India’s digital revolution — overlooked by most of the world — is taking off.
The following article was originally published in “What I Learned This Week” on February 8, 2018. To learn more about 13D’s investment research, please visit our website.
In WILTW January 5, 2017, we made the case that India’s evolving digital infrastructure was on the cusp of mass adoption. AADHAAR, the world’s largest biometric identification system, and “IndiaStack,” which is developing applications to leverage AADHAAR, are creating a low-cost business platform to reach customers at the bottom of the economic pyramid. Recent policy initiatives and key tech innovations have cleared the way for the country to move rapidly towards becoming a “digital-first” economy. India’s current low rate of digital payments recalls China a few years ago. Five years from now it may be as difficult to get through the day cashless in India as it is today in China (Please see section 9).
- India is leapfrogging traditional banking services — branch banking and credit cards — via mobile phones. In the last three years, the government’s financial inclusion program enrolled 285 million new customers for banking services. AADHAAR is the only form of identification utilized and costs just $0.50 per enrollee compared to $20 for the previous paper-intensive system.
- Mobile internet accounts for nearly two-thirds of total internet traffic in India. The smartphone penetration growth is one of the fastest in the world and data tariffs have declined significantly since the launch of Reliance Jio. The share of smartphones in total mobile phone shipments to India has leaped to 50% from 7% in 2012. Morgan Stanley estimates smartphones will reach 100% penetration by 2020. Unsurprisingly, most of the new entrants in banking are “mobile-first” users and are driving growth in digital transactions.
- Digital payments as a percent of GDP rose to 5% in FY 2017 compared to 3% a year earlier — still significantly below other countries. Digital payments as a percent of total personal consumption expenditure (PCE) of nearly 8% is also below most emerging countries. (See chart below).
Digital payments as a percent of GDP is forecast to rise at a CAGR of 30%, to account for 20% of GDP over the next ten years — increasing its share of PCE to 36%. IDC Financial Insights estimates that digital payments in India will overtake cash-based transactions by 2022.
- India has the world’s most-advanced digital payments system. A recent report from FIS, a U.S.-based banking-technology provider, ranks India’s Immediate Payment Service (IMPS) as the best among 25 countries, including the UK, China and Japan. The digital payment systems were measured on parameters such as round-the-clock availability, adoption rate, and immediacy of payments. IMPS credits beneficiaries’ accounts in real time and uses a centralized identification scheme where aliases can be used as an alternative to bank account numbers to simplify the transaction experience.
- United Payment Interface (UPI) — an extension of IMPS for mobile phones — is a game changer for digital payments. The government launched UPI in August 2016 and uses AADHAAR for authentication — enabling fund transfers over the phone via a virtual address in real time. The funds are directly credited to beneficiaries’ bank accounts, removing one step of transferring first to a digital wallet. In conventional digital wallets, payments as well as cash rewards stay in the wallet and generally involve a fee for moving money to the bank account. The UPI platform now allows for instant payments to non-UPI accounts using interoperable quick response (QR) code technology. The interoperable QR technology — a world’s first launched in India — eliminates the need for multiple codes and enables payment by using a single QR code across MasterCard, RuPay, and Visa accounts.
- Transaction volume on UPI has grown several-fold in the last year to 145 million transactions in December 2017, with a total value of over 13 billion rupees — compared to 2 million transactions and 0.7 billion rupees a year earlier. Sixty-seven banks now have UPI-based payment platforms, up from just 21 in August 2016.
- Domestic companies and global giants are launching custom digital payment solutions in India. Google has launched a UPI-based application called “Tez,” which had over 10 million downloads within three months of its launch. Facebook’s WhatsApp, which has over 200 million active users in India, is launching the UPI-based payments app as early as February 2018. The largest domestic e-commerce UPI-based mobile payment company, PhonePe, also recently crossed 10 million downloads. The company offers bill payments, phone recharge and merchant payments and averages over 1 million daily transactions. Alibaba-backed Paytm, which runs a digital wallet with over 100 million downloads, has also integrated UPI into its platform.
- The government will soon launch an upgraded UPI, UPI 2.0, which will enhance user convenience and security. The updated platform will use biometrics to authenticate payments, eliminating the need to remember passcodes. The new version will also have the ability to pre-authenticate recurring transactions, which forms a large part of household expenditure such as rent, insurance premiums, monthly loan payouts and utility bills.
- India’s digital revolution promises to reduce the $270 billion credit supply/demand gap of small businesses and energize the economy. Medium and small enterprises (MSMEs) account for 40% of the country’s total exports and 45% of its total manufacturing output. However, they have long been neglected by banks, creating a huge credit supply/demand gap.
- As India’s digital revolution unfolds it will launch several new business models and provide the infrastructure for millions of small companies to expand operations. Already, fintech startups are helping MSMEs by analyzing their digital transactions to help determine credit scores. They are also enabling low-cost insurance using data analytics along with micro lending. Blockchain technology startups are helping to manage and exchange medical records on a health information grid as well. Similarly, logistics industry digital initiatives are helping manage warehouse operations and tracking shipments to reduce costs.
Privacy of personal data is a global concern in every technology development and AADHAAR is no exception. The Indian government has introduced measures to ensure privacy and minimize the likelihood of data breach and theft. Towards this end, it has introduced a “virtual ID” for AADHAAR. Only AADHAAR holders themselves are able to generate or change these virtual IDs.
Could India become the best-performing stock market over the next ten years? (continued). was originally published in 13D Research on Medium, where people are continuing the conversation by highlighting and responding to this story.