EXPLAINED | Digital payments are up but why trends point to a jagged and slow recovery

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The coronavirus outbreak has ravaged the Indian economy, bringing almost every business activity to a standstill. As businesses resume in a staggered manner, the big question is how will the country recover from this blow? Will it be a ‘V’- shaped quick recovery? If early data of consumption patterns is any indication, the answer is no.

Data sourced by Moneycontrol from digital payment companies, banks and the Reserve Bank of India suggests that at best, it may be a jagged recovery followed by stagnation, maybe a fall again and then finally some gains. This trend will likely continue till the end of the current financial year.

What does the payments data tell us?

Unified Payments Interface (UPI) has got a lot of attention for recovering to pre-coronavirus numbers. As per data from the retail payments organisation National Payments Corporation of India (NPCI), UPI transactions for May stood at 120 crore, close to January’s 130 crore.

But, UPI is not the only one when it comes to payments in the country. A large chunk of transactions happens via IMPS (Immediate Payment Service), NEFT (National Electronic Funds Transfer) and cards. As per RBI data, these volumes are still way below pre-COVID numbers.

IMPS transactions for May stood at 16.6 crore, still down 33 percent down from almost 25 crore in February 2020 but better than 12 crore transactions in April, when the entire country was in lockdown.

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While IMPS is still interbank fund transfer, card swipes on PoS terminals directly correlate with consumption. Debit card transactions stood at 27 crore in May compared to 43.8 crore in February, credit cards were at 10 crore compared to almost 19 crore in the same period. These numbers include both offline and online commerce and digital bill payments through ATMs.

The May numbers are still better than April’s, when transactions had slumped, but are still short of the pre-COVID transactions.

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“Based on transactions held on our platform, we saw online payments grow by 23 percent in June in comparison to 30 percent drop in the first 30 days of the lockdown (March 24-April 23),” said Harshil Mathur, chief executive officer, Razorpay.

July was expected to emerge stronger but with a spike in infections, states are being forced to bring back restrictions, especially in major cities, which could cause a dent in business. But payment companies are hopeful of recovering lost ground.

Why is UPI an aberration?

There is no doubt that UPI is getting popular and is being commonly used for bill payments, rent payments to recharges and even offline merchant transactions through QR codes. Players like Google Pay, PhonePe, Amazon Pay and Paytm are helping drive adoption as well.

Industry insiders have confirmed that UPI continues to be popular for person-to-person transactions. The share of merchant payments has not gone beyond 30 percent on UPI. Who are the people paying each other or is UPI eating into other payment modes? The latter could be true to a certain extent, say some fintech entrepreneurs.

Net banking transactions that were hovering around 26-28 crore a month between November and February dropped to 16 crore in April and clawed back to 20 crore the next month. Given the overall growth in payments, the share of net banking might be falling.

“UPI is not killing cards yet, but it is eating into net banking for sure,” said Sampad Swain, chief executive officer, Instamojo, which offers a complete business platform for micro-businesses operating online.

What happened to good old cash?

Cash is like that big stain on your white shirt, which is hard to wash away. No matter how much the government wishes to do away with cash, it still continues to be a large chunk of overall payments.

As of July 10, the total currency in circulation was at Rs 25 lakh crore, RBI data shows. ATM withdrawals are also up, data shows. In May, there were 40.7 crore cash withdrawal at ATMs against 61 crore in February. This shows that ATMs continue to be popular, though overall digital payments are increasing their share of the pie.

Even smaller towns, which continued to rely on cash even after demonetisation, are showing higher adoption of digital.

According to Mathur of Razorpay, people from Tier 2 and 3 cities are using UPI and other payments methods for bill payments and utilities.

“We believe this consumption pattern will move beyond utilities to an increased demand for online grocery purchases and ecommerce,” he said.

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Does wider digitisation mean a sharp recovery in consumption?

No. There has been some quick uptick in May and June but it is mainly driven by pent-up demand. Going forward, it is unlikely to be very smooth, industry insiders say.

Rajeev Agrawal, chief executive officer at Innoviti Payments, a Bengaluru-based card payment company, said in terms of spends and new stores opening, July seemed to be flat.

“Overall we are doing 50 to 55 percent in terms of business volumes of our pre-COVID days,” he said.

By September, there could be a 70 percent recovery, partly driven by some consumption of fashion and apparel during the festival season, Agrawal said. The climb to 80 percent would be slow and happen only by March 2021. The return to pre-COVID level, or the remaining 20 percent, would be the most trying and painfully slow, he said.

Another fact that stands out is that people are spending less. This will affect business margins for payment companies, Mathur of Razorpay said.

“Even though customer demand has been high, the value of transactions has declined, therefore overall revenue in the e-payments market is likely to decline this year due to losses from ecommerce, travel, hospitality and lending,” he said,

Other fintech entrepreneurs also foresee a slow recovery. Bala Parthasarathy, chief executive at fintech lending startup MoneyTap, which gives out personal loans and consumer durables, also said it would be a jagged recovery.

So, what does all this mean?

Two trends are emerging. First is the wider and stronger adoption of digital payments in the country. Second, as more and more young entrepreneurs move to online channels for sales, UPI is emerging as a popular payment mode. The first is driven by factors like ease of use, fast internet connectivity beyond metro cities and comfort with digital because of COVID-19.

The second is the ease of use of UPI apps over other payment modes and massive promotion done by third-party apps like Amazon Pay, Google Pay and others. UPI being completely contactless has also helped.

It is the payment mode to look out for. It is contactless, directly from a bank account, easy to use and is aggressively leading the pushing for digital payments.