Gauging the direction of the payment industry

Over the last few years, there has been a constant surge in digital transactions as mobile payments and POS machines have redefined traditional retail. UPI transactions, which were started in 2016, has been growing at lighting speed with over 1250 Cr transaction, average transaction size nearly 1700 and total transaction value INR 21,317 Bn in FY 2019-20. The Covid situation might just catalyzed (Opinion by IIM C Prof Ashok Banerjee) the process with payments via wallet and UPI modes being the new norm.

Apart from many challenges on health, social and economic front, Covid-19 has interrupted seamless release of economic data. This poses a unique challenge to economist and policy makers to analyse the extent of damage to economic activity. In such times, online transaction data released by NPCI can be good data point to assess the extent of damage and it can also shed some light to digital vs cash transaction debate.

Covid Impact: On Economy and Digital Transaction

Economic activity, due to lockdown, had come to a near stand-still except for health care and essential items. As shown in chart below, transactions across NPCI retail platforms (ATM Withdrawal, IMPS, UPI) witnessed nearly 40% slump in April before recovering in May. ATM withdrawal and IMPS transactions in May were nearly 20% lower than average of Jan-Mar’20 period. Interestingly, UPI transactions witnessed a sharp recovery with May month transaction nearly equal to March in volume terms and even slightly higher in value terms.

Data: INR Bn

Let’s Dig Deeper into Digital Transactions

Transactions via prepaid payment instruments like digital wallets have dipped by almost half in a two-month period between Feb’20 to Apr’20. Collectively, mobile payments have a steady growth driven largely by marketplace retail.

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Under the P2M segment, offline payments is fast catching up as customers are venturing to local outlets. However, organized offline retail has shown sluggish growth due to high exposure at malls and supermarkets. The cutthroat restaurant industry has been bearing the brunt with certain QSRs keeping afloat through the home delivery model.

Digital payment solutions also have a seasonal dependency on companies engaged in sports and events. Largely one of the top merchants by annual GTV (Gross Transaction Value), Dream 11 drives a size-able revenue. With IPL’20 and Euro’20 postponed indefinitely, the outlook for a faster rebound remains shadowy. The movies business has also taken a hit with customers preferring to watch content over more than 40 OTT channels including Netflix, Amazon Prime and Hotstar. Many film producers are moving towards OTT platforms and digital streaming for their releases.

Revenues for travel partners, Uber and Ola have also plunged in the last couple of months with people working from home and shopping online. With inter-state and international travel plummeting, OTAs (Online Travel Agencies) dependent on flights, trains and buses has come to a massive halt. As the dominos roll, the capital-intensive hotel industry has been bruised badly while petrol pump dealers and oil marketing companies (OMCs) have had an adverse impact on revenue from operations due to the severely hit demand for petrol and diesel. In addition, Fastag providers that undertook massive campaigning in December last year to capture customers across passenger and commercial vehicle segment have to sustain thin margins for some time.

So where has the spending volume grown? For obvious reasons, recharge pending has gone up as users are utilizing more talk time to remain connected along while broadband usage has considerably risen. Utility retail payments for electricity and gas have increased in transaction volume over the last two months.

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In addition, the customer base for marketplace retail has been growing significantly, as customers look beyond lifestyle and electronic goods for shopping. The battle for online grocery shopping has heated up with e-tailers looking at innovative solutions to warehouse and distribute perishable items. Under the P2P segment, digital payments to domestic helps and business transactions have also replaced the traditional cash model.

While the number of corona virus cases do not seem to be peaking, the fear against it might have. However, people have made noteworthy changes in spending habits and it has helped in getting more users under the digital model. While economic growth might be slow in the coming year, expect remarkable spikes in digital credit and debit transfers, card payments as well as prepaid payment instruments.

About Rahul Mohan:

Rahul Mohan, FRM level 1 cleared has 8 years of consulting and industry experience. Primarily focused on risk management and strategy, he has worked across digital payments, treasury management and data analytics. He likes tracking growth of new startups and enjoys trekking tough terrains.

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