By Patti Murphy
Global electronic payments received a major boost last year when the government of India effectively removed 80 percent of the nation's banknotes from its payment system. It was a dramatic move – said to be aimed at ridding India of bribery and black market sales – with a potentially dramatic economic impact. And it's expected to accelerate the global transition to digital payments.
By eliminating the two most popular denominations of currency (a process known as demonetization), the Indian government is forcing more than 1 billion of its citizens who have lacked access to the financial mainstream to accept and make payments using mobile phones (which most, if not all households can access).
A 2016 study published by Visa Inc. revealed that heavy reliance on cash (over 90 percent of transactions last year) costs India 1.7 percent in gross domestic product (GDP). Foregone tax revenues from India's "shadow economy" cost about 3.2 percent of GDP. "Such a huge burden on the economy offers the government of India a clear rationale for accelerating the shift from cash to digital payments," Visa wrote.
It's a shift unlike anything witnessed before. "They're skipping over plastic [card payments] and going straight to mobile money," said Harold Montgomery, Chairman and Chief Executive Officer of MoneyOnMobile Inc. (MOM). Indeed, a report by the business consulting firm RNCOS projected nearly 200 percent growth in the Indian mobile money market between 2016 and 2022.
MOM, formerly Calpian Inc., is based in Dallas and had specialized in payment processing services for U.S. ISOs and merchants. In September 2016, the company sold off its U.S. operations and changed its name and market strategies to focus on India. The company has been operating a mobile phone-based payment network in India since 2012, catering specifically to India's estimated 1.2 billion unbanked and underbanked consumers.
Indian consumers make cash deposits to MOM accounts using registered agents who in effect convert the cash to digital currency, which consumers can then access to pay bills and make other transactions using SMS text messaging. As of February 2017, MOM had 325,000 retail points of presence in the Indian market, and those merchants were being frequented by at least 8 to 10 million accountholders each month. "Our processing volume grew 119 percent from December to January," Montgomery said.
In January, the company heralded the launch of MOM ATM, which will allow consumers to use their mobiles to withdraw cash from their MOM accounts through participating merchants that effectively act as ATMs. "Demonetization in India has increased demand for cash-out services from consumers beyond where the current financial infrastructure can support," said Ranjeet Oak, President and Chief Operating Officer at MOM. When MOM ATM is fully implemented, the move will increase ATM access points throughout the nation from 200,000 to more than a half million, Montgomery said.
MOM isn't alone in its quest to capture Indian market share with mobile payment solutions. National Payments Corp. of India, Visa and Mastercard, working with the Reserve Bank of India and leading Indian banks, created Bharat QR, a national interoperable mobile solution based on Quick Response (QR) codes that the government ordered built to support demonetization. "For consumers Bharat QR eliminates the need to use multiple QR codes from different payment networks," Mastercard stated. When the solution is fully rolled out, it is expected 57 million small and micro merchants throughout the country will use it.
mVisa, which also uses QR codes, went live this year in India, Kenya and Rwanda. The mobile solution is slated for rollout in other emerging economies, including Ghana, Indonesia and Vietnam. "Small merchants using mVisa for the first time are most excited about how quickly and securely they receive electronic payments without having to invest in expensive point of sale infrastructure," said Uttam Nayak, Visa's Senior Vice President of Digital for Emerging Markets.
Paytm, an Indian-based digital payment company with financial backing from China's Alibaba Group Holding Ltd., claims 100 million Indian users of its mobile wallet. And it reported a huge boost in signups in the wake of demonetization. Paytm claims over 4.5 million merchants and aims to aggressively grow that base to 10 million by the end of 2017, according to company statements. In 2016, Paytm was one of a dozen Indian firms to garner approval as "payments banks," special entities created by the government to help mainstream unbanked and underbanked Indians.
These are ambitious goals for a country with a population of 1.34 billion, an installed base of just 1.3 million POS terminals and only about 5 percent of personal consumption spending occurring digitally in 2016, according to Visa. Then there is the sheer size of India, its rudimentary infrastructure (for example, remote towns and villages that still lack electricity) and the existence of multiple languages, dialects and cultural norms. It's a market unlike any U.S. acquirers have experienced, experts noted.
"You have to rethink things from an Indian perspective and come up with products and services that work in these market conditions," Montgomery said. Mobile works well in India because it responds to conditions unique to the Indian market. "We have perfectly good alternatives in the United States. We can get along fine without it [mobile payments]," he added.
It's not just India. Many emerging and established markets pose significant barriers to new entrants from the United States. "Local payment preferences are vastly different from market to market," said Neeraj Gupta, Leader, Product Management at Vantiv Inc. So do regulations, licensure requirements, clearing and settlement rules and legal conventions.
In Germany, the most common method of payment is cash, although card payments have been growing at double-digit rates since 2010, according to Euromonitor International. In Brazil, fewer than four in 10 consumers have internationally branded credit cards. One of the most popular ways to pay in Brazil is with Boleto, a bank-backed installment credit scheme. Data published by Capgemini indicates direct debits outstrip credit card payments in Asia-Pacific nations and emerging Asian economies. And a 2016 survey by Nielsen found consumers in China overwhelmingly prefer technology-enabled payments, according to ChinaDaily.com.
Among Chinese consumers surveyed, 86 percent had made online purchases using digital payment systems during the previous six months. This compares with an average 43 percent of consumers throughout 26 countries Nielsen surveyed. The most common purchases made using smartphones: food, cited by 71 percent of surveyed consumers; 51 percent used their mobiles to purchase event tickets. Research and Markets expects mobile payment transaction volumes to grow at triple-digit rates in China through at least 2020.
Setting up shop in offshore markets is not on the radar at many U.S. acquiring organizations. Vantiv, for example, works with legacy acquirers in local foreign markets to facilitate cross-border payments for its U.S.-based ecommerce clients. Cross-border sales are on the rise for all ecommerce firms and will account for 15 percent of all online sales by 2021, up from 12 percent in 2015, according to Forrester Research Inc. China's share of the online cross-border market is expected to grow from 27 percent in 2015 to 40 percent in 2021.
"Merchants are increasingly looking for a single processor for their global needs," Gupta said. "We made a strategic decision that we were not going to be able to meet the global needs of customers without good backend acquiring partners."
Each national market has unique regulatory and technology requirements, customer demands, and established companies with scale and the appropriate licenses. These are the partners a U.S. acquirer must seek in new markets, Gupta noted. "One thing we can leverage is that we know the right questions to ask when conducting due diligence," he said.
Last year Vantiv partnered with PPRO Group, a London firm that will allow Vantiv's ecommerce merchants to accept noncard payment methods unique to buyers' home countries. Payment schemes supported include direct debits, bank transfers, cash-based e-payments and mobile wallets. "We understand the importance of offering alternative payment methods, which in some regions account for 30 percent or more of all online spending," said Sayid Shabeer, Vice President of Merchant Product at Vantiv.
Local laws and legal conventions loom large for acquirers and merchants looking to overseas markets. A 2016 survey by global acquirer Payvision revealed reduced merchant enthusiasm for selling to international customers because of legal and regulatory hurdles. Nearly half of merchants surveyed by the Amsterdam-based firm identified overseas regulation as the biggest hurdle to expansion. "Without a knowledgeable partner to navigate local legalities and localization, cross-border ecommerce can be a fruitless exercise," the company noted.
The revenue pie from mobile money is charting phenomenal growth. Research and Markets puts the combined global annual growth rate for mobile wallets at nearly 35 percent through 2020. "The growing number of mobile Internet users has encouraged new players to enter the market to provide m-commerce services. This may fuel the growth of mobile wallets during the forecast period, as users will be able to make instant purchases online," Research and Markets wrote.
There's a potential stumbling block, however: growing concerns about fraud and data breaches. Nearly three out of four (72 percent) of merchants surveyed by Payvision, for example, expressed concern about increased risk of data breaches and fraud associated with cross-border payments. And it's not just merchants. An Aite Group LLC survey of consumers in 20 countries shows fewer than half are confident the companies they do business with are protecting their financial/transaction information. In only three countries – the U.S. (at 54 percent), India (60 percent) and Thailand (51 percent) do a majority of consumers express confidence their stored data is well-protected.
The confidence expressed by Americans is noteworthy, since in 2016, Mexico, Brazil and the United States topped the list of countries where card fraud was most prevalent. European countries saw the lowest fraud rates, according to Aite. Meanwhile, 65 percent of consumers said they would stop shopping at a business responsible for fraud or breached data. Andreas Suma, Vice President and Global Lead, Fraud and Data at ACI Worldwide, which sponsored the Aite survey, described the results as "a further wakeup call to the broader payments industry" to do a better job of educating consumers on how their data is being secured.
Consumers want the ability to proactively manage fraud and "overwhelmingly" prefer to do so using their mobiles, Aite found. Seventy-five percent of respondents said they were very interested in receiving fraud alerts via a call or SMS to their mobile devices. "This willingness opens opportunities for financial institutions to optimize the ways in which they reach out and communicate with consumers, ultimately improving customer experience while reducing operational costs and fraud losses," said Aite Senior Analyst Shirley Inscoe.
Globally, there were 387.3 billion noncash transactions in 2014, according to Capgemini's 2016 World Payments Report. Noncash payments in developing countries, as a group, are averaging annual growth rates of 16.7 percent; in developed countries (United States, Europe) noncash payments are increasing at a combined average of about 6 percent a year.
Here's a regional breakdown of global noncash transactions in 2014:
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