India: Understanding The Emerging Frontiers In Payments Systems

Last Updated: 13 October 2016
Article by Monish Shah

The following Deloitte professionals were involved in preparing the report: Nachiket Limaye, Rachit Mathur, Meenakshi Khurana, Vaibhav Anand, Sidharth Ravishankar, Narendra Verma and Bharat Jakati


Foreseeing the Unseen!

It was the Whatsapp moment for the banking sector when Nandan Nilekani launched the Unified Payments Interface (UPI) on 11 April to the applause of RBI governor Raghuram Rajan and several leading industry captains in the country. Its originator, the National Payments Corporation of India, then said that this was just a modest beginning and a real revolution is yet to happen in the form of Bharat Bill Payment System (BBPS) and several other innovative payments systems that are being designed and developed. In the domain of banking, payments today is one of the most happening areas in terms of innovation, technology and business.

I remember Vijay Shekhar Sharma of Paytm mentioning that we are now passing through one of the most exciting times in the payments business with a lot of action happening around. A true follower of the banking sector cannot afford to miss this transformation. What is exciting is that the regulator is moving away from traditionalism and is becoming highly supportive of the innovations and offering the innovators a chance to prove themselves. In fact, the regulations are being created around these innovations so that the banking system evolves in the right direction free of security scares, operational inadequacies and in a manner that is conforming to global standards. The presence of fintech entrepreneurs, accelerators and incubators in the regulator's office is sign that the business of payments is getting redefined and it is not any longer a conservative business.

There have been maximum frauds in the payments realm. In fact, frauds in the corporate banking scene is ten times more in terms of value than those happening in the retail banking scene. The regulator is constantly evaluating the shortcomings in the security infrastructure and suggesting effective counter measures to contain possible frauds. The regulator is also highly sensitive to customer complaints, especially those that are likely to come up against the new genre of banks. In fact, the day is not far off where there would be a regulator for the fintechs, considering the large number of entrepreneurs who are entering this field.

The click revolutionized the commerce, the tap disrupted it and we are awaiting the next level of transformation. I am sure it will be more transparent, safer and easier for one to make payments in the days to come.

We at Banking Frontiers have been trying to be catalysts for this transformation to happen. It has been our endeavor to create a roadmap for the segment. And we are assisted in this effort by Deloitte India. I am thankful to Monish Shah and his team for consistently working with us in this effort and bringing out periodical reports. I must also recall that we have transformed from Mpay Insights to PayNext Insights to match the flavor of the payments business.

We sincerely hope this can be a good yardstick for each one of you reading this report to plan your future business roadmap for it will surely help in foreseeing the unseen and help you strategize accordingly. We welcome your feedback so that we can make it more effective.


India is at the cusp of transformation in disruptive innovations and the notion and benefits of "unscale" are a significant departure from the rule that bigger is always better.

Indian payments industry is undergoing an ecosystem expansion and transformation at the same time. Entry of new banks, acquiring and processing companies, is likely to bring unique business model nuance to the fore. New Payments players are expected to disrupt the market through dramatic technology delivery, shifts in customer servicing, differentiating value propositions thereby competing aggressively with legacy strategy, infrastructure and paradigms.

Aided by growth in "Omni-Access" channels and availability of new payments utility platforms, Indian payments industry is uniquely positioned to leapfrog the trajectory followed by other countries. Despite the din of uncertainty around their viability, new payments and small finance banks have the potential to be hailed as the challenger banks in India. With limited legacy and strong captive customer base, these banks are likely to offer engagement models which are product agnostic and will include products beyond core payments.

These new entrants will also act as a catalyst to shake-up the incumbent banks to improve value proposition, offer better customer experience and adopt engagement models that will go beyond transactional aspects of payments. Both challenger and incumbent banks have started to develop end to end digital value chains starting from user facing applications and interfaces. However, we believe that digitizing the middle office and back office activities will lead to a highest order of sustainable competitive advantage. We are likely to see new partnerships and alliance models emerge in a bid to create customer value propositions.

Customer experience in payments will go beyond the user experience design. Banks and payment companies need to consider service personalization, issue resolution and grievance redressal as an integral part of customer experience. Moreover, building customer trust in electronic payments remains a primary challenge and strengthening of authentication and verification process will go way in advocating user trust and confidence. With the emergence of biometric authentication as powered by Aadhaar, areas of customer frictions can be further streamlined.

Deloitte Thought Leadership Report for Paynext 2016 captures these emerging themes and focusses on three critical areas:

  1. Legacy Banks versus Challenger Banks: New age of innovations in payments with entry of new banks
  2. Forget the wires, connect the wallets: Putting user experience at the heart of multi-channel payments
  3. Building customer trust in mobile payments through improved authentication and verification process

We hope that the readers find this Report useful and insightful.


New Age of Payment

The last three years have seen a lot of activity in the Indian Banking space. Some notable developments have been:

  • Liberalization of the issuance of the coveted banking license, allowing several new players – 2 Universal Banks, 8 Payments Banks (of the 11 licenses granted by RBI, 3 have surrendered it) and 10 Small Finance Banks - to enter the banking space in India and challenge the existing paradigms1
  • Foreign banks having an option to enjoy on par treatment with other banks in India, if they opt for the Wholly Owned Subsidiary route2
  • Public Sector Banks grappling with the issue of rising Non Performing Assets and eroding capital3
  • Announcement on the merger of the larger state run banks with the smaller and inefficient players, to salvage their poor performance4
  • FinTech emerging as strong contenders to banks, globally, and in India
  • National Payments Corporation of India's (NPCI's) Unified Payment Interface (UPI), launched with the aim of achieving electronic payments, reducing cash in the payments system, and financial inclusion5

The next phase of banking and payments will be challenging, and with competition inching up, a host of new players will enter and new business models may emerge. These new players will be the 'Challenger Banks' who will attempt to disrupt the existing paradigms of traditional banking.

All products that a bank offers, are ready for digital disruption and the 'Challenger Banks' are expected to spearhead this change. The business model of these 'Challenger Banks' rests on the requirement that they facilitate a large volume customers or transactions, if they are to be viable, while overcoming the challenges of earning the trust of the customers as a financial partner.

The focus of the 'Challenger Banks' would be rapid technology adoption, better customer orientation, and favorable cost-income ratios. At the same time 'Legacy Banks' may be tempted to or even forced to revamp their efforts and refine or change their existing strategies to withstand the new competition. This will lead to players focusing on areas such as product innovation, pricing strategies, usage of digital channels, extensive use of technology, data analytics, new-gen marketing and branding, etc.

'Challenger Banks' are expected to have a near clean slate and a nimble organization with limited legacy issues. They are likely to bring in their learning, expertise & experience from diverse sectors and come up with unique business & operating models, which may prove to be successful, not only in providing last mile connectivity to the rural hinterlands, but also in creating a sustainable and profitable business model across geographies & customer segments.

'Challenger Banks' will have to make the transition from cash to digital and inculcate a behavioral change in the customer. This will need efforts from all players in the ecosystem.

'Challenger Banks' would need an integrated product platform that goes beyond 'banking'. This will be mandatory to create customer engagement. A modular system architecture should be considered to enhance the convenience of partnering with other companies to provide financial and non-financial services, to meet all the customer needs. As these banks would need to cater to a diverse set of customers with varying needs, the platform needs to be flexible enough to be customized; an in-depth understanding of what's desirable from the perspective of each customer segment is critical.

Key strategic choices which will shape the future of the Banks

With the RBI mandating a certain minimum capital requirement, the 'Challenger Banks' have to necessarily inject this capital in their ventures. To combat the new competition, many of the 'Legacy Banks' may also need more capital as a part of their business reorganization or technological up-gradation activities or for chasing new growth avenues. This will put pressure on both the entities, to create a business model in a capital efficient manner that adds value to its shareholders.

Banking industry of the future will look very different from today. It is critical that 'Challenger Banks' have a clear picture of their end state and work backwards, in order to avoid pitfalls later. A few license winners have withdrawn their interest7 and this shows that players are grappling with the issues of viability and scale up. At the same time, these players have created a sense of urgency among the 'Legacy Banks', who are trying to determine their approach, which could be reactive or proactive, and range from ignore, partner or compete. All players, new and old, need to reconsider their aspirations, assess the market and their own strengths to define their plan. A key thing to keep in mind would be that customers' underlying financial and payments needs haven't changed dramatically, but the way in which they want to fulfil those needs has. Customers now demand products with high convenience, ease of use and innovative features.

To read this Report in full, please click here.


1. RBI Website, Newspaper articles

2. RBI Website

3. 20 PSU banks' loss stand at Rs 16,272 cr in Q4, should you invest in them? ; Financial Express, May 23, 2016

4. Banks Board Bureau chief says it's time for public sector bank mergers, livemint, 15th June, 2016

5. NPCI Website

6. Payments Bank: Telenor, IDFC, Dilip Shanghvi's Sun Pharma to withdraw their licence, DNA, 20 May 2016, Tech Mahindra becomes the 3rd player to nix payments bank plans, Business Standard, May 24, 2016, Cholamandalam drops payments bank plans, Business Standard, March 24, 2016

7. Company Website

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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