Paying Digitally in the Pandemic

As digital payments get a huge pandemic push, governments are now keen to wrest back control from private players

COVID-19 forced economies across the world to modernize their payments systems to support commerce and allow a return to economic growth. According to latest research from The Economist Intelligence Unit (The EIU), the pandemic has allowed regulators a unique opportunity to spur digital payments. More than 70.3 billion real-time payments transactions were processed globally in 2020, a surge of 41% compared to the previous year, as the pandemic dramatically accelerated trends away from cash and checks toward greater reliance on real-time and digital payments, a new global report from ACI Worldwide and GlobalData reveals.

The Indian scenario

India offers a prime example of this shift. Although the country’s population remains largely rural and, therefore, still reliant on cash transactions, the pandemic has lifted digital payments, in terms of both volume and value, to heights far beyond the expectations of the policymakers who facilitated their adoption, reports EIU.

According to an ACI Worldwide report tracking and analysing real-time payment across 48 global markets, India retained the top spot with 25.5 billion real-time payments transactions. India’s total share of instant payments and other electronic payments stood at 15.6 per cent instant payments 22.9 per cent respectively in 2020. Cash payments still account for a considerable 61.4 per cent, but it has reduced significantly from nearly 83 per cent in 2018.

The country’s UPI proves how an enabling policy framework and government regulation can create the infrastructure needed for swift adoption. Government institutions, particularly the central bank, encouraged the use of tools such as QR codes for merchants and radio-frequency identification (RFID) tags for toll gates. This has paved the way for India’s drive towards real-time payments.

The EIU report points out that the prevalence of low-value payments in the Indian economy has led to the highest real-time transaction volumes of this type in the world.

Around the world

Similar trends are visible in other developing countries, however. In the Philippines, the government is making a rigorous effort to achieve a cash-free society by 2025 and aims to make half of its financial transactions digital by 2023. Wider financial inclusion is often the stated objective of these initiatives.

An interesting development is taking place in China which blazed the way into creating super apps that upended the payments systems, and this has led to a crackdown by the government. AliPay and WeChat, whose apps link users’ mobile phones to existing bank accounts, emerged with the spectacular increase in Chinese e-commerce at their parent firms, Alibaba and Tencent, in the 2000s. Originally used for online purchases and messaging, they expanded to become “super apps”— all-in-one platforms that offer ride-hailing, food delivery, entertainment services and a full range of financial products, including credit and insurance. Singapore’s Grab, Indonesia’s Gojek, South Korea’s KakaoPay and India’s Flipkart and PayTM are aiming to build their own super apps.

Chinese regulators are now cracking down on platforms that have previously benefited from loose regulatory oversight to gain a monopolistic advantage in financial services and vertically integrated e-commerce. After allowing simple payments providers to grow into major distributors of financial products, even offering interest-yielding deposits, regulators now want to make them subject to the same supervision that is applied to banks. This is likely to include capital adequacy requirements.

Governments keen, but roadblocks persist

Governments, now keen to wrest back control of digital payments from private players. are championing fast-payment systems indicate that they expand financial inclusion while reducing the leakage of subsidies, per the EIU report. Following the success of India’s UPI, several countries are currently in the process of building instant real-time payment platforms. Brazil, for example, debuted its fast payment platform, Pix, in late 2020, while, in early 2021, Saudi Arabia unveiled its new version of the instant-payments platform, Sarie, which facilitates quick transfer of funds using various methods of identification, including mobile number and email address.

Nevertheless, for digital payments to really succeed in countries like India, connectivity will be a key issue. Internet penetration in India stood at 45.0% in January 2021, which means that over half the population is still unconnected. Digital financial frauds were also on the rise keeping pace with digital transactions. Recent surveys released by independent research firms have also pointed to the trend of increase in the number of financial frauds in digital payments.

The EIU report cautions that despite the enthusiasm around emerging modes of payment, numerous sources of apprehension remain unaddressed. These include concerns around data security, financial fraud, cybersecurity and the role of regulators, many of whom are behind the curve when it comes to technological advancement. The absence of common regulatory standards among geographically contiguous countries, potentially leading to the creation of regional monopolies, is a related concern.

The financial frauds were mostly through phishing, followed by QR code/UPI scams but consumers were also victims of card scams and skimming, according to a report by financial technology firm FIS. According to a report by global information and insights company TransUnion, the share of suspected fraudulent digital transaction attempts originating from India increased 28.32 percent over the 12 months ending March 2021, compared with the previous 12 months.