula on

2012

2014

2016

2018F

2020F

156 Mn

305 Mn

447 Mn

620 Mn

806 Mn

13%

24%

34%

46%

59%

Launched: August 2014 Bank Accounts: 200 Mn (Feb16)

Ac ve Internet Users (MN)

Itz Cash Capital Float Mswipe Ezetap Citrus Pay

Mobile Phone Penetra on in India (MN)

Total Mobile subscrip on

Smartphone Subscrip on

865

944

140

982

269

1022

413

1063

552

Source: World Bank, IANAI & TRAI

The government’s demonetization drive has also created a huge pathway for the Fintech space, increasing the demand for digitized financial services. While its objective of attaining Financial Inclusion in India is yet to fructify in totality, being obstructed by factors such as inadequate documentation, lack of collateral & financial history, meagre income levels of the marginalized sections, as well as high cost of maintaining bank accounts, they can be overcome by a strong-working Fintech market. This is backed by the minimal prerequisites this industry has to offer, such as low transactions costs, limited paperwork, quick scalability and efficient last mile connectivity. While originally MSMEs in India had restricted access to financial services, due to their modest credit requirements, lack of appropriate collateral and unavailability of documentation, they are now able to receive ample funding opportunities from the Fintech platform. This has helped flourish the market, with MSMEs contributing 38% to the national GDP. Another leg for growth stems from the fact that the BFSI industry in India has various loopholes that restrict complete accessibility to the unbanked population (21% of the adults). Fintech helps bridge the gap here.

Nature of Investee Payments/payment bank, mobile wallet Mobile wallet, recharge, bill payments Online marketplace for loans & insurance Online insurance aggregator

Investor(s) Alibaba, Tata Group, SAIF Partners American Express Ventures, CISCO, Sequoia Capital, Tree Line Asia, GMO, Mediatek, Innoven Capital Amazon, Fidelity, Sequoia Capital, Walden International

Financial inclusion technology provider Multi-purpose Prepaid Cash Card

ABG Capital, Info Edge, Intel Capital, Inventus Capital, Ribbit Capital, PremjiInvest, Steadview Capital, Tiger Global Mgt. ICICI Bank, Headland Capital Partners, IFC, Intel Capital, Blackstone Intel Capital, Matrix Partners

Online lending platform for small businesses PoS terminal for accepting card payments

Aspada, Creation Investments, SAIF Partners, Sequoia Capital Axis Bank, DSG Consumer Partners, Falcon Edge Capital, Matrix Partners, Meru Capital

Payment device maker

American Express Ventures

Payment gateway and mobile wallet

Ascent Capital

As can be seen, a popular nature of investment here is in the payments domain, which is fueled by not As can be seen, a popular nature of investment here is in the payments domain, which is fueled by not just government-led factors (such as demonetization, linkage to Aadhaar etc.) but by the rapid mobile just in government-led factorsby(such as demonetization, linkage to Aadhaar etc.) but by the mobile surge India. This is driven the increased number of mobile connections, as well as rapid a steadily rising surge in India. Thisthat is driven by the the run increased number of mobile connections, as well as a steadily rising smartphone market makes as internet services become even more embedded in daily life. The financial inclusion aspect alsothe brings rural services and urban masses together through the phone. smartphone market that makes run asboth internet become even more embedded in daily life.

The financial inclusion aspect also brings both rural and urban massesadoption, together as through the phone. This shift is in line with the worldwide trend towards mobile money the financial services industry positions itself an app away. Technology is changing the nature of the payment process, where This shift is in line with the worldwide trend towards mobile money adoption, as the financial services money will no longer be stored in stationary wallets; it will become truly mobile. industry positions itself an app away. Technology is changing the nature of the payment process, where money will no longer be stored in stationary wallets; it will become truly mobile.

4. The Move to Mobile Money One crucial development in the growing Fintech segment - digital payments - is of mobile money, 4. The Move to Mobile which has rapidly spurred up mobileMoney payments across a multitude of industries. Technically this concept is not relatively new, with PayPal being established in 1998- digital and the first mobile banking being One crucial development in the growing Fintech segment payments - is of mobile services money, which conducted via SMS in Europe as early as 1999. Subsequently, Apple started its own app store in 2008, has rapidly spurred up mobile payments across a multitude of industries. Technically this concept is not giving way to m-wallets. However, the amount of present activity has grown multifold compared to relatively new, with PayPal being established in 1998 towards and the first mobile banking services being what it was years back. This can largely be attributed massive technological advancement that conducted viauser-friendly SMS in Europe as earlyasaswell 1999. Subsequently, started its to own appinto store 2008, and have facilitated access, as the willingnessApple of many firms step thisinsector givingwith way other to m-wallets. the amount of present has grown multifold compared to money partner players,However, extending the network base onactivity a worldwide level. Over 0.5 bn mobile accounts were registered by the end of 2016, with 170 mn active accounts across the globe. In-fact, what it was years back. This can largely be attributed towards massive technological advancement that mobile money providers process around 30,000 minute, translating intothis over 43 mn has facilitated user-friendly access, as well as thetransactions willingness ofamany firms to step into sector and transactions a day. This frenzy is because many unbanked citizens are now able to conduct payments/ partner with other players, extending the network base on a worldwide level. Over 0.5 bn mobile money transactions, as long as they have access to a smartphone; they no longer need to be placed within the accounts were registered by the end of 2016, with money 170 mn control. active accounts across the globe. In-fact, vicinity of physical bank branches in order to have

mobile money providers process around 30,000 transactions a minute, translating into over 43 mn transactions a day. This frenzy is because many unbanked citizens are now able to conduct payments/transactions, as long as they have access to a smartphone; they no longer need to be placed within the vicinity of physical bank branches in order to have money control.

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4.1Core Core Components Components 4.1

Core Functions in Mobile Payments

Core Functions in Mobile Payments M-wallet

Making use of the smartphoneâ&#x20AC;&#x2122;s NFC Near Field Communication Wireless Technology) or Bluetooth Low Energy to make payments

mPOS (Mobile Point of Sale)

Using a smartphone, tablet or dedicated wireless device to act as an electronic point of sale terminal for processing payments

Payment Platform

Online payment solutions allowing users to make peerto-peer transfers or make in-store merchant payments

Bill Carrier

Users purchasing apps/games via the smartphone and carrying forward the charge to their mobile phone bills

Digital Payments Ecosystem SERVICE PROVIDERS

SERVICES

Banks, Licenses/Non-Banks, Other FIs, Fintech Businesses, Telecom Providers Can partner with each other (as well as vendors in various industries) to broaden the network, provide greater value-add services and enable interoperability for users

Primary Ac vity Model

Theoreticallymobile mobilewallets wallets(m-wallets/e-wallets/digital (m-wallets/e-wallets/digitalwallets) wallets)are aresimply simplyan anintangible intangibleversion versionof of Theoretically physical physicalwallets, wallets,which whichallow allowusers usersto tomaintain maintainfunds funds(as (asdone doneininaatraditional traditionalbank bankaccount) account) electronically. This is popularly done through mobile telecommunication devices â&#x20AC;&#x201C; the â&#x20AC;&#x153;smartphonesâ&#x20AC;? â&#x20AC;&#x201C; that â&#x20AC;&#x201C; electronically. This is popularly done through mobile telecommunication devices â&#x20AC;&#x201C; the â&#x20AC;&#x153;smartphonesâ&#x20AC;? people carry around with them at all times. Users can download the mobile wallet app (if not already that people carry around with them at all times. Users can download the mobile wallet app (if not provided by the manufacturer itself), create their personalized accounts, link it with their credit/debit already itself), create their personalized accounts, it with cards, andprovided use the by appthe to manufacturer make subsequent purchases (either by scanning the QRlink code at thetheir merchant credit/debit cards, use mobile the appnumber, to make email subsequent purchases (eitherthere by scanning the to QRuse code at store, or entering theand payee address etc.). Basically, is no need traditional plastic cards and information each timenumber, when conducting a transaction; the phone quite the merchant store, orenter entering the payee mobile email address etc.). Basically, there isis no enough, comprising of the following key functions: need to use traditional plastic cards and enter information each time when conducting a transaction; the phone is quite enough, comprising of the following key functions:

â&#x20AC;˘ â&#x20AC;˘ â&#x20AC;˘ â&#x20AC;˘

Payments for Goods/Services Recharge Bill Se lement Banking & Financial Services (Lending, Insurance, Investment Services, Savings/Transac on accounts)

USERS Consumers, Merchants, Ins tu ons, Businesses, Government The average user seeks alterna ve payment mechanisms that are accessible & affordable, built upon a secure pla orm

UTILITY Paying Bills

Saving

Borrowing

Lending

Insurance Services

Gifting

Buying

Remittance Services

Open Wallets: Users are allowed to pay for&goods & services at different locations a â&#x20AC;˘ Open Wallets: Users are allowed to pay for goods services at different locations from a from centralized

wallet, withdraw cash fromwithdraw ATMs/banks moneyand to other wallet users. Thesewallet occurusers. in colcentralized wallet, cashand fromtransfer ATMs/banks transfer money to other laboration with banks such as SBI Buddy. These occur in collaboration with banks such as SBI Buddy.

Semi-Closed Wallets: Users pay merchants who are contracted with the particular â&#x20AC;˘ Semi-Closed Wallets: Users can paycan merchants who are contracted with the particular MobileMobile Service without being able to withdraw cashOla â&#x20AC;&#x201C; i.e. PayTM, Ola Money. ProviderService (MSP),Provider without (MSP), being able to withdraw cash â&#x20AC;&#x201C; i.e. PayTM, Money.

Wallets: Generally used by ecommerce companies, users here can only pay for goods & â&#x20AC;˘ Closed Closed Wallets: Generally used by ecommerce companies, users here can only pay for goods & serservices that a firm particular has to offer â&#x20AC;&#x201C; i.e. Make my Trip Wallet. vices that a particular has tofirm offer â&#x20AC;&#x201C; i.e. MakeMyTrip Wallet.

Depending on their nature, m-wallets can be used for conducting multiple payment services, such as

Depending on their nature, m-wallets can be used for conducting multiple payment services, such as securingreceipts, receipts,IDIDcards, cards,loyalty loyaltycoupons, coupons, transferring transferringmoney money to to aa range range of of user user accounts, securing accounts, paying paying utility bills, shopping for movies/airlines/hotel tickets, recharging mobile phones etc. This is possible due utility bills, shopping for movies/airlines/hotel tickets, recharging mobile phones etc. This is possible due the theinvolvement involvementofofvarious variousplayers playersininthe thedigital digitalpayments paymentsecosystem, ecosystem,as asfollows: follows:

Support Enablers

Variations ofof M-Wallets Variations M-Wallets Regulatory Support

Governments that host an open and flexible regulatory environment for Digital Payment Providers (DPPs) to operate â&#x20AC;&#x201C; i.e. structured licensing process, incen ves etc. Alongside this, they provide a clear set of legisla ve norms that protect consumers from cyber-issues, balancing the interests of various stakeholders.

Network Opera on

Enterprises and Network providers that extend the coverage of DPPs and user interface. An uninterrupted service line that keeps opera ons smooth and informa on in real me, across the payment process.

Stakeholder Acceptability

Merchants, Consumers, Banks, Regulatory Authori es and all those involved in the transac on value chain accept the digital payment pla orm as a sound payment mechanism, crea ng a posi ve feedback loop.

Source: Press Articles & Mazarsâ&#x20AC;&#x2122; Analysis

Evolution into the digitized wallet system is not just for traditional money alone. Even cryptocurrencies (digital â&#x20AC;&#x153;moneyâ&#x20AC;? that is created/secured by cryptography instead of a central bank) have joined the frenzy with the rise of the Bitcoin Wallet. Given the nature of crypto-assets, these wallets hold private keys for each crypto-user, reflecting ownership of the public digital code and hence giving access to the blockchain. While offline wallets (such as desktop, paper, hardware wallets) are better suited when opting for long-term storage of the cryptocurrencies for investment purposes, online alternatives such as mobile crypto-wallets are gaining much appeal for everyday use.

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4.2 The Perks of Digitization

Kenya – The Lead On

The reasons why various stakeholders around the world are making the radical shift from traditional cash/cards/accounts to their mobiles is because digitization of payments – specifically in mobile phones – brings in a host of benefits for various stakeholders, as follows:

Why Digitize?

Why Digitize? “On the Go” Features for the “Smart” Consumer

Digital wallets are much easier to use, access and operate. They clear the hassle of carrying a physical wallet all around. Further, m-wallet providers are also upgrading to allow the digital storage of various key documents, such as PAN card, Aadhaar, Driving License etc.

Coordinated Management System

Given the need for integration amongst various pillars of the ecosystem, the digital model facilitates strong coordination between users’ credit cards, bank accounts, mobile accounts etc. This helps reconcile bills/transactions for proper management.

Real-Time Operation

Innovation at the Forefront

Rewards for Usage

Emphasis on Safety

Financial Inclusion across Industries

Kenya’s launch of M-PESA in 2007 is a prime example on how mobile payment systems paved way in the global sphere. Though Safaricom and Vodacom ini ally designed this system in order to allow microfinanceloan repayments through the phone (and reduce the stress behind cash-handling for lower interest rates), it grew onto become a generic money-transfer scheme; users could request to deposit, withdraw and transfer cash on the phone, which was then subsequently handled by dedicated agents who administered the sufficiency of funds, credited appropriate amounts in M-PESA accounts etc. In fact, this pla orm became quite an effec ve tool during the post-elec on violence breakout in early 2008, when M-PESA helped transfer money to those trapped in Nairobi’s slums, or those who wanted to avoid placing money in banks that were entangled in numerous disputes. These various uses at the me of need, along with being able to cater to the formerly expensive money transfer market and experimen ng into new areas, clearly provided impetus for users to not just join but encourage others to become part of the network as well; mobile money has become ubiquitous in Kenya. M-PESA has not only dispersed in other parts of the world such as Tanzania, Afghanistan, South Africa, India & Eastern Europe, but has also triggered the growth of similar models worldwide, such as Equitel, Airtel Money, ICICI Pockets, HDFC Chillr etc.

Transactions conducted electronically are instantaneous in nature, as there is no need to account for cash/change, deposit money with the bank to earn interest etc. This speed helps drive efficiency up for both the buyer and seller. Many m-wallets come with robust features allowing users to preload money in their customized accounts for seamless payments. With that, m-wallet providers are engaging in R&D to help users get the complete “financial services” experience on the smartphone – i.e. securing loans digitally, using UPI to avoid multiple sharing of bank account information, paying for a range of services etc. Opportunities are endless. Users can accumulate rewards/points for making regular purchases through their mobile phones, which can then be redeemed upon subsequent deals. Unlike cash, each transaction is duly recorded and accounted for electronically, which makes it easier to recognize and gift loyal customers. M-wallet providers are vary of data sensitivity and therefore utilize encryption technology to protect consumer-data in payments, upholding confidentiality. Technological advancement has also provided multiple channels for verifying user authenticity, which is not available when handling paper notes. Anyone, regardless of their access to full-fledged bank accounts, can join the bandwagon of digital payments. This is largely important in helping “organize” the unorganized sectors in India, where heavy reliance on cash gives way to several inadequacies among operations/reporting/sustainability.

In fact, the sector received a substantial boost post 2008, due to being able reach out to the underserved population in developing markets, after which the total number of mobile money services has grown by 16 times to reach a total of 277 mn by the end of 2016. What started out as a lead in Sub-Saharan Africa, soon trickled over to South East Asian countries, with expansion into the Middle East, North Africa, Latin America, Europe and Central Asia, over the last decade. 300

250

254

200

250

230 177

200

177

150

116

150

116

100

69 69

Source: Press Articles 50

4.3 GlobalAcceptance Acceptance 4.3Soaring Soaring Global One acrosscountries countriesisisfinancial financialinclusion, inclusion,asasmany many Oneofofthe thekey keypillars pillarsbehind behindthe thesurge surge of of mobile mobile money money across individuals situated in different stages of economic advancement have been provided with a transparent, individuals situated in different stages of economic advancement have been provided with a transparent, digitized means towards financial services. The market has also grown in terms of the range of services digitized means towards financial services. The market has also grown in terms of the range of services offered, which is very different when the industry first took ground for simply purchasing airtime or offered,money which across. is very different when the firstbrought took ground for simplyusage. purchasing airtime or sending Mobile money hasindustry now been into everyday

March 2018

277

270

100

254 230

300

Source: Press Articles

sending money across. Mobile money has now been brought into everyday usage.

270

Growth of Mobile Money Services (2001 - 2016)

2001

2002

1 0

2001

3 2003

3 2002

3 2003

2004

56 2004

2005

Sub-Saharan Africa

6 2005

2006

7 2006

East Asia and Pacific

7 2007

2007

South Asia

17 17 2008

2008

2009

Middle East and North Africa

2010

2011

2012

2011

Latin America and the Carribean

Middle East and North Africa

2013

2012

2014

Europe and Central Asia

Latin America and the Carribean

2013

2015

2016

2014

Europe and Central Asia

Source: Groupe Spécial Mobile Association

march 2018

2015

The rate of growth is different as each country has a unique history and development in the mobile money domain. A snapshot of few of these countries is as follows:

Korea – Driven by Cashless Similar to Kenya, cash is also “not king” in South Korea, cons tu ng only 20% of transac ons. Rather, customers like to make use of a variety of cashless op ons available. The popularity of such mechanism can be traced back to 2004, when T-money was introduced to streamline public transport payments by the use of a stored-value, rechargeable chip-enabled smart card. It has steadily been modified to fit seamlessly into credit/debit cards, as well as SIM cards, enabling consumers to tap their phones to make a variety of payments for not just transport but also at retail/restaurant/convenience stores etc. This has dras cally surged the market up for electronic payments, including mobile money. In fact, many tech giants have entered the space post the government relaxed financial regula ons in 2015. Samsung Pay has already hit the USD 12 bn transac on volume mark, while other mobile payment apps such as Toss, Naver Pay and Kakao Pay are genera ng an ever-growing subscriber base. In line with this, the Bank of Korea has even cut back upon issuing paper money and min ng coins, with the objec ve of going cashless by 2020 in order to help kick back economic growth.

China – Mobile Frenzy China has become a leading global force in digi za on, with its boom in e-commerce accoun ng for ~40% in value of worldwide transac ons. Its internet user penetra on has grown from 25% in 2013 to 68% in 2016, paving a significant market base for mobile payments. In fact, the country recorded a whopping USD 5.5 tn worth of transac ons by mobile payment in 2016, with an upcoming surge forecast ahead as more than 600,000 villages go cashless. However, it has not been long since this drive has gained momentum. Cash was s ll considered “king” in China some three years back un l AliPay and WeChat Pay shook the system by integra ng mobiles into various payment avenues such as taxi fares, peer-to-peer transfers etc. These apps have become ubiquitous, with their easy-to-use feature garnering much appeal from people of all age groups (including children and the elderly) from both rural and urban areas; they all know the basics of QR scanning for making purchases. This has made these two players account for over 93% of the country’s mobile payments market, with plans to expand in other parts of Asia, including the neighboring region of Hong Kong. Many other firms have also cropped up, with Chinese ci es becoming hotbeds of digital innova on in the me to come. While China itself did not have the tradi onal payments infrastructure legacy that most developed na ons have, it leaped straight away into smartphone technology, with mwallets becoming second nature.

UK – Slow But Steady Similar to the US, the UK’s entry into mobile payments has been slow, with consumers generally op ng to use direct debit, banking websites or contactless cards. As per various surveys conducted, only people aged 18-34 show some inclina on towards using mobile apps/contactless NFC via smartphone/smart watch etc., but even the 10% response is quite low compared to other millennials elsewhere. Nevertheless, this is not to say that this market does not have poten al. UK’s adop on rate has steadily increased over the years, even outpacing the US in a variety of aspects. This is because the broader acceptance towards NFC has made merchants very comfortable with tapping at the POS. Hence, the amount of money spent by mobile payments surmounted to over GBP 370 mn in the first half of 2017, which is a 336% rise in comparison to the same period in 2016. Much of this mobile market is dominated by purchases related to transport (mass transit network), as well as peer-to-peer transfers. This is simultaneously driving up the mobile wallet sphere. As per a study by the Interac ve Adver sing Bureau (IAB) and On Device Research, over 24% of UK mobile buyers now use a mobile wallet to pay for goods/services. Therefore, while mobile money here is not a top preference, the ongoing development does show a steadily promising market ahead. Source: Press Articles

While financial inclusion is not at the forefront in developed countries, mobile banking can still cater to the growing shopping/personal transaction needs of individual consumers. This is largely due to the high cell phone penetration rate, giving everyone accessibility towards the digital platform. For example in the US alone, over 64.5% of the population own a smartphone as of 2016; this number is expected to reach to over 80% by 2022. Meanwhile the smartphone penetration rate in the UK as of 2017 stands at 65.8%, with the number of monthly active smartphone users expected to reach over 54 mn by 2022. Hence, MSPs have a wide scope in understanding the diverse needs of these consumers and translating them into their cell-phones, given that they already have access to the technology. While this may be slower in terms of banking services, where people largely use their phones as a complementary feature as opposed to conducting their main financial transactions on the platform, there is scope for them to make the shift once they start using mobiles for a range of other services. This is especially promising in general shopping activities, given the positive response of global respondents on how they use their phones across various steps of the buying process.

US – Limited Usage In the US, the use of m-wallets is at de minimis, with a slow but steady number of new consumers par cipa ng in this niche market. While its history can be traced to July 2008 when Apple started its app store, opening it to third party developers, the market saw a lot of uncertainty as players learned how to capitalize on apps holding payment data. The rise of Google Wallet in May 2011 further gave a push to this industry, demonstra ng the prac cal framework that led onto various “miss and hits.” Though the US mwallet sector has stabilized over the last few years, with companies such as PayPal being able to gather a cri cal mass, the adop on remains rather flat as consumers have either made their minds to replace cards with digital wallets or s ck to former methods. As per various surveys done in the research/consul ng domain, nearly a third of the respondents do not own and neither are interested in m-wallets. These preferences, largely driven by habit, will take me to change; regardless of the exact technology that governs the system (NFC, Bluetooth etc.), the key for rapid adop on lies in having both consumers and merchants believe that mobile-enabled wallets can actually host seamless payments.

March 2018

march 2018

How Customers Use Mobiles in Shopping 21% 22%

AS A PERSONAL SHOPPING ASSISTANT

India has largely capitalized on the growing developments behind mobile technology, enabling it to become a core function of society. Currently, it stands as the second-largest global smartphone market in terms of users and is seen to constitute the largest global smartphone sales in the coming years; the size of the domestic mobile manufacturing market is forecast to become INR 135,000 cr in FY19-20, which is a rise of over 43% from the INR 94,000 cr market as of FY16-17. The recent demonetization act, coupled with the intention of building Smart Cities across a digital & cashless India, foresees the country take off into its fourth and fifth generation wireless technology leap.

36%

17%

37% 25%

30% 34% 26%

TO MAKE SHOPPING TRIPS QUICKER OR MORE EFFICIENT

32% 31%

TO LOOK FOR COUPONS OR DEALS

32%

38% 54%

34%

TO MAKE BETTER SHOPPING DECISIONS

43% 44%

27%

49% 38%

TO LOOK UP PRODUCT INFORMATION

44% 36%

TO COMPARE PRICES

North America

Latin America

10%

20%

Africa/Middle East

30%

40%

Europe

Forecasted Growth in Mobile Payments (INR)

57% 55% 56%

60% 50%

60%

Asia-Pacific

The adoption of mobile technology into everyday life is inevitable for both developed and developing economies at a point of time, simply because it feeds from an ever-growing network of users, which ultimately shapes the way for how activities will be carried out. Industry-wide value chains are spread out across various countries; if a large part of them have accustomed the mobile way of sourcing, processing, selling & buying, others will follow suit.

4.4 The Indian Mobile Revolution India, being one the various South Asian countries that are currently running as “mobile money hotspots,” has come a long way from the start of its mobile journey 22 years back. It all started in 1994, when West Bengal CM Jyoti Basu invited B K Modi in view of making Calcutta become India’s first city to host a mobile network; it subsequently culminated into the first historic mobile call on July 31, 1995, marking the start of a massive mobile revolution into the country.

March 2018

945

70%

Source: Nielsen

2205

54% 54%

41% 0%

Around 60-65% of total e-commerce sales here are generated through mobile devices & tablets. This is why mobile payments, which have been in existence since 2010, have grown multifold over the last 6 years. Their presently smaller contribution towards the digital payments landscape will change as they increase steadily year-on-year. The total mobile payment transaction volume in India stood at 2.9 bn as of FY16, generating INR 8.2 tn worth of transaction value. While the transaction volume is forecast to rise at a CAGR of 132% from FY16-22, reaching 460 bn by the end of 2022, the value is expected to grow at a CAGR of 150% in the same period, becoming INR 2,205 tn by 2022.

53%

328 2.9 8.2

6.9 22.5

16.2 62.5

37.8 146

FY16

FY17

FY18

FY19

Transaction Volume (Bn)

FY20

460 195

FY21

FY22

Transaction Value (Tn)

Source: Assocham

With that, mobile internet penetration has surged in tandem, with there being around 389 mn mobile internet users as of December 2016 – roughly 29% of the total population. This number will reach over 420 mn by June 2022, as over 35% of the population is planned to get access. In terms of mobile money, while Oxigen Wallet was the first non-banked m-wallet in India, approved by the RBI in 2013, the market has frantically built up with various players (from both the banking and non-banking sectors) such as PayTM, MobiKwik, Citrus Pay and many more. The market is appealing here, given that m-wallet transactions have skyrocketed by 17 times from 2012-13 to 2015-16, reaching a value of INR 205.8 bn as of 2016.

march 2018

400 300

100

200 50

0 2012-13

100

2012-13

2013-14

Transactions(mn) (mn) Transactions

2014-15

Value (INR(INR bn) Value

2015-16

0 2015-16

bn)

Source: RBI

However, there is still ample room for growth in this sector, in terms of the m-wallet concept gaining widespread recognition. This is because majority of the consumers still prefer to either use their credit/ debit cards (provided they have access to such cards) or Cash on Delivery (COD) to make payments. However, this becomes a problem when some consumers do not have credit/debit cards and the COD facility is not offered on many merchant sites. Using m-wallets becomes key here as they are easily accessible; however, to use these one must first ensure access to the mobile itself. While over 650 mn people in India own a mobile phone, only over 300 mn of them have a smartphone. Hence, the mobile sales volume here itself could grow by over 50%, as more users get their hands on the “smart” technology. Counterpoint Research claims that a rise of 176 mn smartphone users will be witnessed in the next 5 years itself. A pivotal driver behind such growth of smartphones and hence m-wallets will be of India’s budding young population of the millennials – popularly known as the “digital natives”. They are working steadily towards interlocking mobile usage with every part of human life. Alongside this, the bustling start-up culture, given the “Make-in-India” initiative, is looking at more grounds to not just propel the growing consumption but also develop a complete set of value-driven technology in-house. Partnerships with m-wallet providers has become key for companies across a range of industries – pharmaceuticals, banking & financial services, education, etc. – as they provide the gateway for players to integrate the digital platform with industry-specific services, in order to not only retain the existing client base but also attract greater consumers in the market. Such tie-ups are also intended to raise funds for m-wallet players, given that both parties can capitalize upon each other’s unique expertise/ offerings in this multifaceted industry and generate synergy across the value chain. In light of this, firms in the mobile money sector are strategizing upon growth through acquisitions, JVs, partnerships and alliances, leading to lower costs and increased business agility.

March 2018

300 200 100 0

Source: Press Articles

150

Hike – the homegrown instant messaging app, has partnered with Airtel Payments Bank for the digital m-wallet. Through this partnership, Hike will be able to provide its 100 mn registered user base with all the services provided by Airtel Payments Bank; this will in turn grow its service base and clientele number. Meanwhile, Airtel will also be able to expand its reach to a greater number of users.

Value in INR bn

Transactions in mn

500

400

Vodafone India has extended partnership with itel Mobile – India, offering a cashback of INR 2,100 to new buyers of itel A20. This cashback will be credited in the Vodafone M-Pesa wallet, helping popularize the phone, the power of 4G connec vity and usage of digital wallets in the country. Both firms will capitalize upon increasing their user base.

600

200

Euronet Services India Pvt. Ltd, provider of electronic payment & transac on processing solu ons on a global level, has formed a strategic partnership with Infini um Holdings Pte. Ltd – a leading provider of electronic payment & authen ca on solu ons in Asia. This collabora on allows both firms to leverage upon each other ’s differen ated technological exper se (i.e. i n authen ca on/authoriza on) and local market knowledge, such as of India, to provide innova ve combined offerings.

500

700

Transactions in mn

250

Key Digital Payment Partnerships India, 2017

600

Indusland Bank has associated with MobiKwik to launch its new m-wallet, enabling customers to pay with the MobiKwik merchant network. Bank account holders can sync their accounts once and then pay with the cobranded app, without having to use the MobiKwik prepaid wallet separately. This will create synergy between banks and fintech companies in the payments business.

Surge in Mobile Wallet Usage - India

One of the leading digital pla orms, Paytm, has partnered with ICICI Bank to provide customers with instant credit for use across bill payments, movies etc. through Paytm-ICICI Bank Postpaid. The product relies on the bank’s analysis of customers’ digital behavior to determine the credit worthiness. Such limit will ini ally be offered to select customers of the bank using the Paytm app, and then move onto other Paytm customers, crea ng a large user base.

700

Examples of a few key m-wallet partnerships in just 2017 are as follows:

march 2018

Similarly, the m-wallet players have also indulged in creating tie-ups with a variety of merchants operating in the e-commerce space, as follows:

Leading M-wallet Players and their Tie-ups with Merchants

eting, e-shopping, e-food ordering, electronic insurance premiums, metro rides and other transit card recharges. The surge in such numerous types of transactions over the last 2 financial years is largely attributable to rising awareness around the digital payments infrastructure, as well as increasing merchant tie-ups (especially at small terminals such as transport facilities, groceries and other merchant stores).

Yehhi.com, BookMyShow, Dish TV, IRCTC, MTNL, Yaatra.com, Ferns & Petals, Koovs, Cleartrip, Fu Cinemas, Satya Paul, Redbus.in, OYO Rooms

The RBI foresees a six-fold rise in mobile payments by FY22, which will also drive growth in the m-wallet market. The radical demonetization drive has also created a lucrative opportunity for players, with the share of m-wallet payments expected to rise from 20% in FY16 to 57% by FY22. This is because post 2016, the RBI temporarily relaxed the caps on such wallets from INR 10,000 to INR 20,000 per account holder, and enabled merchants to transfer INR 50,000 per month from their wallets to their bank accounts. This initiative is seen to have encouraged m-wallet usage in FY16, gaining a market size of INR 1.54 bn. The numbers are expected to further grow by 196% over FY17-22, reaching a total market size of INR 1,512 bn by the end of FY22.

Big Bazaar, Cafe Coffee Day, WHSmith, PVR, Domino's, Pizza Hut, Myntra, Jabong, MakeMyTrip, Yatra, BookMyShow, JustEat, eBay, ShopClues, Pepperfry, Zomato, Food Panda

Forecasted Growth in Mobile Wallet (INR)

M-wallet Players

Merchants Homeshop18, MakeMyTrip, BookMyShow and Naaptol, Delhi Metro, Ola Cabs, Jugnoo Autos, Zomato, Food Panda

Healthkart, Lenskart, Millap, Meru Cab, Pepperfry, Sun DTH

260

275

The Mobile Store, Planet-M, Croma, One Mobile, In & Out, Sify Iways, Music World, P3, Next stores TABcab

100 95

Uber Dominos, CCD, Provogue watches, TANZ Headphones

5. Commercializing On-the-Move Payment Solutions The move towards mobile money has created a very robust market for businesses to operate in, where there is stifling competition on how to commercialize various payment processes “on-the-move.” This is seen through the rise of the Mobile Banking Platform in India, which enables users to conduct a range of financial services in a friendly and affordable manner. Hence, there has been a massive migration of consumers from cash transactions to card/wallet based transactions, backed by the convenience, flexibility and ease of operation the medium offers.

5.1 Market Segmentation Within this domain, the Indian Mobile Payment market is segmented into 3 categories: Mobile POS, M-Banking and M-Wallet. M-Banking has contributed the largest share as of FY17, with the majority of transactions being “money transfers. Its share in the mobile payment market has increased from 8% in FY14 to 56% in FY17. Concurrently, m-wallets have contributed ~30% share in the volume of transactions, stemming through mobile payments. This market for m-wallets is largely segmented into 3 broad categories: namely Money Transfers, Recharges (Bills & Payments), and Other Activities. The “Money Transfer” segment, constituting bank-to-wallet, wallet-to-wallet and wallet-to-bank transfers, is one of the major categories in the Indian m-wallet market, constituting a 38% share in FY17. This is closely followed by the “Recharges and Bills Payments” segment, catering towards mobile phone recharges as well as DTH, Landline and Utility bill payments; this makes up over 31% of m-wallet transactions. The remaining 31% is captured by services offered by ecommerce firms, including a range of online shopping activities such as e-tick-

March 2018

0.6 0.2

2.1 0.95

FY16

FY17

3.5

FY18 Transac on Volume (Bn)

45 11

FY19

FY20

FY21

FY22

Transac on Value (Tn)

Source: Assocham

In order to cater towards the growing demand, many new licenses have been issued, creating an open market space for players to operate in. For example, various new firms from the banking domain have entered in the market since FY15, namely HDFC Zappy, ICICI Pockets, SBI Buddy, YES Pay and Axis Ping Pay. These m-wallets, operated by banking entities, do not require agents or distributors in its value chain and can be directly operated by bank account holders.

5.2 The Mobile Operation The operative model behind m-wallets is fairly simple: Smartphone users install a particular application on their phones and create an account (which is then verified through the mobile’s OTP to generate a Permanent Pin), enabling them to use all services such as transferring funds, loading money, making payments etc. While bank account holders typically use their debit/credit cards to load money, applications also allow non-banked individuals to load with cash by visiting any m-wallet retail store. This financial inclusion is very important, as a certain portion of tech savvy consumers may opt for setting up full-fledged bank accounts with mobile banking, being able to take care of their financial services on a single electronic device.

march 2018

Successful players are those who are able to understand the needs of different consumers (i.e. their degree of technical know-how, accessibility to traditional banks, core payment areas, familiarity with smartphones, rise profiles etc.) and develop products that either cater to a niche group or can be customized to appeal to a wider range. Firms must also make sure that the right environment exists – i.e. proper awareness, access to smartphones and the internet - in order to ensure m-wallets are feasible to use at all points of time.

5.3 A Highly Integrated Business Model MFS providers operate on a “For-Profit” business model. This sector constitutes of mobile network operators (MNOs) such as Vodafone, Airtel, BSNL etc. that host applications such as M-PESA, Airtel Payments bank etc., as well as firms that develop technology platforms and partner with MNOs to provide connectivity to the end user – i.e. PayTM, MobiWik, Freecharge etc. Such products are operative with all mobile network providers and functional throughout the country. Subsequently, these firms may also partner with banks/financial institutions, the government, and other industry parties to enable users to carry out a range of monetary transactions.

Parties Involved in setting up of M-Wallet In India Closed

Issuing Company

Card Holder

Semi-Closed

Issuing Company

Semi-Open/Open

Issuing Company

Card Holder

Merchant Payment Gateway

Card Holder

Bank Bank

Network Partner

Merchant

What happens to money To the issuing company’s account

to escrow account

To bank account

While a specific company may choose to issue, create and host its own app with an exclusive wallet (i.e. closed wallet by the issuing company), many merchants prefer to tie up with independent mobile wallet providers such as PayTM, given that majority of users wish to utilize funds from a common source. Hence, for these wallet providers, much of the revenue is levied from commissions, which is earned through merchants or users involved in the transaction process. While MFS providers also catalyze revenue by charging transaction fees to the end-user, majority of users in India are not billed for registration or for depositing money in m-wallets; rather, only money transfers and cashing-out services are chargeable. Therefore, much of the revenue growth is dependent upon the frequency of transactions, fueled by the number of users that join the application network. In light of this, the distribution of services (by empaneling with multiple parties) is critical to this model, as it enables the products to gain a wider end-user outreach and drive profit. This involves joining hands with a network of agents and franchisees (with a specified commission scheme), who aid customers in setting up their accounts and make transactions. Partnerships across a range of entities, including MNOs, Local Banks, the Government, Regulators, and service providers in many different industries are highly valuable in this regard, helping disperse the quantity and quality of the m-wallet service across multiple domains.

Mobile Network Operators (MNOs)

Mobile financial service providers partner with mobile network operators to ensure a wider outreach of service in the rural and urban parts of India.

Various en es in the Mobile Wallet Space

Mobile Payment Vendors conduct each transaction “task” internally on their customized technology platforms, developed by a mobile financial service provider (MFS). The communication technology works in tandem with the features of a smartphone, allowing consumers to upload and store money in their m-wallets, which can be used for their day-to-day needs. The mobile banking model utilizes a user friendly interface, which can be installed in both smart-phones and feature phones. In fact in India, certain applications such as BHIM, UPI etc. are exclusively designed to function on feature phones, aiming to capture a larger section of the rural population and provide them access to digital financial services.

Local Banks – Licensed by RBI

Businesses that offer banking services also partner with banking ins tu on/firms. For example, PayTM is a mobile financial service provider, based in India, which has now acquired the licence to run PayTM Payments Bank in India.

Government of India

Mobile money pla orms are being seen by the GoI as a key way to distribute G2P payments (welfare payments, salaries etc.). The GoI is working with major MNOs to send payments for welfare schemes directly to users’ mobile linked bank accounts.

Financial regulator of the country – RBI

The central bank of the na on (in which the firm is opera onal) provides a license to the company to offer the mobile financial service.

Other Service Providers

Companies are increasingly partnering with other organiza ons that want to use their pla orm. In India, Mobikwik & FreeCharge have partnered with a number of commercial businesses to allow consumers to pay for shopping and other availed services through the mobile.

Source: World Bank & Press Articles

Interest earned by the Issuing company Company my or may not earn interest

4-8% intrest can be earned only through “core portion agreement”

Company and bank both earn interest

Source: Assocham

March 2018

march 2018

are highly valuable in this regard, helping disperse the quantity and quality of the m-wallet service across multiple domains. Key players in the mobile money market, such as PayTM, MobiKwik, FreeCharge, ItzCash and PayWorld, have tapped the opportunity in the growing online space; many consumers have tweaked their payment needs and switched to such alternative wallets in the ongoing cashless drive.

The various ways m-wallet providers can earn revenue in the domain is as follows:

Revenue of M-wallet The various ways m-wallet providersGeneration can earn revenueModel in the domain is as follows:

Some of such key players under operation currently, along with their Gross Transaction Value (GTV), are as follows:

 Commission Income from Recharges: Companies earn commission Banks such as through talk time recharges, as HDFC Revenue Generation ModelICICI, of M-wallet m-wallet Comapnies

Tie-ups

Receives certain percentage as a commission on every transaction

• Airtel Money

India Transaction Landscape 2017 (%)

Movie Booking website such as bookmyshow

Airlines such as Indigo, Spicejet

Mobile Wallet GTV Share

m-wallet Users

Others

electricity boards

Revenue • Vodafone M-Pesa such as BSES Generation • Idea money of m-Wallet • Oxygen Wallet Companies • Paytm are highly valuable in this regard, helping disperse the quantity and quality of the m-wallet service • Mobikwik

across multiple domains.

42%

4% 11%

Others

Source: Assocham

43%

The various ways m-wallet providers can earn revenue in the domain is as follows: Source: Assocham

 Commission Income from Recharges: Companies earn commission through talk time recharges, as well as utility and bill payments. Revenue Generation Model of M-wallet  Income from Merchants: This is earned by two ways. First as a one-time setup fee, which firms earn when they register merchants on their website. Subsequently, wallet providers earn commission when users transact with their designated merchants on the m-wallet platform, based upon the value of such transactions.  Interest Income: Income here is accrued on a time proportion basis, at the applicable rates.  Income from Forfeiture of Unused Users’ Wallet Balance: Income is recognized when such user amount is forfeited.

5.4 Major Players in the Indian Transaction Landscape 5.4 Major Players in the Indian Transaction Landscape The Indian m-wallet market is highly fragmented, with a long list of players hailing from different sectors, which instils intense competition upon building a large consumer base. This landscape space The Indian m-wallet market is highly fragmented, with a long list of players hailing from different sectors, includes firms such as Telecom Network Operation & Distribution entities, Ecommerce firms, (through whichbased instils shopping intense competition upon building a large consumer base. This landscape space includes brand apps), Banks, NBFCs, as well as many Mobile Payment Application entities. The firms such as Telecom Network & Distribution entities, (through branda driving factor around who drivesOperation the majority of share depends onEcommerce the networkfirms, of users that utilize particular wallet;apps), this is Banks, based upon both the as quality quantity of partnerships, well as The the driving presence based shopping NBFCs, as well manyand Mobile Payment Applicationasentities. of a diverse merchant base. The rest lies upon execution; players that are able to offer seamless service factor around who drives the majority of share depends on the network of users that utilize a particular and reach consumers both in urban and rural areas (who may have different needs as regards to usage, language, mode of operation etc.) are the ones that take home the larger slice of the market.

• The rest of the market is extremely fragmented with 10+ players, and none with a market share >4%. • Jio Money (on the Reliance Jio network) and Airtel Money (on the Airtel network and Payment Bank License) are expected to be the breakaway Players. • Mobikwik, backed by Sequoia Capital, has raised $125+ mn, and is on track to be the dominant third player through pan-India tie-ups with offline and online restaurants. • Freecharge, recently acquired by Axis Bank from Snapdeal, transitioned its recharge business into a Digital Wallet, with Recharge and Utility as strengths. • Integration with Axis Bank and offline merchant tie-ups will drive next year’s growth. • PayTM, the most well funded Digital Wallet backed by Alibaba, is the clear market leader with the highest brand recall and adoption. • PayTM is expected to remain a market leader, due to the tight integration with its own ecommerce business and a latest Payment Bank license.

Source: RedSeer Consulting *Others: Airtel Money, M-Pesa, ICICI Pockets, Oxigen Wallet, ItzCash, PayZapp, Pay U Etc.

5.5 The Recipe for Success All these developments showcase that India has been steadily progressing towards complete mobiledeployment, with a considerable increase in momentum post demonetization. For example, the initial Indian payments banks have also begun operations shortly after RBI awarded licenses by the end of 2016. These banks are relatively new in the terrain, characterized by a lower risk profile than banks, catering to certain stringent limitations on accepting/investing deposits from users. They hold potential to change the game of day-to-day transactional services as they offer a futuristic environment that nurtures the growth of digitized products and services. However, these payments banks have to fight it hard for reaching a massive transaction and client volume, given that they are operating in a highly fragmented, competitive and commoditized market, accompanied by new banks, government schemes, and specialized payments/credit providers.

21 Source: Assocham

22well March 2018 as utility and bill payments.  Income from Merchants: This is earned by two ways. First as a one-time setup fee, which firms earn

march 2018

M-wallet players also face intense competition from debit and credit card issuers, given that much of the Indian masses are still â&#x20AC;&#x153;stickyâ&#x20AC;? to change. Alongside this, these wallets are capped at a maximum monthly transaction value of INR 1 lakh on a monthly basis, which can restrict users from making high-end purchases. Within this, each wallet has its own caps set for daily/monthly transfers and transactions, which may appeal to different customers, based on their needs. This is why, as per RBI, the average transaction value for m-wallets stood at INR 320.9 as of FY15, while the market for credit & debit cards is 5-10 times more, standing at INR 3,087.4 and INR 1,501.7 in the same time frame. Some m-wallets may further be nonâ&#x20AC;&#x201C;compatible with all types of mobile phones; certain apps may only be functional on restricted operating systems. For example, the â&#x20AC;&#x153;HDFC Zappyâ&#x20AC;? m-wallet does not comply with Windows and IOS operating systems, restricting its usage only for Android users. Similarly, services offered by â&#x20AC;&#x153;Oxigen walletâ&#x20AC;? are compatible with IOS and Android phones, doing away with a market base of Windows smartphone users. However, in the advent of rapid technological advancement in this space, along with country-wide measures towards greater interoperability, these compatibility glitches will subsequently resolve in the time ahead. M-wallets will work across varied operating systems and telecom network providers. While the monetary caps are still there, m-wallet providers can still target consumersâ&#x20AC;&#x2122; payment needs that are based upon smaller value transactions; in fact, the average consumer spends more time in a day making lower denomination purchases such as paying for transport, movies, grocery, bills, recharges etc. than opting for large outright expenditure. This is where the convenience of m-wallets is much needed. Plus, winning firms are those that not only use mobile technology to optimize the payment process, but the entire purchasing journey. This means crafting intricate loyalty/rewards programs for regular users, hosting a vast product/merchant variety, using big data to track each consumerâ&#x20AC;&#x2122;s shopping/merchant preferences, and facilitating person-to-person transfers/gifts; in short, taking steps to address the â&#x20AC;&#x153;pain pointsâ&#x20AC;? in the payment experience. A snapshot of how the mobile wallet platform creates opportunities for a range of different players is summarized as follows: Opportuni es for en es involved in the Smart Money Space

Banking Ins tu ons

Telecoms

Wallets/Prepaid Card

Technology Enterprises

Payments Bank

Mobile wallets have emerged as a new means for banks to enhance their customer base. While banking ins tu ons adopted internet banking over a decade back, being highly accepted by users, this service was only applicable to account holders of the respec ve banks. This prerequisite on having an account before opera ng the digital pla orm restricted significant growth in the customer base. However, mobile wallets are independent of this requirement, crea ng a possibility to loop in the unbanked sector of the na on. Thereby, banking en es have twin mo ves to par cipate here: (i) move to endorse â&#x20AC;&#x153;financial inclusionâ&#x20AC;?, which is much encouraged by the Indian government; and (ii) gauge a wider prospect for mone za on through an enlarged customer base.

In light of a consolidated compe ve environment amidst new market entries, telecom service providers are ba ling in pricing services in order to yield business margins and maintain their market share. Digital wallets seem to brighten up the scenario here, bringing in an unexplored business segment for telecoms. With increased mobile penetra on in India, as well as eased out â&#x20AC;&#x153;KYCâ&#x20AC;? procedures, telecoms foresee scope to tap a wider, tech savvy consumer base and capitalize upon the same.

The Indian wallet space also encapsulates a list of startups, funded by venture capitalists, allo ng high marke ng budgets for customer acquisi on that in turn feeds into the revenuegenera on model. Such enterprises drive commissions by selling a variety of services. They build strategic partnerships with a range of service providers such as food chains, cke ng vendors, groceries, entertai nment service providers (PVR), transport operators (cabs, metro) etc. and offer these facili es in mobile apps. Such alliances with merchants/service providers, in lieu of a small transac on based commission, forms a running revenue source for the enterprise opera ng the wallet/Prepaid card.

Such enterprises intend to capture the massive market of consumers op ng for the digital payment route, either by developing their own wallets or acquiring wallet led startups. Thus, they are leveraging the booming digital payments landscape to further widen the consumer base, tapping online shoppers and thereby genera ng revenue from the volume of transac ons.

These represent new-age banking ins tu ons, which are subject to certain restric ons in lending, issuance of credit cards, acceptance of NRI deposits and opera on as virtual banks. Such enterprises, like any other banking ins tu on, generate revenue from interests (earned from services offered to customers) and commission (earned from merchants and service providers). Payments banks have been granted licenses in order to drive financial inclusion of the unbanked masses in rural and semiâ&#x20AC;&#x201C; urban areas, enabling a cashless economy. Hence, they can dras cally capitalize in the surge of digital payments, expanding into every region of the growing techy-savvy popula on.

However, it not just the users and merchants who are reaping in all the benefits. Going â&#x20AC;&#x153;mobileâ&#x20AC;? has wider positive implications on the macro level, where a digitized & cashless platform helps streamline industries (doing away with illegitimate practices), as well as channel the right consumption demand for economic growth.

Government Of India

The GoI, since the commencement of its term in May 2014, has grappled with the issue of curbing the circula on of illegal tender in the economy. This is because a sizeable market of unaccounted legal tender is generated out of illicit prac ces such as hoarding, black marke ng, human trafficking, terrorism, bribery etc. In view of this, various policies and structural reforms have been introduced that restrict unwarranted flow of capital, including the demone za on drive and capping of cash funding/giÂing to poli cal par es to name a few. This enables a more transparent avenue for monetary transac ons. With this intent, mobile money brings in unparalleled opportuni es for the government to structure the payments domain, building upon financial inclusion amidst a cashless economy. Everyone will have access to the mobile wallet plaÂ&#x201E;orm, regardless of a personâ&#x20AC;&#x2122;s banking status/locality/educa on aÂ&#x2020;ainment etc., with each transac on being duly captured and recorded electronically. The scarcity of tangible notes/coins will in-turn start to fade away the black market, which will not only help in securing proper tax payments (genera ng a sizeable source of poten al revenue to cut down upon the fiscal deficit) but also dy up illegal prac ces and dealings that are necessary for na onal security. Funding of cash-heavy criminal ac vity will decrease as people will only engage in ac ons that are legal, on account of having everything recorded/stored. Meanwhile, direct cost benefits include reduced expenditure in having to print paper currency. With that, the government will have access to a comprehensive set of data for further analysis (in real me), which is impossible to gather in a cash-heavy economy. Having beÂ&#x2020;er transac ons data can help it to design customized fiscal and monetary policies that help channel growth in the right direc on.

Advantages to the Indian Economy and the GoI

Indian Economy

On a macro level, having a cashless economy helps generate a higher na onal income amidst a class of workers that have a globally exchangeable skillset. Generally, the shiÂ to electronic payment methods makes the purchases process easier, which in turn drives greater consump on. This increase in spontaneous buying behaviour has been witnessed in countries such as the US and Singapore, with greater sales leading companies to produce more. This helps create jobs, drive investment, which is then subsequently reflected in a higher GDP. In light of this, the Indian economy can also benefit from the digi za on drive, with a variety of payment op ons available to help drive spending and speed up industries, which may have otherwise faced a slowdown due to changes in GST repor ng etc. India also has the talent in Fintech to cater towards this change. This compliments the na onâ&#x20AC;&#x2122;s journey towards becoming a super power in the future, with increased opportuni es of obtaining foreign funding.

Source: Mazarsâ&#x20AC;&#x2122; Analysis

Source: Mazarsâ&#x20AC;&#x2122; Analysis March 2018

march 2018

6. A Mobile Regulatory Backdrop

RESPONSIVE REGULATION

In order to instill a healthy backdrop for players to commercialize digital wallets and work towards creating a cashless economy that benefits the country as a whole, there must also be a friendly regulatory environment for them to operate in. From the â&#x20AC;&#x153;Start-up Indiaâ&#x20AC;? and â&#x20AC;&#x153;Make-in-Indiaâ&#x20AC;? schemes, to the drastic 2016 Demonetization Drive, it is clear that the Government of India (GoI) wants to establish a mechanized version of money that steps away from the traditional notes/coins framework. It has thus taken various steps to establish an open market culture for firms.

6.1 Vision 2018 The Reserve Bank of India (RBI), being the central banking institution in the country, has outlined its vision to build a world-class payments and settlements system for a â&#x20AC;&#x153;high-cash economyâ&#x20AC;? such as India. The vision of the RBI for 2018 in the digital payments space revolves around 5 contours (i.e. the 5Cs): This is meant to be achieved through the establishment of responsive regulation, robust infrastructure, effective supervision and a consumer- centric business strategy (as given in the following snapshot), along with some key initiatives to strengthen the digital payments landscape:

Coverage

Making both instrumental products, as well as services, cost effec ve for users

Promo ng integrity through opera onal systems security and customer protec on

Enabling wider access to a variety of electronic payment services

Convenience Enhancing user experience through ease of usage, as well as availability of products & processes

Confidence

Con onvergence er enc

Cost

Ensuring interoperability across service providers

Source: RBI

1. Orien ng Policy with New Developments & Innova on â&#x2014;? Framing new policy: Se ng the framework for CCPs; Exit policies for authorized en es, grounds for penalty, regula ng payment gateway service providers & payment aggregators; effec ve monitoring. â&#x2014;? Review of exis ng policies / guidelines for PPIs, mobile banking, White Label ATMs (WLA), Nodal account for Intermediaries.

ROBUST INFRASTRUCTURE

EFFECTIVE SUPERVISION

CUSTOMER CENTRICITY

1. Facilita ng Faster Payment Services 1. Assessment of Resilience of Payment 1. Strengthening Customer Grievance â&#x2014;? Na onal Electronic Funds Transfer (NEFT) - and Se lement Infrastructure including Redressal Mechanism host frequent se lement cycles and explore FMIs and System-Wide Important â&#x2014;? Guidelines to ensure enhanced redressal mechanism in authorized payment feasibility of adop ng the ISO messaging Payment Systems (SWIPS) format. â&#x2014;? Dra ing framework for tes ng resilience systems. â&#x2014;? Mobile Banking - enhancing customer â&#x2014;? Resilience of communica on/messaging â&#x2014;? Have payment system operators adequately train front-office staff and registra on for mobile banking services, infrastructure agents. widening their access in mul ple languages, â&#x2014;? Resilience of IT systems of PSOs looking at non-smartphone users. â&#x2014;? Building capability to process â&#x2014;? Encouraging innova ve mobile based transac ons of one system in another payment solu ons. system

2. Improving Accessibility 2. Design an Oversight Framework 2. Enhancing Customer Educa on and 2. Se ng up a Payments System â&#x2014;? Increasing acceptance infrastructure â&#x2014;? Based on propor onality of risk posed by Awareness Advisory Council (PSAC) of industry and â&#x2014;? Implementa on of the Bharat Bill Payment PSOs â&#x2014;? Electronic Banking Awareness And Government representa ves/ experts System â&#x2014;? For large-value payment systems, retail Training (eBAAT) for strengthening the consulta ve â&#x2014;? Implementa on of the Trade Receivables payment systems (including IS audit), BBPS â&#x2014;? Have PSOs disclose fees and terms & process. Discoun ng System (TReDS) and TReDS. condi ons of respec ve services 3. Amendments to the PSS Act â&#x2014;? Improved governance of Payment 3. Strengthening the Repor ng 3. Protec on of Customer Interest System Operator (PSO) 3. Promo ng Interoperability Framework including Fraud Monitoring â&#x2014;? Encourage PSOs to develop robust fraud â&#x2014;? Resolu on of Central Counter Party â&#x2014;? Unified Payment Interface (UPI) â&#x2014;? Shi repor ng of periodic returns by & risk monitoring systems. (CCP)/Financial Market Infrastructure â&#x2014;? Toll Collec on payment system operators to XBRL. â&#x2014;? Framework to limit customer liability for (FMI) â&#x2014;? Payments for Mass Transit systems â&#x2014;? Framework for data collec on on unauthorized electronic transac ons. â&#x2014;? Non-Registra on of charge on payment system fraud. collateral with CCPs 4. Enhancing Safety and Security â&#x2014;? Migra on to EMV Chip & PIN cards 4. Posi ve Confirma on 4. Strengthen Financial Stability â&#x2014;? EMV card processing at ATM based on chip 4. Analyzing Data and Publishing Reports â&#x2014;? Incorporate sending posi ve â&#x2014;? Encouraging adop on of Legal En ty data â&#x2014;? Oversight report on select retail and confirma on of payment to the remi er in Iden fier (LEI) by financial en es. â&#x2014;? Security of ATM transac ons by holis cally large value systems. the Real Time Gross Se lement system. â&#x2014;? Se lement of funds leg of financial strengthening the safety and security of ATM â&#x2014;? Analysis of payment system-related data â&#x2014;? Strengthen the posi ve confirma on within the bank. transac ons in central bank money infrastructure feature of NEFT. â&#x2014;? Feasibility of Aadhaar-based authen ca on 5. Cheque Clearing Systems â&#x2014;?Eliminate Paper-to-Follow arrangements 5. Conduc ng Customer Surveys â&#x2014;? Engage with various for all cheques issued by State Governments â&#x2014;? Use of posi ve pay mechanism, na onal stakeholders/professionals to conduct user / customer surveys on specific archive on cheque images, etc. â&#x2014;? Complete migra on of cheques to CTSpayment system aspects. 2010 standards

Source: RBI

Government PG. 25of India has taken mul ple of ini a ves to boast the digital payments landscape 2009

2010

2012

2014

2015

2016

2017

6.2 Purview of the Payments and Settlement Systems Act In view of such vision, the RBI has outlined a framework to enable the smooth operation of Mobile Wallets (or Digital Wallets) and regulate the functioning of players in this industry. The Payments and Settlement Systems Act 2007 (PSS) draws out a holistic approach towards the development of Pre-paid Instruments and Payment Systems, and make the entire process consumer friendly and vigilant. This Act (which received assent on 20th December 2007 and came into effect from 12th August 2008) empowers the RBI to constitute a central board committee, known as the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), and create a legal framework for â&#x20AC;&#x153;nettingâ&#x20AC;? and â&#x20AC;&#x153;settlement finality.â&#x20AC;? By definition, with the exception of stock exchanges and clearing corporations (that are set up under stock exchanges), all systems that carry out a settlement or payment operation fall under the purview of the PSS. While the Act does not discriminate against foreign entities operating a payment system in India, all entities (whether domestic or foreign) need to obtain due approval/license from the RBI prior to operation. This helps create a regulated field, against the open entry backdrop, in order to prevent unfit businesses from entering in this sensitive sector.

New schemes to promote BHIM Aadhar Pay Govt. receipts beyond a limit Electronic Sign

2 million Aadhar based POS Payments Regulatory Board

Payment Banks

Tax benefits for non-cash transac ons Duty Exemp on on POS devices No cash transac ons above `200,000

Source: Axis Bank March 2018

march 2018

Confidentiality of customer information is key and issuers must take proper measures to preserve records held by them, as well as their agents.

The PPI issuers properly monitor their agents’ activities, carrying out an annual performance review, and ensure adherence to all relevant land/KYC/AML/CFT norms.

Similar lines of reasoning hold when issuing PPIs under co-branding arrangements; sound due diligence of the co-branding partner is needed, as well as accountability from the issuer for all acts taken in this regard.

6.4 Master Directions 2017 – Road Towards Interoperability

One crucial turning point in the RBI guidelines has been due to the introduction of new technology in the market. For example, the National Payments Corporation of India (NPCI) has recently launched the Unified Payment Interface (UPI) in the virtual payment landscape, hoping to ease the payment procedure for users and capture a greater segment of society, consisting of both rural and urban dwellers. This is because the new system makes it possible for users to instantaneously transfer funds across banks through a single identifier (i.e. virtual address) and not have to exchange sensitive data, such as bank account numbers, during transactions. Various banks have partnered with the NPCI (that acts as the umbrella organization for retail payment systems) and offer UPI-enabled services.

In view of this, the RBI has taken steps to integrate the UPI framework with PPIs, and enable interoperability between wallets. Hence, it issued the new Master Directions on the Issuance and Operation of Prepaid Payment Instruments (Master Directions) on October 11, 2017, replacing the PPI Policy Guidelines followed earlier. Key amendments made in these directions revolve around the following parameters:

28 March 2018

Security, Fraud Preven on & Risk Management

Cross Border Transac ons

The issuers carry proper due diligence of persons appointed/designated agents for such purpose.

The issuers are held responsible for all PPIs issued by their appointed agents, acting as the principal for all their agents’ acts, including any omissions/commissions made or security/safety parameters.

Varia ons of PPIs

En es seeking RBI approval under the PSS, which are regulated by any of the financial sector regulators, must apply with a No Objec on Cer ficate (NOC) from the respec ve regulator within 45 days of obtaining clearance. The non-bank applicant’s Memorandum of Associa on (MOA) should cover the proposed ac vity of opera ng as a PPI issuer.

KYC (Know Your Customer)

Semi-closed PPIs issued by both banks and non-bank en es would have similar features with regards to their limits, customer due diligence depth and loads, as men oned in the table below.* These features differ from the ones permi ed under the earlier PPI Guidelines and hence issuers had to convert pre-exis ng instruments in the new categories by December 31, 2017. Meanwhile, banks can also issue open PPIs, with due KYC and loading features in the table below.* Other than that, two other varia ons allowed are Gi Instruments and Mass Transit Systems (details provided below).*

Unlike the earlier guidelines, which required semi-closed PPI issuers to conduct complete customer due diligence to the extent of money maintained in the PPI (i.e. PPIs up to INR 1,00,000 required full KYC), the new Master Direc ons mandate full KYC for all semi-closed PPIs. This will be achieved in a phased out manner – i.e. requiring minimum PPI holder details for PPIs up to INR 10,000 and subsequently conver ng them into fully KYC-compliant PPIs within a year from the date of issue. Apart from KYC, the An -Money Laundering (AML) and Comba¥ng Financing of Terrorism (CFT) guidelines issued by the Department of Banking Regula on (DBR), and the RBI also apply muta s mutandis to all PPI issuing en es and their agents.

Procedural Requirement

Unlike the earlier guidelines, the Master Direc ons permit using PPIs for cross border transac ons. These PPIs are KYC compliant, reloadable and issued by banks for cross-border outward transac ons – i.e. for current account transac ons involving purchase of goods/services, as under the Foreign Exchange Management Act, 1999. The per-transac on limit here is INR 10,000, while monthly the transac ons should not exceed INR 50,000. Meanwhile, bank and non-bank PPI issuers that are appointed as Indian agents of an overseas principal, may issue PPIs to beneficiaries of inward remi ances, as under RBI’s Money Transfer Service Scheme (MTSS). PPIs here will be electronic, reloadable and KYC-compliant. Up to INR 50,000 from individual inward MTSS remi ance are permi ed for load/reload, while amounts in excess of that are paid by credit to the beneficiary’s bank account.

There is a Board-approved policy on the framework for engaging agents.

The Master Direc ons require PPI issuers to have a Boardapproved Informa on Security policy in order to guard the safety and security of their payment systems, implemen ng measures in order to mi gate iden fied risks. These measures shall be reviewed: (a) on an on-going basis (at least annually), (b) if there is a security breach/incident; and (c) before/a er a major change of infrastructure or procedures. PPI issuers shall also place a centralized database/management informa on system to prevent PPIs from being purchased at different loca ons and provide a direct interface to agents to ensure compliance.

Banks are also permitted to issue and reload the PPIs at bank branches. Meanwhile, banks and nonbanks can issue/reload instruments from authorized outlets or agents, subject to the following criteria:

Refers to the ease by which customers can use payment instruments seamlessly with other users; this is achieved through the adop on of common standards between all providers within the sector. While the earlier PPI Guidelines were silent on this ma er, the new Master Direc ons propose a phased-out interoperability plan. Phase I – PPI issuers make their instruments (in the form of wallets) KYC compliant, which are interoperable amongst themselves through the UPI by April 11, 2018. This interoperability will subsequently extend between wallets and bank accounts, as well as for PPIs that are issued as debit/credit cards.

Consequently, banks and non-bank entities have rolled out their PPI products, seeking required approvals from the RBI. This permits firms to issue reloadable and non-reloadable PPIs, complying with the norms of their unique category of instrument. Such PPIs can be loaded/reloaded by cash, credit/debit cards, and other PPIs (through regulated entities and done in INR). Cash loading here is limited to INR 50,000 monthly, subject to the overall limit. Capital Requirement Non-bank en es must have a posi ve Net Worth of a minimum INR 5 cr (USD 781,000), as per the latest Balance Sheet at the me of submi¥ng the applica on. This shall be increased to INR 15 cr (USD ) by the end of the 3rd financial year from the date of receiving authoriza on, and maintained throughout. Meanwhile, exis ng non-bank PPI issuers must comply with the posi ve INR 15 cr Net Worth requirement as on March 31, 2020. Capital adequacy requirements remain unchanged and will be set by the RBI – i.e. 15% or 9% for coopera ve banks. Meanwhile, non-bank en es with Foreign Direct Investment (FDI)/Foreign Ins tu onal Investment (FII)/Foreign Por§olio Investments (FPI) should also meet applicable capital requirements under the extant Consolidated FDI Policy Guidelines.

6.3 Key Compliance Parameters

Interoperability

Pre-paid instruments (PPIs), as covered in the PSS, are divided into 3 major brackets based on the variations of m-wallets. There are Closed Instruments, which involve the same vendor and issuer, as these PPIs can only be used to purchase from the issuing entity and cannot be converted in cash. Given their nature, these instruments do not involve payments/settlements for third party services; hence, they do not qualify as systems needing RBI approval. On the other hand, Semi-Closed Instruments (where PPIs are used to transact with merchants who have contracted with the issuer, with the exception of cash withdrawal) or Open Instruments (issued by banks to purchase goods/services from any merchant and engage in cash withdrawal, point-of-sale etc.) involve a range of third parties and hence must abide by eligibility/operational criteria as designed by the RBI. Banks, given they obtain due approvals, can offer open/semi-closed PPIs, while non-bank entities can only issue semi-closed instruments. Guidelines on operational capital requirements, safeguards, the authorization process etc. are detailed out in Master Directions/Guidelines/Circulars issued by the RBI, as conferred to it by Section 18 (read together with Section 10(2)) of the PSS.

Source: RBI march 2018

Semi Closed PPIs Limit Up to INR 10,000 Up to INR 100,000

Customer Due Diligence Minimum Customer Details KYC Needed

Loading Feature Reloadable Reloadable

Customer Due Diligence KYC Needed

Loading Feature Reloadable

(ii) Technology Enhancements and Innovation: The increased penetration of mobile phones, uninterrupted connectivity, various modes of authentication (i.e. voice and biometrics) and adoption of the “cloud”/Internet of Things (IoT) are few of the technological changes that pave the way for a soaring digital landscape in India. The use of UPI can further be refined to enable a large scale adoption of digital payments; this includes overcoming current short falls through the integration of various service providers such as banks and other financial institutions, as well as the provision of a uniform customer experience.

Open PPIs Limit Max Value Outstanding INR 100,000

(iii) Higher Merchant Adoption: Customer adoption is highly co-dependent to the extent that merchants adopt the latest technology – i.e. there is no use paying digitally if the receiving party wants cash. Hence, digital market players also need to focus on making merchants connect with the latest trends, providing comfort with sophisticated electronic payment systems and incentivizing them to incorporate e-wallets in their sales models. Vendor-specific discount rates and other transaction charges on digital payments need to be rationalized and a new regime of charges - based on high volume and low fees should be rolled out by the RBI.

Others Type Gift Instruments

PPIs for Mass Transit Systems (PPI-MTS)

Limit Max INR 10,000

Max Value Outstanding INR 3,000

Customer Due Diligence Issuer needs to maintain KYC of purchasers; separate KYC not needed for customers who are issued instruments against debit to bank accounts in India. Issuer may decide on obtaining customer details.

Loading Feature Not Reloadable

(iv) Increased Awareness: While there has been a significant adoption of digital payments amongst the Indian masses, there is still a considerable amount of work that needs to be accomplished to educate rural sections. The GoI should take initiatives to set up skill camps amongst such population, as well as merchants across various industries, disseminating knowledge on the benefits of digital transactions. The establishment of an awareness campaign redressal forum for issues in digital payments can go a long way to increase adoption of e-payments in India.

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Along Alongwith withthese thesekey keyamendments, amendments,the thelaw lawalso alsohas hasnorms normsto toenable enablebroader broaderconsumer consumer reach reach across across telecom operators and an effective grievance redressal mechanism to ensure long term gains for the telecom operators and an effective grievance redressal mechanism to ensure long term gains for the market players; this requires having a publicly-disclosed customer grievance redressal framework that market players; requires having aand publicly-disclosed customer grievance redressal Information framework that has a nodal officerthis handle complaints an escalation matrix for efficient resolution. comhas a nodal officer handle complaints and an escalation matrix for efficient resolution. Information munication here is vital.

communication here is vital.

6.5Way WayAhead: Ahead: Open Open Regulatory with Increased Awareness 6.5 RegulatoryArena Arena with Increased Awareness Undoubtedly, the RBIhas hasbeen beenvery very“mobile” “mobile” shiftingthe theregulatory regulatoryarena arenaininline linewith withlatest latestdevelopUndoubtedly, the RBI inin shifting developments, crucial in changes in theofsphere of PPI offerings create open for playments, bringing inbringing crucial in changes the sphere PPI offerings to createtoan openan field forfield market ersmarket to stepplayers foot. The stage is set issuers to for integrate instruments launch itand to alaunch wide variety to step foot. Theforstage is set issuerstheir to integrate theirand instruments it to a ofwide consumers, where the long-term success of their wallets would be largely dependent on the ease variety of consumers, where the long-term success of their wallets would be largely dependent on and convenience, along with many other factors such the presence of an effective customer redresthe ease and convenience, along with many other factors such the presence of an effective customer sal framework, foolproof security measures to instill confidence, as well as incentives to ensure larger redressal framework, measures toUsers instillshould confidence, as well as incentives to ensure participation from both foolproof urban andsecurity rural populations. basically receive similar-benefits as larger participation from both namely, urban and rural populations. Users basically receive similar- and they do with cash transactions; universal acceptability, lowshould transaction costs, convenience immediate settlement. All cash stakeholders, including theuniversal government, need to work together tocosts, achieve benefits as they do with transactions; namely, acceptability, low transaction this, which canand be done through the 6 KeyAll Factors highlighted as follows: convenience immediate settlement. stakeholders, including the government, need to work

(v) Enhanced Customer Service Offerings: A generic digital payment ecosystem comprises of multiple participants such as telecom operators, payment gateways, banks and regulators. It is important to clearly define the roles and responsibilities of all the involved stakeholders in the payment cycle. Effective customer handling will be one of the primary drivers for adoption and all stakeholders need to ensure that consumer interests are paramount in their operating and business models. The fact that interoperability is being treated at the forefront, with the GoI taking steps to link PPIs through the UPI to other accounts, plays a great hand in building a consumer-centric strategy that can make e-wallets replace cash completely in the coming years. Other initiatives around institutionalizing the customer complaints/grievances handling mechanism and establishing a chargeback and dispute resolution process, would further foster growth in the consumer base. (vi) Fit for Purpose Offerings: PSPs can use the data gathered by monitoring and analyzing consumer payment transactions to provide customized deals and offers to customers, thereby influencing their buying pattern and driving more business. However, it is imperative for the security architecture to ensure confidentiality, integrity and authenticity of the users and their data. Enactment of robust and vigil encryption measures - for the purpose of communication of user data and payment information between stakeholders - along with periodic risk management analysis and security vulnerability assessment of the application & network, would encourage more masses to embrace e-spending.

together to achieve this, which can be done through the 6 Key Factors highlighted as follows: (i) Ease of Use: As per surveys undertaken by various consultancy firms, the “ease of doing payments” is (i) Ease of Use: As per surveys undertaken by various consultancy firms, the “ease of doing payments” is one of the major factors migrating users to digital payment platforms. Hence, the more payment transone ofare thesimplified major factors migrating to digital payment platforms. Hence, the more actions the better. Thisusers can be achieved by designing usage scenarios that payment incorporate transactions are simplified the better. Thisexchange. can be achieved by designing usage scenarios thatmoney optimal transaction flows and information Some prevalent measures in the digital domain here include offlows 2FA for online payments below INR 2,000, adoption of Aadhaar incorporate optimalrelaxation transaction and information exchange. Some prevalent measures in thefor authentication of digital transactions, as well as its usage for KYC. This helps build up credibility with of digital money domain here include relaxation of 2FA for online payments below INR 2,000, adoption ease, which can further drive payments up.

March 2018

In a broad sense, building Trust is key here, not just amongst consumers but the entire network of stakeholders (including the government), across the value chain. While the RBI has set the ground for the efficient working behind PPIs, their adoption lies in building the trust amongst the population to replace cash with intangible wallets.

march 2018

7. Security at Fingertips Building trust among consumers lies in making them comfortable with the new payment system. This can be witnessed by the large-scale adoption of digital wallets across the globe. Over just the last 3 years, various m-wallets have flooded the market, such as Samsung Pay, Walmart Pay, and Microsoft Wallet etc.; as per Business Insider Intelligence, they have led to a USD 75 bn mobile payment volume in the US alone in 2016, which is expected to reach USD 503 bn by 2020. Meanwhile, worldwide mobile payment revenue is expected to cross the USD 1 tn mark by 2019. However, there are still a number of people who are hesitant to join the bandwagon. If the reasons behind such can be identified and addressed with effective counteractions, m-wallets can completely replace traditional wallets very soon.

7.1 Gaps Hindering M-Wallet Adoption

S ckiness to Old School Payment Methods

It is disrup ve to suddenly make a radical change towards using mobiles to se le bills when many people (especially those before the millennials) have been using hard cash for so many years. In fact, except in places such as Kenya and Brazil, where the crime rate is high, consumers generally perceive cash to be one of the most “comfortable and safe” modes of payment – then why change? This mindset will take me and only change with a growing network of users on the digital pla orm.

Inadequate Knowledge/Awareness

People will only adopt systems they know that exist, understand how to use them and can incorporate them in their lifestyles with ease. A key reason hindering adop on in the stream of digital payments lies in a lack of educa on or awareness of this emerging sphere, its benefits over cash etc. This is especially so in the rural parts of the country, where poten al customers may not be readily equipped to keep up with the latest trends/advancements. Taking extra educa on ini a ves here is paramount.

CHINA – Adoption does not mean Trust Businesses automatically believe that the more people use mobile wallets, the more trust they inherit in the system. However, that is not always the case as sometimes consumers are simply pitching in the mechanism without the complete belief that their funds are secure. This can be witnessed in China. More than half the population here utilizes payment gateway at least once a week, using it for multiple functions such as CHINA – Adoption doesthe notdigital mean Trust Businesses automatically believe that the morehailing people taxis use mobile wallets, themaking more trust theyreservations inherit in theetc. As per paying for goods/services, transferring funds, through Alipay, hotel system. However,Forum’s that is not alwaysMobile the case as sometimes are simply pitching the mechanism Mobile Ecosystem annual Money Report,consumers Chinese consumers are theinmost active within mobile without the complete belief that their funds are secure. This can be witnessed in China. More than transactions, with over 88% of the population involved in the activity in comparison to 80% inhalf thethe US and 66% in population here utilizes the digital payment gateway at least once a week, using it for multiple functions such France. Nevertheless, around 77% users in China (a per the Oxford Economics survey) are concerned onashackers paying for goods/services, transferring funds, hailing taxis through Alipay, making hotel reservations etc. As per stealing their information and believe their data is at risk.

Mobile Ecosystem Forum’s annual Mobile Money Report, Chinese consumers are the most active within mobile transactions, with over 88% of the population involved in the activity in comparison to 80% in the US and 66% in EvenFrance. in India, studies showcase that majority of respondents are deterred from e-banking and mNevertheless, around 77% users in China (a per the Oxford Economics survey) are concerned on hackers banking services, due to concerns around security. stealing their information and believe their data is at risk.While the likelihood of fraud is remote and hence not

a major consumer pain point for digital payments in India, users are hesitant towards managing multiple Even in in India, India, studies studies showcase showcasethat thatmajority majorityof respondentsare aredeterred deterredfrom e-bankingand Even respondents e-banking m-m-bankusernames/passwords in a proper and secureofmanner, without making from grave mistakes.and Hence, it ing services, due to concerns around security. While the likelihood of fraud is remote and hence notnot a banking services, due to concerns around security. While the likelihood of fraud is remote and hence becomes even morepain critical to address concern, making consumers aware of the major consumer pointfor forcompanies digital payments in India,this users are hesitant towards managing multiple a major consumer pain point for digital payments in India, users are hesitant towards managing multiple usernames/passwords in a proper and and secure making mistakes. Hence, it be- even technology in securing their payments keymanner, simple without steps that can grave be taken to boost security usernames/passwords in a proper and secure manner, without making grave mistakes. Hence, it comes even more critical for companies to address this concern, making consumers aware of the techfurther, providing them access to the most advanced safeguard mechanisms. becomes even more critical for companies to address this concern, making consumers aware of the nology in securing their payments and key simple steps that can be taken to boost security even further, providing them accesstheir to the most advanced mechanisms. technology in securing payments and key safeguard simple steps that can be taken to boost security even

further, providing them access to the most advanced safeguard mechanisms.

7.27.2 TheThe Framework behind Contactless Payment Communication Framework behind Contactless Payment Communication

As the name suggests, Contactless Payment Communication (CPC) technology generates transactions As the name suggests, Contactless Payment Communication (CPC) technology generates transactions Framework behind Contactless Payment Communication that7.2 doThe notnot require contact amongst consumers’ paymentdevices devices and merchant’s point-ofthat do requirephysical physical contact amongst consumers’ payment and thethe merchant’s pointAs the name suggests, Contactless Payment Communication (CPC) technology generates transactions of-sale (POS) terminal. As long as the consumer holds the payment device – i.e. mobile phone – in sale (POS) terminal. As long as the consumer holds the payment device – i.e. mobile phone – in close closedoproximity to the POS terminal, the payment information is transmitted across point-ofthrough that not require physical contact amongst consumers’ payment devices andwirelessly the merchant’s proximity to the POS terminal, the payment information is transmitted wirelessly across through radio radio frequency. A typical m-wallet scenario involves the following steps: sale (POS) terminal. As long as the consumer holds the payment device – i.e. mobile phone – in close frequency. A typical m-wallet scenario involves the following steps: proximity to the POS terminal, the payment information is transmitted wirelessly across through radio frequency. A typical m-wallet scenario involves the following steps:

Lack of Interoperability

Interoperability remains a significant challenge as it is not possible to transfer cash from one wallet to another, due to the imposi on of bank restric ons. Withdrawal also brings in significant charges, while funds si ng in wallets do not earn interest. This not only affects cash flow, especially for merchants, but may also dissuade users to invest greater amounts in mobile pla orm, op ng to keep money in bank accounts (which can be transferred across accounts) and pay directly through cards. However, these compa bility issues are to step up with the RBI’s Master Direc ons.

Myth around Security

One of the most crucial factors here is Security – both the “s ckiness to cash” and lack of educa on trigger the belief that mobile payments are not safe. In fact, as per a survey partnered by Oxford Economics, only 13% consumers believe the mobile is the most secure payment choice. Meanwhile, around 70% fear hackers could steal personal informa on in m-wallets and 67% are concerned on money being stolen. People with lesser educa on have a stronger hesita on around security than those with higher educa onal a ainment. However, this does not hold true, as mobiles are actually one of the safest choices – these phones run on encryp on, tokeniza on and authen ca on technology, enabling them to screen mul ple forms of iden ty, as opposed to cash. Source: Press Articles & Mazars’ Analysis

March 2018

Source: European Unionfor Agency Network and European Union Agency for and Network andInformation Information Source:Source: European Union Agency Network Information

While popular walletssuch suchas as Apple Apple Pay/Android PayPay havehave a slightly customized payment While popular wallets Pay/AndroidPay/Samsung Pay/Samsung a slightly customized payment process run according to their own servers, the essence of the transaction remains intact – the acquirer process run according to their own servers, the essence of the transaction remains intact – the acquirer (bank to be paid) sends the details (token, cryptogram) to the payment network, in which it is mapped (bank to be paid) sends the details (token, cryptogram) to the payment network, in which it is mapped to the user’s bank account, authorized by the issuer and the outcome of the payment is communicated to the user’s bank account, authorized by the issuer and the outcome of the payment is communicated march 2018 32 33 32

to the acquirer and the merchant. Mobile payments generally have the same fundamental design setup forWhile traditional card-based payments; instead of utilizingPay thehave card’s primarycustomized account number popular wallets such as Applehowever, Pay/Android Pay/Samsung a slightly payment process to their servers, the essence of the transaction remains intact – the acquirer (PAN) and run cardaccording verficication codeown (CVC) to conduct transactions, they make use of tokens.

(bank to be paid) sends the details (token, cryptogram) to the payment network, in which it is mapped to

Tokenization hereaccount, acts as aauthorized data protection thatthe prevents sensitive information such as the PAN the user’s bank by theprocess issuer and outcome of the payment is communicated to the acquirer and the Mobile payments generally have the same setup for and CVC to be sent overmerchant. the wire and become vulnerable to being stored in fundamental intermediarydesign servers. traditional card-based payments; however, instead of utilizing the card’s primary account number (PAN) Rather, card issuers (acting as the Token Service Providers) generate a numeric value (the token), which and card verficication code (CVC) to conduct transactions, they make use of tokens. is then used in place of actual account details. Meanwhile, UPI is tied to the mobile hardware itself, Tokenization here acts as a data protection process that prevents sensitive information such as the PAN checking all technical signatures; it also calls for a second level of authentication – the MPIN password – and CVC to be sent over the wire and become vulnerable to being stored in intermediary servers. Rather, to card enable greater transaction security. issuers (acting as the Token Service Providers) generate a numeric value (the token), which is then used in place of actual account details. Meanwhile, UPI is tied to the mobile hardware itself, checking all

Unlike fiat money, electronic also make use a variety of biometric authentication features technical signatures; it also platforms calls for a second level ofof authentication – the MPIN password – to enable ot greater make sure the “pinsecurity. lies with the person.” For example, the GoI’s Aadhaar Pay mechanism transaction authenticates users based on their fingerprints as opposed card of swipes. Suchauthentication multiple layersfeatures of Unlike fiat money, electronic platforms also make use of ato variety biometric ot make sure “pin lies with the person.” Forinexample, the GoI’s Aadhaar Pay mechanism authenticates security help the protect all the parties involved the transaction.

users based on their fingerprints as opposed to card swipes. Such multiple layers of security help protect all the parties involved in the transaction.

7.3 Potential Threats and Counteractions

In this peculiar case, the Bank of Maharashtra’s core system declined the transfer of funds request from the syndicate, as there were insufficient funds in the users’ accounts. However, the bank’s UPI system misread this message as “accept”, moving literally artificial money across as there were hardly any funds to transfer. In the end, the core banking system had to bear the brunt of miscommunication. However, this does not mean that the UPI itself is unsafe. What is important here, just like with using any payment mechanism, is to properly overlook the process on a regular basis and reconcile money inflow with outflow to identify potential discrepancies in time. Sole reliance on the system is not enough.

Threats to Mobile Wallets Whereas the UPI makes use of the MPIN to authenticate transactions, the sphere of m-wallets is slightly different. While various payment platforms conduct a variety of user authentication before completing the transaction, there are apps that simply rely on the phone’s locking system as security. The absence of a second level of authentication can add a greater vulnerability to hacking; with this, many hesitant users fear consequences that can occur should their phones fall in the wrong hands. While these factors do pose as potential risks in the system, this is not to say they cannot be mitigated. Some typical m-wallet threats and possible measures taken to counteract them are as follows:

There no processThreats in the world that is 100% guaranteed, free from loopholes and vulnerabilities. The 7.3 isPotential and Counteractions Digital Payments ecosystem also hosts forguaranteed, potential threats, which can beand witnessed by the recent There is no process in the world that room is 100% free from loopholes vulnerabilities. The UPIDigital bug that left theecosystem Bank of Maharashtra shortfor of potential INR 25 crthreats, in just awhich few simple Whilebythere was Payments also hosts room can besteps. witnessed the recent UPI bug that left the Bank of Maharashtra short of INR 25 cr in just a few simple steps. While there was no identifiable virus or hacking involved here that led the syndicate to divert funds in its account, the no identifiable virus or hacking involved here that led the syndicate to divert funds in its account, the transfer occurred due to the existence of a communication gap between the bank’s core system and the transfer occurred due to the existence of a communication gap between the bank’s core system and the UPIUPI app; thethe app was not able toto interpret app; app was not able interpretthe thecorrect correctmessage messagesent sentfrom fromthe themain mainsystem. system. Bank of Maharashtra – Signal Gone Wrong Bank of Maharashtra – Signal Gone Wrong Given the fact that the ecosystem of Digital Payments involves the interplay between several different Given the fact that the ecosystem of Digital Payments involves the interplay between several differparties – the user, merchant, acquirer bank, issuing bank, payment network etc. – communication ent parties – the user, merchant, acquirer bank, issuing bank, payment network etc. – communication between allall ofof them is is highly crucial. InIn the Bank between them highly crucial. the BankofofMaharashtra Maharashtracase, case,the thetypical typicalUPI UPIapp app helped helped move move money across bank accounts through a “push & &pull” money across bank accounts through a “push pull”system, system,displayed displayedas asfollows: follows:

1 2 3 4 5

The paying party (user) keys in the 4-digit pin to “push” money from its account to the receiving party’s (merchant’s) account. The user’s bank mobile app confirms the account is active and there are sufficient funds to make the payment.

Phishing/Social Engineering User being driven to provide sensi ve personal informa on – name, date of birth, contact etc. – via phishing emails or social engineering. Stolen data can then be mone zed through fraudulent transac ons.

Source of o Threat T reat Th Users/Cardholders

Installing Malicious Applica ons Users may not carry proper due diligence in downloading apps/games, which can poten ally infiltrate their phone data. Malware can also find way through insecure WiFi hotspots, network spoofing etc.

Poten al Threat

• Users should be aware of such fake techniques undertaken to extract informa on and refrain from divulging personal details on sites without sound verifica on. • Public WiFi hotspots without encryp on should not be used for making payments. • Apps/Games from untrusted sites should not be downloaded on a phone that is used to conduct banking ac vi es and transac ons. Such apps may be illegi mate in nature and break into the system.

Mi ga on

The bank’s UPI system connects to the National Payments Corporation of India (NPCI) system, which then reaches to merchant’s UPI bank system. The UPI system of the merchant bank signals its core banking network to credit the designated amount and close the transaction. There is also a “pull” transaction involved in the UPI system – in this case, the merchant “pulls” the money from the user’s account through the intertwine of communication as displayed earlier. The transfer happens when the user approves such “pull” request through a PIN. March 2018

march 2018

Unauthorized Access to a Lost/Stolen Device

Losing a phone with all sensi ve banking/m-wallet apps installed may give way for a poten al a acker to conduct numerous transac ons, given they are able to bypass any PINs/locks etc.

Source of Threat Mobile Devices

Data The and Usage Through Spyware

Some apps may trigger the installa on of rootkits, giving access to unauthorized user data. Spyware can then be used to gather informa on and send it across to third par es.

Poten al Threat

• Damage done from lost phones can be greatly minimized through the use of strong PINS/remote data wipes/incorpora on of biometrics such as fingerprints or iris recogni on, for authen ca on. • Default security measures and controls should be le in ac on on the device to prevent malicious spyware. • The Opera ng System (OS) should also be duly updated.

S Source off Threat T Th t M-Wallet Apps

Exploi ng Weakly-Build Apps Applica ons with faulty designs– i.e. weak credit card storage, unlinked biometrics (fingerprints only for user-device authen ca on, not user-payment transac on), improper third-party blocks etc. – can put user sensi ve data at risk. Insecure channels can jeopardize informa on while it is in transit.

Poten al Threat

• Applica ons should adopt secure code prac ces & reviews (both manual and automa c) to iden fy intrusion areas, use jail break detec on and ins ll an debug protec on. • Providers should only place applica ons in trusted app stores that are duly authorized. • Poten al design flaws should be tested, iden fied, understood and modified as necessary both in the ini al stages when the prototype is being developed, as well as before the readied version is put out into the market for public use.

Mi ga on

Source: European Union Agency for Network and Information Security

7.4 Emphasizing Security in Product Features Potential loopholes and threats are common with any kind of payment system. For example, pickpocketing is a looming potential danger with hard cash, without there being any identification mechanism to trace back the stolen funds. However, the crux of the action lies in undertaking proper practices to effectively minimize, if not negate, any security concerns. Glitches are common with any kind of technology, be it phones, computers, machines etc. What makes systems such as m-wallets (similar to any e-payment mechanism) of a greater concern is the fact that these apps store highly sensitive information, which can have adverse implications if they fall under the wrong hands. Consumers are used to getting indemnification as they get in credit card usage; however, when a mobile payment is also funded through a credit card account, then the same guarantees hold

March 2018

Cybersecurity is another key issue as data regarding customers, employees, and card payments is Cybersecurity another keywallet issue as data regarding customers, employees, card payments vulnerable tois theft. While providers also vouch to take all necessary and measures to protectis vulnerable to theft. Whileas wallet also terms vouch&toconditions, take all necessary to protect information information privacy part providers of the general much ofmeasures the counteraction here lies with privacy as part of the general terms & conditions, much of the counteraction here lies with users themusers themselves. The more precaution they undertake when downloading any third-party app on their selves. The more precaution they undertake when downloading any third-party app on their phones phonesonly (utilizing onlylegitimate trusted, legitimate forthe access), morethey prudent they are in an ad(utilizing trusted, app storesapp for stores access), more the prudent are in maintaining maintaining number firewalls theirpasswords/pins devices (i.e. strong passwords/pins as opposed to equate numberanofadequate firewalls on their of devices (i.e.on strong as opposed to setting easy codes to setting bypass easy this feature) and the more vigilant they are towards phishing/social engineering, the safer their codes to bypass this feature) and the more vigilant they are towards phishing/social data is. engineering, the safer their data is.

Some common “Dos” and “Don’ts” for users in upholding the security of their mobile-driven data,

Mi ga on

Reverse Engineering Poten al a ackers reverse engineer the source code to extract the design informa on and framework behind a certain app, and tamper with possible loopholes such as hardcoded passwords/encryp on keys etc. Backdoor intrusion strategies may be used to obtain remote access to access apps user networks.

when a mobile payment is also funded through a credit card account, then the same guarantees hold true as they do with plastic cards. At the same time, non-card funded e-payment providers are looking true as theymapping do with out plastic cards. At the same time, non-card funded looking towards similar guarantees. Businesses must make suree-payment customersproviders are awareare of all these towards mapping out similar guarantees. Businesses must make sure customers are aware of all these existing security features as lack of proper understanding is the largest contributor towards m-wallet existing security features as lack of proper understanding is the largest contributor towards m-wallet hesitation. Many potential customers willing switch their mobiles,provided providedtheir theirneeds needsare areadhesitation. Many potential customers areare willing toto switch toto their mobiles, addressed in cases of fraud. dressed in cases of fraud.

Some common “Dos” and “Don’ts” for users in upholding the security of their mobile-driven data, stemstemming from the various threats aforementioned, can be summarized below: ming from the various threats aforementioned, can be summarized below:

DO…

 Ensure a strong firewall is in place  Complex PIN codes, Data Wipes, and Biometric identification  Different passwords for each mobile wallet account and the overall phone  Use private connections with encryption when inputting sensitive data to make payments  Download all apps and/or games from legitimate sellers  Recognized dealers such as Apple Store, Google Play Store etc.  Third-party sites claiming apps that take up lesser data than original ones may be infiltrated  Separate phones used for financial transactions versus gaming/social media  Run anti-virus cleaners and clear away cookies/cache  Keep the operating system updated

DON’T…

 Provide personal details without proper verification of the requester  Lucrative email/SMS/phone call  Abrupt URLs advertised by apps/contacts  Remove in-built security controls/blocks in the device  Constantly stay logged into email accounts on mobile browsers at all times  Keep wireless services such as Bluetooth on when not in use  Share sensitive details in written format over phone  Sending bank account numbers and/or debit/credit card details/PINs via WhatsApp/SMS  Having devices “remember” the typed out passwords for quick access

In In light of of this, companies light this, companiesmust mustbebemore moreproactive proactivetowards towardsadopting adoptingadvanced advancedbiometric biometricauthenticaauthentication tion systems and offer such heightened security measures to their consumers. In fact, users are much systems and offer such measures to their consumers. In fact, users much welcoming towards usingheightened these new security identification features, such as fingerprint scans andare facial & IRIS welcomingover towards using thesepassword. new identification features, such as scansthis andsafety facial & IRIS recognition, the traditional Wallet providers should befingerprint ready to meet requirement.

37 march 2018

recognition,should over theavoid traditional password. Wallet providers should beaccepting ready to meet this safety through the mobile. Businesses harboring misconceptions about payments requirement. Many are vary towards the costs of buying and running this system, along with the possibility of fraudulent transactions. However, m-wallets actually make use payments of the same chip-and-PIN terminals enabled to Businesses should avoid harboring misconceptions about accepting through the mobile. Many process card In this sense,along many retailers already have the hardware in place to are varycredit/debit towards the costs of transactions. buying and running this system, with the possibility of fraudulent run mobile payments. The market is growing. Meanwhile advanced identification transactions. However, m-wallets actually make use of the same chip-and-PIN terminals enabled totechnology is there to prevent as much as it is there in traditional payments. Hence, security should not be an issue processfraud credit/debit card transactions. In this sense, manycard retailers already have the hardware in place refraining both users and merchants to adopt this mechanism; the mobile can prove to run mobile payments. The market is growing. Meanwhile advanced identification technology is thereto be one of the safest modes ofaspayment, and optimized in theHence, rightsecurity way. should not be an to prevent fraud much as it if is handled there in traditional card payments. issue refraining both users and merchants to adopt this mechanism; the mobile can prove to be one of the safest modes of payment, if handled and optimized in the right way.

8. The Road Forward

The move towards mobile money is inevitable, given its fitting with the Digital Age, as well as 8.ultimate The Road Forward the ease by which it speeds up the entire payment process. Holding notes and coins will steadily fade The ultimate move towards mobile money is inevitable, given its fitting with the Digital Age, as well as out as “smartphone money” becomes second nature. However, this is not to say this adoption would the ease by which it speeds up the entire payment process. Holding notes and coins will steadily fade be in a standardized format. Rather the journey of mobile money over the last decade has seen a numout as “smartphone money” becomes second nature. However, this is not to say this adoption would be ber of trial and errors, as different digital solutions were performed in different countries, generating a in a standardized format. Rather the journey of mobile money over the last decade has seen a number varied degree of success based on local acceptance. Such evolution is still taking place with developed of trial and errors, as different digital solutions were performed in different countries, generating a nations, in smaller steps than developing ones, making the shift from long-inherited credit/debit card varied degree of success based on local acceptance. Such evolution is still taking place with developed transactions to the phone. Contrastingly, various countriescredit/debit have leapfrogged into mobile nations, in smaller steps than developing ones, making the developing shift from long-inherited card technology, creating commerce markets and financial inclusion on these electronic devices alone. While transactions to the phone. Contrastingly, various developing countries have leapfrogged into mobile oldtechnology, habits die hard,commerce a growing network of users, as well merchants and providers across the entire creating markets and financial inclusion on as these electronic devices alone. While payment value chain, can propel widespread adoption of such wallet across every part of the globe. old habits die hard, a growing network of users, as well as merchants and providers across the entire payment value chain, can propel widespread adoption of such wallet across every part of the globe.

8.1 Past,Present Present & Future 8.1The The Past, & Future

While involved conceptualizing thewallet digital idea andit introducing it in the market, the Whilethe thepast past involved conceptualizing the digital ideawallet and introducing in the market, the present inaddressing addressing bottlenecks in comparison tomethods. traditional Theonfuture depends on presentdeals deals in bottlenecks in comparison to traditional The methods. future depends how able to out ironthe out the wrinkles andusers howembed well their users embed their trust in the system, howwell well providers providers areare able to iron wrinkles and how well trust in the system, shaping the road of digital wallets as follows: shaping the road of digital wallets as follows: PAST 



Past

Apple’s app store conceptualized the idea of applications holding payment data. Period around 2011 saw an extent of uncertainty on how exactly mobiles would communicate payment information across. Debate on whether information should ideally be stored in SIM cards or handsets, or just the cloud. Though bank participation was limited, the launch of Google Wallet in 2011 gave the idea on how technology can converge information on various devices. Compatibility issues on having the right servers dwelled on. Various different models pitched in after this, with some failing due to control issues or not being able to capture a critical mass. Meanwhile, some garnered the right cooperation from banks, as well as card networks, leading to an “adoption ramp.”

PRESENT 



present

M-wallets have gained recent momentum presently, with various players such as Fintech startups, banks and financial institutions jumping in the bandwagon. Growth of the ecommerce market and countrywide drives such as demonetization have given digital wallets profound acclaim. Some merchants operate their own full-fledged apps with inbuilt payment mechanisms while others have tied up with MSPs down the value chain. Interoperability remains the key challenge, as well as the obstacles involved in withdrawing money. Technologies such as the UPI, firm-wide collaborations, as well as national support (i.e. through the new Master Directions in India) can steadily harmonize the PPI system up as it is doing for banks. This depends on the extent to which the two complement each other.

FUTURE 



Future

While there are a variety of views on what is headed for mwallets ahead, there is much consensus that mobile money will gain even stronger footing over time, being wellconnected across systems & networks. Greater fungibility will drive down the cost of transactions, with customers having to pay little fees in transferring money from wallets to bank accounts. Wide-scale recognition, provision and adoption of advanced biometrics and big data handling will greatly cut back upon security concerns38 associated with intangible wallets. Trust and acceptability will build up. Integration of newer technological systems such as Bluetooth can further transform the payment experience, offering greater ease & convenience.

8.2 Possibilities and Opportunities in Picture While the exact future of the digital payments landscape is yet to be seen, there are a number of developments and technological introductions in play, which can drive the industry forward. Some of those key trends in line are as follows:

Bluetooth as a Game Changer

AI alters Payment Experience

While majority of mobile payment providers have their major focus set upon NFC (which requires the sending/receiving devices to be cen meters apart), Bluetooth can turn the tables, having a greater range of over 50 meters. If adopted successfully, this can further speed-up the checkout process, crea ng a hands-free experience as customers would no longer need to take their phones to the reader. Mul ple transac ons can be facilitated from a single payments terminal at one me.

While Ar ficial Intelligence (AI) has been transforming a number of industries, it will take center stage in the payments landscape. Amazon Web Services, which uses AI to structure fulfillment, logis cs and personaliza on, foresees “machine learning” to become the future for growth. For digital payments, this means using data to understand consumers’ moves, needs and a erthoughts; this understanding will create payment systems that are highly customized and transform the phone into real- me personal assistants.

Various companies, such as Flipkart ad PhonePe to name a few, are further inves ng in the Fintech sphere (i.e. by acquiring tech startups) and hos ng dis nc ve business heads with a range of financial services around insurance, EMIs, mutual funds etc. Businesses are also integra ng with each other in order to expand their reach. PhonePe and FreeCharge’s recent 2018 partnership sees rapid integra on of 45 mn FreeCharge users linking their wallets to the PhonePe app and have access to a range of merchant stores.

Messaging apps can also change industry dynamics as they start to introduce payment op ons in their own systems. For example WhatsApp, which is one of the most widely used apps, is all set to integrate the UPI pla orm with banks such as the State Bank of India, ICICI, HDFC and Axis, in order to bring about the WhatsApp Pay feature in the Indian market. The product will allow for peer-to-peer and merchant transac ons, which can ramp up compe on in this domain even more if it is well accepted by the public.

Rapid Integra on

Messaging Apps Link with Payments

Source: Press Articles

8.3 India – Building a Data Rich Landscape In line with the rest of the world, India will be facilitating wide-scale digitization over the coming years, including in both the urban and rural population. Industry leaders hold an optimistic outlook through the creation of “India stack”, which will be an open framework that encompasses a payments layer, paperless layer of document storage (including e-Sign), as well as an identification & authentication layer (built upon Aadhaar and its linkage with a wide range of documents). The emergence of Bluetooth technology, as well as rapid integration and AI across the value chain, will help grow the network of users, leading to a dynamic shift into consumer preference for digital wallets. The emergence of UPI technology will also help cater towards the interoperability challenge to a great degree. While there is some debate as to whether the UPI architecture, which facilitates easy transfer of funds across banks, can make m-wallets redundant down the line, this will likely not happen as they serve quite distinct purposes. UPI is in essence an added infrastructure layer that end-user apps can integrate in order to better their offerings; it is not really an end itself. While the UPI has been built to reduce the friction in bank-to-bank transfers, m-wallets are a comprehensive payment mechanism that hold a variety of features such as transferring funds, making payments, recharging, storing loyalty points, earning gifts/cash backs and much more. In fact, while the UPI caters to customers that have access to maintaining and running full-fledged electronic bank accounts, m-wallets cater to both banked and unbanked consumers. They are designed on very user-friendly platforms that are easy to learn and operate. It would be a far stretch to assume that they can be replaced by UPI that is utilized in a single bankled app. Rather, given the diverse range of consumers and their needs, no one single app or payment technology can cater to everyone. A range of multiple apps and payment tools will continue to grow and operate, which are able to meet the tailor-made demands of their target consumers.

Source:Press Press Articles Source: Articles

8.2 Possibilities and Opportunities in Picture

38 2018 WhileMarch the exact future of the digital payments landscape is yet to be seen, there are a number of developments and technological introductions in play, which can drive the industry forward. Some of those key trends in line are as follows:

march 2018

grow and operate, which are able to meet the tailor-made demands of their target consumers. Regardless of the type or nature of the app itself, all mobile wallet apps will cater towards the common purpose of helping move India into a cashless economy, which will bring benefits on a macro level. This includes helping to “clean up” the illegitimate sectors, which are largely funded by black money, and Regardless of the type or nature of the app itself, all mobile wallet apps will cater towards the common catering towards national security. It also includes streamlining transactions data in a systemized purpose of helping move India into a cashless economy, which will bring benefits on a macro level. This electronichelping database, whichup” canthe help give the government a better picture of local and supply. includes to “clean illegitimate sectors, which are largely funded bydemand black money, and This is important to design the right fiscal and monetary policies for further development. catering towards national security. It also includes streamlining transactions data in a systemized electronic database, which can help give the government a better picture of local demand and supply. This Allimportant this is given the factthe that each individual in the country digitization in daily use. This is to design right fiscal and monetary policiescan forreadily furtheradopt development.

is not it will Rather, willreadily take place in digitization a phased-out All thisto is say given the happen fact thatovernight. each individual inthis the adoption country can adopt in manner, daily use. This gaining as eachovernight. section/locality towards this method, growth themanner, networkgainis not tomomentum say it will happen Rather,turns this adoption will take placehelping in a phased-out ing momentum as each thisneed method, helping growth the forward. Especially in thesection/locality rural sections, turns users towards would first to equip themselves withnetwork the pre-forward. Especially in the rural sections, users would first need to equip themselves with the requisites (i.e. proper smartphone/feature phone, internet connectivity, desired app etc.),pre-requisites familiarize (i.e. proper smartphone/feature phone, internet connectivity, desired app etc.), familiarize with the new with the new set of processes involved and then develop it into a habit. One the number of domestic set of processes involved and then develop it into a habit. One the number of domestic smartphone ussmartphone usersthe itself touches 50%can mark – which happen given theofcurrent rate of ers itself touches 50% mark –the which happen bycan 2019 given by the2019 current rate speed – it should speed – it should a huge boost to industry, the digitalhaving walletitindustry, at a CAGR 148-150% give a huge boostgive to the digital wallet grow at ahaving CAGRitofgrow 148-150% in 5 of years. Critical success factors here depend on how will PSPs can provide an intuitive user experience with low transin 5 years. Critical success factors here depend on how will PSPs can provide an intuitive user experience action costs (i.e. by developing interest-paying wallets), as well as personalized in a uniformlywith low transaction costs (i.e. by developing interest-paying wallets), as well asfeatures personalized features in built app. Key lies in filling up the DELTA between users and merchants. That is: a uniformly-built app. Key lies in filling up the DELTA between users and merchants. That is:

ABOUT MAZARS Mazars is an international, integrated and independent organisation specialising in audit, consulting, accounting, tax and legal services. Directly present in 86 countries, Mazars unites the skills of 20,000 professionals. Mazars is a founding member of the international alliance Praxity, comprising over 70 independent organisations of audit and consulting, bringing together over 28,000 professionals. Mazars has the ambition to constantly expand its services for the benefit of its clients - which range from large international organisations, SMEs to public organisations by providing global solutions that are customized to help clients find dynamic solutions for sustainable growth. In India, Mazars has an ambitious growth plan and already has a national presence with a strong team of over 700 professionals with 8 offices located in Bengaluru, Gurgaon, Mumbai, New Delhi and Pune. Our professionals have in-depth experience in sectors like Energy, Telecom, BFSI, Automobiles, Technology, Real Estate, Shipping, Services, Manufacturing and Retail.

Developing user-centric apps that create a seamless payment experience. Engaging users throughout the product search, shortlist and payment process, so as to make them feel valued in the system.

Learning about the interests of both consumers as well as merchants in order to create a platform that addresses common needs such as timeliness, computability, reliability, confidentiality, security etc.

Teaching users (consumers and merchants) on how to operate the app as well as its core features, in order to establish Trust.

Accelerating the user-base by building effective partnerships down the line and creating wide-scale acceptability. If utilized properly, payments may end up driving consumption, as opposed to the other way around.

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March 2018

Author Credits Ankur Malhotra Director - Research & Consulting, Mazars India

Editorial Team Anumita Mitra Raveena Mital

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