E-commerce is set to see greater heights in coming years, not just because of India’s rising Internet population, but also due to changes in the payment landscape
Payment landscape is undergoing change with the surge in e-commerce
Indian payment industry has witnessed a huge change since the introduction of online payment as more and more consumers are shifting from traditional method of making payment i.e. paper based to the new payment methods like online bill payment and card based payment methods. The most preferred payment instrument for online payment in India is credit cards. However, there is a very low penetration of credit/debit cards in India, which restricts the online purchasing power. At the same time, the payment landscape in India has evolved considerably and the number of payment options is increasing. Cash cards have emerged in the market, in addition to credit and debit cards. Direct debit from accounts, electronic wallets and mobile payment are alternative options.
The number of internet banking users increased to account for 7% of the total number of bank account holders in 2011 as compared with 1% in 2007. The number of payment gateways in India has also increased, and their charges have come down to 2.5% – 3% of transaction value. Authentication requirements for online transactions have been made stringent with the addition of multiple layers including OTPs and two-factor authentication. E-commerce players have also come up with innovative delivery models such as Cash on Delivery (CoD) to overcome challenges associated with online transactions. Mobile payment options are likely to witness increased uptake on the back of the growing mobile subscriber base in India.
PayPal has emerged as the leader in the alternative payment system in India with a user base of 300,000 (in 2012). To make its offering more attractive, PayPal has increased the per transaction limit to $10,000 from $3,000 starting July 2013.
Rupay: India’s own card payment network
RuPay is India’s answer to Visa and MasterCard and has been set up at the behest of the Reserve Bank of India (RBI) to bring down transaction costs and spread electronic payments. RuPay card payment scheme was launched by the National Payments Corporation of India (NPCI) in 2012. Rupay was conceived to fulfill the Reserve Bank of India’s vision to offer a domestic, open-loop, multilateral system which will allow all Indian banks and financial institutions in India to participate in electronic payments. Since its launch in March 2012, over 3 million RuPay cards have already been issued and NCPI plans to take this number to over 10 million by the end of 2014. In addition, customers in rural banks and small cooperatives can now make online purchases with the National Payment Corporation of India launching an e-commerce solution for its RuPay card.
Electronic payment methods in India
The retail electronic payments space in India is still dominated by card-less payment methods, i.e. National Electronic Fund Transfer (NEFT) and Electronic Clearing System (ECS) credits and debits. ECS is an Automated Clearing House system in India that is operated by National Payments Corporation of India with supervision from the RBI. The two payment methods gained significant momentum in the electronic payment space in India during the last decade with a rapid adoption of Internet banking by customers of both public sector and private sector banks in India. These two modes of payments have enabled person to person payments via bank accounts and have been established as secure, robust and the most popular mode of electronic payment.
While ECS and NEFT are well established as electronic payment methods, there are new and emerging modes of payments being promoted by the RBI to move towards cashless society. One key initiative in the direction has been the introduction of check truncation in India. The check truncation system was first introduced in 2007 on a pilot basis. The pilot-run received a very positive reaction from the market and RBI has introduced check truncation as the only acceptable standard for check clearing in the country starting August 2013. Check truncation substantially reduces the time taken to clear the cheques as well enables banks to offer better customer services and increases operational efficiency by cutting down on overheads involved in the physical cheque clearing process. In addition, it also offers better reconciliation and fraud prevention. The process uses cheque image, instead of the physical cheque itself, for cheque clearance thus reducing the turn-around time drastically.
Young and growing population: future drivers of growth in the market
The changing consumer lifestyles, supported by the younger population base of India, have given a boost to the e-commerce business. More than half of the total 1.2 billion population of India falls under the ‘below 25 years of age’ bracket. Also, 65 per cent of India’s population, representing the working age group of 15 to 64 years, would aid the further growth of e-commerce, driven by their rising disposable income. Notably, discretionary spending in India is expected to jump to 70 per cent by 2025 from 52 per cent in 2005. Also, the growing inclination towards purchasing online is reflected in a trend for higher value online transactions. Shoppers are ready to shop for values exceeding $500, which earlier hovered in the range of $40 – $100.
One of the major factors in the e-commerce ecosystem is the breadth of Internet penetration in a country. The current penetration rate in India is at 10.1 per cent, which translates into a huge Internet consumer base of around 125 million (as of 2011), the third largest in the world after US and China. At its current pace, this number could multiply three-fold to nearly 380 million by 2015, surpassing the US and China. However, even with its large consumer base, just 1 per cent of the total (less than 10 million Internet users) is engaged in e-commerce activities, thus reflecting a huge untapped opportunity. This number is expected to touch 39 million users by 2015 as Internet penetration increases and e-commerce becomes more secured.
Further, size of the total e-commerce market in India is estimated to expand at a compound annual growth rate of about 40 per cent during 2010–20 to $200 billion. Likewise, India is expected to record the highest growth in the Asia Pacific region during 2012–16. The trend would shift with the online retail segment contributing equally to the total market size, considering it is expected to grow significantly in the coming years. The Business to Consumer (B2C) segment would continue to lead the e-commerce market, thanks to the budding Indian Internet population, supporting demographics, ease of payment modes and customer-centric innovative policies. According to a research by India Brand Equity Foundation, the B2C sector is expected to offer much more revolutionary practices such as transacting with the help of mobile money, and having access to virtual trial rooms in the coming decade.
Re-birth of e-commerce in India
The e-commerce market in India has enjoyed phenomenal growth of almost 50% in the last five years. Although the trend of e-commerce has been making rounds in India for 15 years, the appropriate ecosystem has now started to fall in place. The considerable rise in the number of Internet users, growing acceptability of online payments, the proliferation of Internet-enabled devices and favorable demographics are the key factors driving the growth story of e-commerce in the country. The number of users making online transactions has been on a rapid growth trajectory, and it is expected to grow from 11 million in 2011 to 38 million in 2015.
A number of business models for e-commerce have evolved and are in varying stages of maturity. Of the various business models that are prevalent, consumer e-commerce is perceived to have a wider and stronger impact on retail or direct consumer and has engaged entrepreneurs, Venture Capitalists, Private Equity firms and others. It is expected to grow by 33 percent in the year 2013.
Online travel: Lion’s share of the market
The country’s B2C e-commerce sector can be split into two broad categories — travel and non-travel. Online travel (76 percent) and financial services (10 percent) form the biggest component of online shopping followed by e-tailing (8 percent). While services such as travel tickets, movie tickets, restaurant discount vouchers, hotel bookings, utility payments, insurance policies, and premium payments lead the wallet share of the amount spent online, product categories such as computers & accessories, cameras & mobiles, electronic durables, and books are picking up. But, product categories such as apparel, jewelry and footwear (require high touch and feel), which offer maximum potential in terms of market size, face challenges such as high return rate and negative cash cycles due to COD (cash on delivery).
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Source: KPMG, E&Y, NCPI, IBEF, RBI