Encouraged by increasing customer demand, favorable regulation, and unburdened by legacy infrastructure, developing countries are beginning to lead the pack when it comes to large scale payments innovation.
A great example of this leapfrogging trend can be found in India, home to several of the ingredients necessary to encourage new technology to flourish and old systems to make way for new. Key among these ingredients are the increasing customer demand for digital payments, a supportive regulatory environment and a highly skilled tech market.
Payments leadership in emerging markets
India, like many emerging markets, has moved away from a commoditized, service/call centre-based tech economy to become a hub for technology development in its own right. Silicon Valley is no longer the only home for great startups and here at PayU we are working with entrepreneurs from India to Israel to bring world-leading tech to market.
In India as well as in other emerging markets, we continue to encounter inspiring startups and growth companies that offer world class solutions aimed at advancing access to financial services globally.
India’s growing demand for digital payments
The rapid growth of smartphone usage is fueling the corresponding adoption of digital payments worldwide. With over 500 million users, India is now the second largest smartphone market in the world after China. As this is still less than half of India’s total population, which numbers over 1.25 billion, the country’s appetite for mobile products and services will only continue to grow.
In more established markets, the fact that digital payments have been a mainstay for some time is the very reason that innovation is often stifled. With legacy infrastructure and entrenched customer behavior – just look at the stubborn commitment of Americans to writing checks – innovations in payments don’t always have an easy path to maturity.
In contrast, smartphone growth in emerging markets such as India enables businesses who are unencumbered by aging legacy systems to more easily adopt mobile-first, digital payment solutions. As smartphones become ubiquitous, consumers naturally seek frictionless payment services that cater to their expectations. The better the experience on offer, the quicker the uptake will be.
One of the key overall challenges for doing business in emerging markets is the ability to offer a wide breadth of payment options. Indeed, in markets like India, alternative payments – which refer to payments made using something other than a credit card like cash, coupons, bank transfers, prepaid cards etc. – still represent as many as two-thirds of all payments. This means that although regulatory and legacy system barriers don’t exist, offering a seamless customer experience remains operationally challenging and cost intensive.
Regulatory support for payments innovation
When it comes to the challenge of how to best support multiple payment types, interoperability and open platforms are critical to help break down the barriers. European regulators are already attempting to tackle these issues with the full implementation of the Payment Services Directive 2 (PSD2) in September 2019. Emerging markets are showing signs that they will follow suit, looking at their local capabilities and infrastructures and how to make these more open.
Fortunately both Indian consumers and payment providers are supported in this open platform ambition by a progressive regulator that is open to adopting a legislative framework to promote innovation.
This forward-thinking attitude was evident in the Royal Bank of India’s 2016 announcement of “demonetisation”, which laid out the mandate for the removal of as much as 75 percent of bank notes from the market overnight. While the surprise element brought on personal difficulties for many citizens who rely on cash, the impact of this move also almost immediately changed the way people viewed and used digital payments platforms. At PayU, we saw our daily transaction volume skyrocket by 80 percent immediately after the announcement was made. It then settled to a 25 percent increase compared with pre-demonetisation – still a significant number.
While the long-term outcome of this demonetisation is still to be seen, the bi-product is large scale payments innovation, made possible by a regulator ready to disrupt the market.
India the leapfrogger
A combination of consumer appetite, supportive regulation and a thriving entrepreneur community has laid the necessary foundation for India to leapfrog over more established markets.
The conversation about high growth markets and financial services is no longer just focused on inclusion. With a strong pace of change, more and more payments companies from emerging markets are becoming the global leaders when it comes to worldwide payments innovation.