How Electronic Payments Could Put a Big Dent in Cash Transactions

Mobile wallets may have become a daily household name, thanks to Internet enabled smartphones, but the concept of electronics wallets itself is nothing new. They started off as prepaid stored value cards way back in ‘90s, as EBT (Electronic Benefit Transfer) cards issued by the US Govt. in place of paper based food stamps for low income households. Even today, prepaid stored value cards have many use cases, like video game parlors and fun zones for kids, food courts, etc. They make life easier by allowing electronic transactions instead of inserting coins in every video game machine or pulling out petty cash at different fast food joints.

"Wallet players are continuously working on giving customers a great usage experience”--Fareed Jawad, Principle Architect-Payments, FreeCharge

Mobile wallets are a new form of stored value cards, and in fact, have taken the concept of low-value transactions to a whole new level, thanks to companies like FreeCharge, PayTM, etc. According to Fareed Jawad, Principle Architect for Payments at FreeCharge, cash is the biggest competition to electronic transactions. Fareed spoke at HPE’s recently concluded event for BFSI tech decision makers, Pay-iT Conclave, in Shillim, Maharashtra. A highly engaging discussion ensued his session on the future of payments. Here are the key take-aways.

Mobile Wallets Could Put a Dent in Cash Transactions

“We all know cash is everybody’s biggest competitor, as 98% of all retail/consumer transactions today happen by cash”, Fareed said. This is bound to happen because the infrastructure to make such petty payments electronically has been missing or not very easy to use. “All that will go away as the right payments infrastructure is setup and people are rewarded for transacting electronically”, he added. And as the saying goes, that the proof of the pudding lies in eating it, mobile wallets have actually made it easier for people to transact electronically.

So the question now is how big a dent can mobile wallets and electronic payment instruments make in cash transactions? Fareed feels that there are two sides of the coin. One would be the people who like their anonymity while buying something, and would prefer to pay by cash. The other are people who find it more convenient to pay electronically, and this number is growing. “With the proliferation of smartphones, there’ a strong case that mobile device as a form factor would allow wallets or payment instruments to ride on it”, he added.

They will proliferate further as companies develop more innovative payment techniques around mobile phones. In many developed countries like the US for instance, it’s common to find cab drivers carrying mobile based PoS devices that accept credit card payments.

Similarly, mobile wallets can also be used to pay for a variety of services, and their use cases are picking up. A key reason for this, Fareed feels is their ease of use. “When you transact using cards online, the experience is sub-optimal, but wallets overcome this challenge because you load them once, and transact multiple times. Wallet players are continuously working on giving customers a great usage experience”, he added.

More Use Cases a Must for Electronic Transactions to Grow

This very nature of wallets has helped their popularity grow, because customers don’t have to expose their bank accounts to so many different merchants, due to fear of a security breach. The obvious next step is to identify other use cases for wallets so that they can grow further.

Currently, the biggest use case for mobile wallets is recharges, with bill payments picking up. E-Commerce is still minimal and largely restricted to merchants that accept wallets, and even within that to the categories that are suitable for wallet-based purchase like books and other low value items. Likewise, another use case is to sign-up millennials who currently don’t have the right payment instruments, and they need it for their routine expenses. Wallets become the right payment mechanism because their parents can control the balance and recharge. Use of mobile wallets to buy platform tickets was another use case that came up, followed by DTH recharge, which is another growing business where wallets can come in handy. Similarly, Toll/Transit/Commute are other growing businesses where mobile wallets can become a killer proposition. “Tolls and transit present a huge opportunity for mobile wallets, as they incur significant revenue leakages today”, added Fareed.

The One Billion Customers Opportunity

The group discussed many other and more powerful use cases for wallets and electronic payment instruments in general. For instance, “why can’t the tickets issued by BEST in Mumbai also be used to buy vegetables? Or why can’t mobile wallet players pick up such an opportunity, and reduce the use of cash and currency for transactions?”, said a Mumbai based delegate. There was a feeling that food vendors could become sales agents or bank branches of mobile wallet players. If such unexplored opportunities are tapped, there could be a billion customers just waiting to be tapped. “Even a 1% service charge by banks on that could be a much bigger revenue opportunity than anything else!”, came another opinion.

“It’s therefore all in the use case. You can’t own the customers unless you provide them with a compelling use case.”, added Fareed.

Cash: Biggest Enemy of Electronic Transactions

The group felt that there was a need to move cash transactions to electronic ones, for which an eco-system play is essential. Everybody has to work jointly to make it happen, be it wallet players, bankers, or even the govt. by introducing policies that are conducive to encouraging electronic transactions. “Those are the kind of steps that would make somebody like a “Vada Pav maker” at a junction be able to accept FreeCharge, Deutsche bank cards, etc.”, added Fareed.

A key challenge to overcome here is mobile Internet connectivity. Such small merchants would never use electronic transactions if they’re not easy to use, so solutions will have to be created keeping that in mind. A few suggestions were to use stored value cards, or SMS based transactions, which would reduce the reliance on 3G/2G data connectivity. Plus, of course, emerging fin-tech companies are coming up with other innovative ideas. “If we can enable NFC and other contactless mechanisms, maybe even sound, to complete a transaction, it would solve the problem”, added Fareed. Such solutions would have to be very cost-effective, which currently they’re not for this target audience.

“The boundary of authentication has to be much lower, in order to enable low-value, high frequency electronic transactions’, said Fareed.

Overall, the group felt that it is going to happen but will just take some time. It has already started happening at higher levels, with fast food joints, or even petrol pump stations, accepting mobile wallets as payment mechanisms. In fact, Fareed added that there’s also interest to offer greater financial services on wallets, especially for customers who don’t invest in millions, but in hundreds of thousands. If wallets could be accepted for railway bookings, their adoption would increase, and once that happens, they could even be used to offer more high value services like mutual funds.

Wallets Wallets Everywhere, But None Work in Sync!

The other challenge raised is the sheer number of mobile wallets out there. When someone makes a credit or debit card transaction, it doesn’t matter who the issuer bank is. Unfortunately, the same is not true of mobile wallets. Not all merchants accept all wallets, making it difficult for consumers to figure out which wallet to keep and which one to re-fill. In other words, it’s not fair for the consumers. For this, there’s a need for the regulatory authorities to evolve interoperability standards between different wallets, which ensures that all the right things are kept in mind, like prevention of money laundering, secure transactions, and so on.