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Though innovation in payments is quite high in India, digital adoption remains low, said panellists at the VCCircle Payments Summit 2018 held on Wednesday in Mumbai.

In a panel discussion on fin-tech and payments startups, the speakers highlighted how emerging firms in the space can differentiate themselves and the challenges companies face.

The panel comprised of Badal Malick, principal innovation officer at Catalyst, a donor-funded cashless payment partnership; Pratik Jain, director at private equity firm Actis; Pallav Jain, business head of consumer at payments firm PayU; Piush Kothari, head of strategy, digital business and customer analytics at Aditya Birla Idea Payments Bank; and Niren Shah, managing director at Norwest Venture Partners.

According to Pratik Jain, India is the only country with an interoperable banking system, namely, Unified Payments Interface, run by National Payments Corporation of India. However, 95% of the country still runs on cash.

“In terms of innovation, we are ahead of markets like Malaysia and Indonesia, where payments still happen via the point-of-sales network at the merchant, which India completely skipped and went online,” he explained.

However, China is 20 times ahead of India in terms of payments. It is also ahead of the US. Third-party payments in China are worth $11 trillion in a year, said Jain. “About 15-16% of that is consumer-to-business payments, which is about $2 million, and that is just third-party providers which are the Alipays and Tenpays of the world,” he said.

China is dominated by three to four massive players that have the propensity to own the entire value chain, unlike the rest of the world, including India and the developed markets, he added.

Alipay, Tenpay and others like them are expanding into other areas of fin-tech besides payments. “This is a very high level of integration within the large players in China, which is unique and has not happened anywhere else in the world,” Jain explained.

According to Malick, when you talk about innovation, particularly for the bottom 80-90%, it’s not how you want to go digital but why. “There has to be a value proposition and it has to be linked to tangible, immediate value. It’s more about value in terms of functionality and experience and also business model,” he said.

Are payment banks viable today?

Kothari thinks it is possible because most financial services do not have extensive reach. “The largest private insurance firm in the country would not have presence in more than 1,000 towns and cities. If you look at the assets under management (AUM) of the mutual fund industry, over 80% of AUM comes from top 15 cities. If you look at lending, more than two-thirds of folks don’t have access to formal lending sources,” he explained.

If firms can reach these people, which can be done through telcos, and if they have a strong brand, the problem of financial inclusion can be truly addressed in the country.

Some of the challenges from the business segment perspective in payments are cash-flow volatility and vulnerability to shock, and there are barriers, namely, inability to grow businesses and livelihoods, said Malick.

According to Pratik Jain, the biggest challenge payments firms face is unit pricing, which is where the regulator has a big say. Besides, the debit-card business has witnessed depression and that has made acquiring businesses unviable for most players. For example, Pine Labs has had to evolve different models to make money on its core business. They also run value-added services through which they generate some good money.

He added that a lot of payments companies are also getting into credit because it’s highly underpenetrated. Most merchants struggle to get credit outside of the banking system.

Many fin-tech players now are so similar that they look the same, so how can these firms differentiate themselves?

According to Malick, innovation happens in cycles and to create a niche and unpeel value, startups must address specific segments and use cases.

“One is to focus on the segment or use case and do it really, really well. The other area, which I feel in India is lacking, is developer platforms,” he explained.

He added that fin-tech firms now operate in an era where digital finance converges. While traditional banks function in silos, in the digital world, everything is meshed into one. By opening up platforms to partnerships, the right players can be brought to the right opportunities.

Also, being a startup means one has no access to data, but with partnerships, an exchange is possible, says Pallav Jain. “You may not have data but you may have capabilities which you bring to the table—analytics, bank infrastructure—and there is someone else who has data but does not want to invest and build in these capabilities,” he explained.

Another way to gather data is through the old way of getting loans, where users have files, said Kothari. According to him, this are the easiest things to digitise. Besides files, goods and services tax and others are also credible sources of data.

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