In the Chinese Zodiac, 2018 is the year of the dog. So how different has it been from the preceding one, which in the Middle Kingdom's belief system, was about the rooster? Well, you might be inclined to believe that it was largely a case of a dog's breakfast, but in reality there was a lot to crow about on the digital front.
Take ICICI Bank's "Trade Online". It eliminates the need for physical documentation for export-import transactions. You can digitally issue letters of credit, bank guarantees, collect bills, disburse export credit, and make payments against imports. The platform has been welded to the Import Data Processing and Monitoring System and Export Data Processing and Monitoring System. The integration helps to regularise bills of entry digitally by matching payments against entries. "It brings in unprecedented convenience eliminating branch visits. We believe this facility will give a boost to customers and enhance ease of business on the global stage," said Ajay Gupta, head-Commercial Banking Group at ICICI Bank.
Similarly, SBI Securities has partnered with IBM to create new mechanisms for trading bonds using the latter's blockchain hyper-ledger as a basis for the trials. The Indian Banks' Association has suggested the use of blockchain to tackle fund diversion from consortia.
Or take digital lending company CASHe, which in the two years since its launch has disbursed over Rs 6.5 billion through its mobile-only platform for unsecured loans ranging from Rs 10,000 to Rs 200,000. Fino Paytech (the promoter of Fino Payments Bank) has picked up an undisclosed stake in CityCash. In the arrangement, Fino will take care of the issuance and settlement of the prepaid instrument and CityCash will offer its near field communication-based cashless payments technology and micro-payment merchant acquisition.
But it's not about the esoteric alone – the Union Budget 2017-18 widened the scope for digital banking to the bottom of the pyramid by allocating Rs 19 billion over three years to help primary agricultural credit societies offer next-gen solutions to small and marginalised farmers.
In the new digital world, nobody gets to beat anybody — you team up with others so that you do not become a big nobody. It's a trend which appeared almost a decade back. Korea saw a jamboree with MasterCard, LG Telecom (handset) and Shinhan Card (a credit card company) to make PayPass work across the networks of Korea Telecom, LG Telecom and SK Telecom. Visa gobbled up South Africa's Fundamo, a mobile-based financial services firm, for $110 million; Telenor picked up a 51 per cent in Tameer Microfinance Bank in Pakistan.
Ramaswamy Venkatachalam, managing director (India) at financial services firm FIS, says: "You will see greater changes in the payments landscape. Fintechs will likely enable more payment options. The adoption rate of mobile apps has created new opportunities for financial institutions to tap this growing segment of users... physical branches will become leaner and focused."
The upcoming tectonic shift in the digital landscape must be read along with what's happening in e-commerce, which can feed into the larger payments scenario. A PwC-National Association of Software & Services Companies report says the local e-commerce mart of $35 billion will grow at 25 per cent over the next five years to exceed $100 billion; e-tail and e-travel will account for 90 per cent share of this pie, while online financial services will witness the fastest growth.
Sandeep Ladda, partner - Global TMT Tax and India Technology Sector Leader at PwC India, says: "There is a gradual shift in the focus of companies and investors alike towards a sustainable economic model centred on the customer. It's taking e-commerce beyond just selling things online. The next phase of growth in the sector will come from ensuring a seamless shopping experience, building digital trust, voice-based or conversational commerce and creating an inventory of localised content."
The government has laid out a target of completing 30 billion digital transactions annually by March 2019. Ambitious as this is, one of the areas of concern is the failure rate of payment gateway transactions (pass-through of 60–70 per cent) and the cost of transactions; a big segment believes the former is due to multi-step authentication which inconveniences customers and results in failed transactions. While the Reserve Bank of India in December 2016 relaxed the additional factor authentication for online transactions below Rs 2,000, it has not been adopted by stakeholders due to implementation issues.
The inflection points
The waiver of the merchant discounted rate on debit cards, BHIM, United Payments Interface (UPI) and Aadhaar Enabled Payment System transactions of less than Rs 2,000 from January 2018 has alleviated the fears of merchants on reduced margins as they now stand to benefit from the enhanced utility of digital payments.
Merchants have been incentivised to change their behaviour and realise the benefit of receiving digital payments. UPI, too, has been tweaked to enable easy P2P and, to some extent, P2M transactions. These payments are restrictive for e-commerce players due to the settlement guidelines for intermediaries: all payments to merchants involving nodal banks shall be effected within a maximum of T+3 settlement cycle. This puts a strain on working capital and bilateral agreements with suppliers of e-commerce companies.
Venkatachalam expects mobile devices and wearables to find deeper integration with banking and payment services. "The Aadhaar verdict on eKYC imposes a significant change to the banking and payment industry, but we also see technology advance creating opportunities for banks to offer new and improved ways to interact with their financial institution," he said. Think of State Bank of India's partnership with Google India—Google Tez. Going ahead, you may also see banks using live video for remote customer verification or workflows in loan origination. P2P platforms are set to gain in popularity due to their efficiency, high return on investments, and low lending rates. Globally, it is growing annually at 48 per cent and is expected to top $800 billion plus by 2024. "The goal now is to automate the entire lending activity from origination to collection — beginning to end," adds Venkatachalam.
On the flip side, you also have financial stability implications from fintechs. The Financial Stability Board (set up after the G20 London summit in April 2009 as a successor to the Financial Stability Forum) notes that many fintech innovations have not yet been tested through a full financial cycle.
The potential risks include micro-financial risks such as credit risk, leverage, liquidity risk, maturity mismatches, and operational risks, especially cyber and legal risks. Moreover, there are macro-financial risks such as unsustainable credit growth, increased inter-connectedness or correlation, pro-cyclicality and contagion incentives for greater risk-taking by incumbent institutions.
As the year of the dog melts into the year of the pig, you will see more drama in the digital space.