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Teething pains for India’s new payment system

Jan 14, 2013 | By |

Expectations India’s new mobile transaction platform – IMPS – would revolutionise payments by 2015 are overblown

It’s a painful headache for India. The country is largely unbanked. More than 41% of its 1.3 billion population does not have a bank account. Broken down, that means 40% of Indians in urban areas and 61% in rural India.

The government was quick to spot the exponential growth of mobile phones as an opportunity to access those in the hardest to reach areas and provide a form of mobile banking whereby money can be transferred via a SMS text.

As far as a CFO or treasurer is concerned, banks were equally quick to notice this trend would benefit corporate clients keen to save money on payment reconciliation.

The stats hold up. Roughly 54% of Indian households own a handheld device and the numbers are growing rapidly. To boost these numbers further, the government is set to pass out free cell phones with free minutes to rural families living below the poverty line, accounting for roughly six million households.

In step with these developments, the National Payments Corporation of India (NPCI) launched its mobile payment system – the Interbank Mobile Payments Service, or IMPS – designed to allow customers to use their phones to access bank accounts and remit funds.

The beauty of the system is its simplicity. Much like a switching or credit card network, IMPS doesn’t hold money, it simply transfers the data. It’s the banks, at either end, effectively make the transaction. IMPS connects the dots between the banks.

Two years after the IMPS pilot went live, how far has the mobile payments movement progressed? Well, the jury is out.

One key need of the NPCI is to ensure as many banks get on board with IMPS because coverage throughout India would be sketchy otherwise. The NPCI has done a good job on this front. It now boasts 51 banking members – which account for roughly 95% of the total banking coverage in India – and just under 42.5 million mobile IDs have already been supplied.

Mobile hype?
In terms of volume the story is a little more mixed. According to available NPCI data, the total number of transactions (both intrabank and interbank) in November 2011 tallied 11,853 (when 30 banks where on board). The amount transacted was 419.47 lakhs ($760,000). In October, total transaction volumes for the month reached 88,444 with the total amount reaching 2961.61 lakhs ($5.4 million).

Overall, the total number of transactions completed in the period between November 2011 and October 2012 reached nearly 730,500 transactions, totalling approximately $30 million.

Market analysts estimate mobile volumes will vary between $8 billion by 2015 (gross transaction value) and $350 billion, depending on the forecast. But how much of that pie will IMPS really take up?

Based on these estimates the IMPS market would need to grow 266 times in two years just to reach the $8 billion estimate. Given that it has grown only 36 times in ten months, even that number seems optimistic.

Of course “mobile” transactions incorporate any payments made via a mobile device which can be any payment, including NEFT and RTGS, as long as a mobile channel is used to initiate it.
Even when IMPS usage strangely soared in August 2012, it only accounted for 12% of overall mobile transactions for that month. Most of the time that percentage is much lower. However you cut it, IMPS has not exploded out of the blocks.

But that doesn’t mean IMPS is failing; more that expectations for its immediate impact have been too optimistic. More important to a treasury department, banking strategies won’t change because of it. Global banks are still setting their sight on providing mobile services for their corporate clients via IMPS. They expect lower volume but higher ticket business to make it worthwhile.

“We see the largest opportunity for IMPS is in the consumer-to-business corporate receivables segments,” remarks Jason Tiede, regional head for cards and emerging payments for Bank of America Merrill Lynch in Hong Kong, who argues that the benefits for both are strong enough to create a market.

Table manners
Certainly from the merchant’s side the biggest value is moving away from a cheque-based process and bank reconciliation system to a mobile process. It reduces the risk of fraud (cheque kiting, for example) and cuts internal reconciliation costs to a minimum. IMPS creates a reference number when a payment is made from a person to a corporate – which serves as an invoice number or customer ID. This allows the corporation to reconcile a payment 24/7.

What’s less convincing is the benefit this really brings to the individual. Yes, it is easy to make payments with a device that sits nicely in your pocket, but it’s hardly a dynamic shift away from paying with cash or writing a cheque. Inventive thinking will be required by the company to attract consumers to mobile payments.

“You could see the corporate client providing an incentive, discount or other benefit,” Tiede says. He believes the reason person-to-person mobile payments hasn’t really taken off is that people haven’t shown a strong need to transfer money to friends and family over a restaurant dinner table, for example. Certain traditions are hard to eradicate.

One interesting angle is the potential IMPS has between large scale corporate business and smaller businesses, especially in the fast moving consumer goods sector. Receiving goods and being able to pay for it by mobile phone may make life a lot easier and safer for mom and pop stores throughout India. Instead of storing large sums of cash to pay delivery firms on demand, a mobile phone will do the trick.

A well-known working example is Hindustan Coca-Cola Beverages, the bottling operation of Coca-Cola in India which was one of the early adopters of IMPS (via Citi’s own Cash-to-Mobile payments service).

Bhalchandra Joshi, head of service delivery and operations excellence at Reliance Capital Management, told The Corporate Treasurer he planned to launch a mobile system based on IMPS for its clients by the first quarter of 2013.

Plenty more examples like these are needed before the IMPS market really heats up, however.
And there’s still the issue of infrastructure. It’s good news plenty of banks have signed up to IMPS, but many are yet to provide the service in all the areas they cover.

“Some of the Indian public banks don’t have the centralised technology infrastructure – they will adapt zone by zone, region by region,” says Sandip Patil, Asia regional head for payables and receivables, at Citi in Hong Kong. He believes the adaptation will take around 12 to 18 months before 95% of the banking population will be able to use IMPS.

If true, it will take time to transition to mobile. That said, banks will still be eagerly chasing corporate business if they think these estimations are credible. Since transactions are priced thinly and infrastructure costs for the banks are extremely high, volume is everything.

IMPS numbers are heading in the right direction, but are still lower than most hoped. India’s headache won’t go away just yet

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