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India has made remarkable progress towards financial inclusion, but the use of digital payments remains limited

The Pradhan Mantri Jan-Dhan Yojana (PMJDY), the Indian government's landmark financial inclusion initiative, has facilitated the opening of over 200 million bank accounts since its launch in August 2014. In addition, over 950 million Indians have Aadhaar – a unique biometric-backed identification, which makes it easier to confirm their identity when opening bank accounts. The Aadhaar scheme has also made it possible for the government to begin digitizing benefit transfers, meaning beneficiaries can now keep their benefit payments stored more securely and use their accounts more actively. Simultaneously, the number of mobile phone connections in India has reached 980 million, allowing even more people to access financial services wherever they are. Together this ‘JAM’ (Jan-Dhan Yojana, Aadhaar, Mobile) trinity presents a huge opportunity for India to realize long-lasting financial inclusion. However, despite the success of ‘JAM’, the use of digital payments in India remains very limited.

Why a complete digital environment remains a distant dream

Cash transactions as matter of habit
Few consumers use digital payments

Only 11% used debit cards for payments last year

Few merchants accept digital payments

Promoting digital payments is critical to achieving meaningful financial inclusion

Meaningful financial inclusion is about more than just having an account – it also includes the ability to use these bank accounts regularly and easily. In addition, financial services and products must be tailored to meet consumer needs and goals.

Digital payments can enable individuals to store and spend money safely from the comfort of their own homes, thereby promoting financial inclusion. In addition, the data trail generated from digital transactions can be used to create tailored financial products (e.g. credit) suited to their individual needs and circumstances. The use of digital payments can also reduce the burden of cash on the broader economy: the Reserve Bank of India (RBI) estimates the cost of currency operations to be around $3.5 billion per year.

Although access to bank accounts has seen significant growth in India, use of these accounts is still lagging. Only 29 percent of bank accounts in India have been used in the last three months. The use of electronic payment methods, such as debit cards and mobile wallets, is even lower. While the benefits of digitizing payments are clear, what is less obvious is how we can change the everyday behavior of consumers and merchants in a cash-based economy like India. We do know that these efforts must be grounded in a strong understanding of consumer and merchant preferences, which can then be used to tailor solutions to drive digital adoption.

Cash is an inefficient medium of exchange, costing the economy $3.5 billion annually. The World Bank estimates that the Indian Government can save 1% of the GDP annually from digitizing current cash based subsidies alone.

A Partnership to support digital financial inclusion in India

Recognizing the critical role digital payments can play in deepening financial inclusion, the Government of India’s Ministry of Finance (MoF) and the United States Agency for International Development (USAID) launched a Partnership specifically focused on increasing the use of digital payments at point of sale, particularly among low-income consumers. Over 35 key Indian, American, and international organizations have partnered with the MoF and USAID on this initiative. They cut across six categories of organizations — fast moving consumer goods companies (FMCGs), banks, payment networks, mobile network operators, e-commerce providers, leading civil society organizations, and ecosystem players. The goal of the Partnership is to identify, test, and scale innovative approaches that will drive greater use of digital payments at the point of sale.

To guide the efforts of this partnership, USAID commissioned a study to understand the current behaviors and perceptions towards digital payments among consumers and merchants in low-income communities in India. This research is intended to serve as a resource to policymakers and business innovators as they work to accelerate the adoption of digital payments in India. The study was conducted by Dalberg, a strategic advisory firm dedicated to global development, between July and September 2015.

We conducted research to meet the following objectives:

  1. Understand the factors that drive awareness and interest among current non-users of digital payments
  2. Analyze the experience of those who currently use digital instruments – debit cards, mobile money, and online bank transfers
  3. Identify potential strategies to spur the adoption of digital payments among these consumers and merchants

The research was carried out in the metropolitan cities of Mumbai and Hyderabad, in the smaller cities of Kota and Vishakhapatnam, and in villages around Guntur and Jaunpur. This report captures the key findings from quantitative surveys with over 2500 respondents as well as from deep ethnographic research with low-income consumers and small merchants to understand their spending and saving patterns, and their perception of cash and digital payments. Our survey is not intended to be nationally representative. Instead, the aim is to cover a significant number of users as well as non-users of digital financial payment systems. This web report provides the key highlights from this research. For detailed quantitative and qualitative findings, as well as methodology and data, please visit the supporting research page.

Consumer Research Insights
What will it take for them to make the switch?
Consumers in India are more digitally connected than ever before. But are they ready for a complete digital transition?

1. Current users of digital payments are highly satisfied with their experience

Debit card payment users were asked to rate the likelihood of recommending their card to someone they knew, on an ascending scale of 0-10. We found that these users are highly satisfied with their experience, primarily because cards allow convenient, “any-time” access to funds, and are considered to be a more “modern” way of transacting. Debit card users from the lowest socio-economic segments also recommend them because they are safer to carry.

 

Similarly, 84% of users of mobile money and 91% of bank transfer users say that they will recommend these instruments to others. Users recommend mobile money for its modernity and speed. Respondents also appreciate the discounts on airtime that often come with mobile wallets and the convenience the instrument offers for mobile recharges (which is what mobile money is predominantly used for in our sample). Bank transfer users cite modernity, speed, and safety as top reasons for their satisfaction. 

"Mobile money lets me pay bills from home. I can also recharge my mobile at any time."
Hari, Student, Kota

2. Awareness of and interest in digital payments among current non-users is low

We asked non users if they were aware they could use digital payment instruments to buy goods. Those who were aware were then asked how interested they were in adopting these instruments.

Only 28% of respondents who do not hold debit cards are aware of them, and only 45% of those who are aware are interested in adopting debit cards. The figures are even lower for mobile money and bank transfers. Among mobile money non-users, awareness stands at 18%, and interest in adoption at 46%.

Many of the consumers who are aware of digital payments have only a fringe awareness. In fact, the lack of deeper awareness and understanding are the top reasons driving disinterest in adoption.

3. Low interest in digital payments is often driven by the lack of a digital store of value

Consumers often lack opportunities to convert cash into digital. They either do not earn money digitally or do not have opportunities to store it digitally. Almost 80% of the consumers surveyed do not earn money digitally. Only 21% of those not earning digitally actually save money in a bank account. This poses a significant barrier to transacting digitally, evident in the fact that those earning and saving digitally in our sample are around 2.5 times more likely to transact digitally than those who do not.

On the bright side, there appears to be strong demand for additional ways of saving, presenting an opportunity to help people build a digital store of income. When asked if they would like additional ways to contribute to their savings, 55% of urban respondents and 47% of semi-urban respondents agree. Research shows the ability to make small-value “micro-savings” is particularly valuable.

4. Low penetration of merchant acceptance is a key barrier to adoption

A large percentage of people surveyed were active debit card users who use their cards only at ATMs. This is mainly because most users don't have merchants around them who accept card payments, which means they have never even thought about using their cards for merchant payments.

Digital payments are also most often associated with high value transactions only, which impacts wider use. When asked what payment instrument they would prefer for various sized transactions, only 4% of respondents chose a digital instrument for a transaction value of ten rupees, as compared to 31% for a transaction value of 10,000 rupees.

 

5. Consumers recognize the problems associated with cash

Managing odd value transactions, which requires either the customer or the merchant to have exact change, is a significant problem for consumers. Of the sample, 45% of urban respondents and 50% of semi-urban respondents report having a significant problem managing loose change. These pain points can be addressed with digital payments and represent a promising opportunity area. On a related note, high-frequency, low-value transactions, such as daily transportation, which involves spending time waiting in queues, are also a major pain point.

Another problem with cash transactions is tracking expenditure. In our sample, 54% of urban respondents and 50% of semi-urban respondents say they are unable to track their monthly expenditure easily. Digital instruments provide an avenue to address this issue.

Merchant Research Insights
What will it take for merchants to accept digital payments?
A majority of merchants in India rely on a well-entrenched cash economy. But they are crucial players and need to be brought on board to help create a digital payment ecosystem.

1. Merchants who accept digital payments are highly satisfied with the experience

89% of debit card acceptors in our sample state that they would recommend accepting card payments to other merchants. These merchants highlight a number of benefits to acceptance, the most prominent being safety, faster transaction speeds, ease of use, and a reduced hassle of finding change. Mobile money acceptors are also highly likely to recommend acceptance; 97% would recommend acceptance to others, highlighting ease of use, safety, and appeal to customers.

2. Among merchants who do not accept digital payments, awareness and interest is low

Only about 40% of merchants not accepting payments via debit cards in our sample are aware that they could do so. Of them, only around 40% are interested in accepting cards in the future. For mobile money and bank transfers, the numbers are even lower. Approximately 20% of merchants not accepting these instruments are aware they can accept payments through these channels, and just 30% of them are interested in accepting these instruments in the future.

3. Merchants, like consumers, are trapped in cash ecosystems, which inhibits their interest

The need to make cash payments to suppliers is the top-ranked reason driving merchant disinterest in adopting debit cards, only second to lack of awareness. Low consumer demand ranked third. Interestingly, some commonly held beliefs regarding lack of acceptance, such as tax implications and costs, ranked much lower.

Of the merchants paying suppliers in cash, 17% state they are very likely to pay their suppliers digitally if their supplier insists. Another 46% say they would be open to switching, but would attempt to negotiate. This suggests digitization of retailer to distributor payments could be both feasible and a good way to drive last mile acceptance.

Another interesting observation is that 90% of merchants not paying cash to their suppliers use checks as a payment instrument. This is because of inherent advantages that checks provide, such as a physical transaction trail and latency (i.e. the ability to delay payments to suppliers). Digital instruments hold the promise to replicate these features that make checks so attractive.

4. It is expensive for merchants to adopt digital payments, which affects their interest

Merchants highlight the high cost of trial as a factor driving down interest in acceptance of digital payments.

“I was thinking of installing a card machine at my store. But the banks asked for a 5,000 rupee deposit. How can I invest this money without knowing if it will succeed or not?"
Hitesh, general store owner, Mumbai

5. Merchants experience cash pain-points, which offer an opportunity for digital payments

Merchants rank the safety of carrying and storing cash as a major business challenge, followed by the management of change to return to customers. Considering that digital payment instruments can effectively address these issues, they represent a significant opportunity for increasing merchant acceptance.
 

6.  Vast unmet demand for credit can be used as a “hook” for digital payments acceptance

When asked what value-added services were most attractive, merchants rank credit for business investments and easy/lower cost access to working capital credit as the highest. This is consistent across geographies, store type, and store size, reflecting the vast unmet demand for credit. This insight provides a unique opportunity for digital payments. Digital payments help create a digital transaction history, which can be used to provide credit to merchants. This possibility offers a great hook to encourage merchants to accept digital payments.

Incentivizing Consumers
Action Ideas
  1. Digitize income

    Our research shows that consumers who are paid digitally are more likely to transact digitally. To support this effort, the Indian government should continue digitizing benefit transfers, and also consider providing incentives for organizations to pay their employees digitally.

    Banks and payment players can incentivize employers to open bank accounts for employees and pay salaries through these accounts.

    FMCGs can encourage manufacturers in their supply chain to digitize employee salaries.

  2. Create opportunities for micro-saving

    We found that consumers who save digitally are much more ready to transact digitally. Banks and payment players should develop flexible and convenient micro-savings products for low-income consumers. Digitizing self-help and microfinance group savings and loan disbursements are steps in that direction.

    The government should continue rolling out micro-pension programs like the recently launched Atal Pension Yojana.

    There is also an opportunity to bundle savings products in government direct benefit transfers.

  3. Create digital payment solutions that address cash pain-points

    The pain of using cash for high-frequency, low value transactions like transport is felt by most consumers. The government should continue to digitize mass-transit and other public transport systems. It should also consider expanding the use of transport payment instruments to broader usage. A case in point is the Octopus card, Hong Kong’s contact-less mass transit card, that is also used for making electronic payments at online/offline stores. Recent announcements by the RBI to allow semi-open wallets linked to public transportation, across cities, is a step in that direction.

    Banks and digital payment players can create digital products to solve the problem of managing loose change. Creating explicit, easy-to-use expense tracking features within digital payment instruments can also elicit interest among consumers.

  4. Incentivize current users to deepen use and bring other users on board

    Given that current users tend to be highly satisfied with their experience, the government can encourage consumers to expand their digital payments use by providing tax and monetary incentives. For example, the usage of cards or mobile wallets can be linked to income tax rebates.

    Banks can also incentivize consumers to use and recommend digital payments by offering cash-backs or loyalty points.

  5. Communicate specific use-cases and encourage trials among new consumers

    The lack of deeper awareness and understanding is one of the top reasons driving the lack of interest in digital payments. To generate interest in digital instruments, banks and payment players can focus their marketing and advertising campaigns on tangible, easy-to-understand, and specific use-cases.

    Banks and payment players can also encourage trials amongst new consumers by providing innovative incentives. For example, incentives like providing cash-back on a consumer's first five transactions can be effective.

 

Bringing Merchants Onboard
Action Ideas
  1. Enable merchants to try digital payments acceptance at low or no cost

    The up-front cost of trial is a major barrier to merchant acceptance. To encourage acceptance of digital payments, banks and payment players can consider removing upfront fees and device installation charges and move towards pay-per-use models.

    Additionally banks can remove restrictions on minimum current account balances and simplify the onboarding experience.

  2. Digitize retailer-to-supplier payments    

    The need to make cash payments is the top factor driving down interest in acceptance. To address this, FMCGs can incentivize retailers to pay distributors digitally and provide technical assistance to distributors to bring their retailers onto a digital payment platform. FMCGs can also offer discounts and cash-backs to retailers on goods sold digitally.

    Banks and payment players can design digital payment services that mimic the characteristics of checks (e.g. delayed/scheduled payments).

  3. Use transaction-based credit as a “hook” for acceptance

    Given the large unmet demand for credit among small merchants, banks and payment players can collaborate with data analytics companies and credit providers to provide working capital and business investment loans based on the transaction-data generated by digital payments.

    Credit can also serve as a “hook” to incentivize merchants to accept digital payments. FMCGs can also offer loans based on digital sales data to incentivize retailers to pay distributors digitally.

  4. Incentivize existing merchants to further use digital payments and recommend them to others

    Since current merchants are quite satisfied with usage of digital payment instruments, banks and payment players can provide existing accepting merchants with incentives and discounts for on-boarding new merchants.

    The government can provide tax and monetary incentives for digital sales by merchants.

  5. Communicate benefits of digital payments that could offset cost liabilities

    Banks, payment players, and government agencies can join forces and lead a campaign emphasizing the benefits of digital payments, including safety, consumer satisfaction, or reduced burden of managing loose change by highlighting specific use-cases.

Looking Forward
A CALL TO ACTION

This research is intended to serve as a foundation for action. We hope you will use it to design policies, products, and other efforts. Over the coming years, the USAID-MoF partnership will be working to identify, test, and scale innovative approaches that effectively and sustainably incentivize consumers and merchants to transition from cash to digital payments.

We hope you will join this conversation and call to action.

If you have ideas you would like tested, please let us know at digitaldevelopment@usaid.gov.

Methodology
OUR RESEARCH APPROACH

Our research was focused on low-income consumers and merchants across rural, semi-urban and urban areas, with a variety of digital payments usage experience. For detailed qualitative and quantitative findings, please visit the supporting research page. This page will also be updated with the methodology and raw survey data as it becomes available.

Our intention in making this information and methodology public is to provide opportunities for others to build upon this research or to perform similar studies in additional markets.