Barter system is an age old exchange mechanism, which was prevalent in the earliest stages of human evolution. It meant exchange of goods, for goods. Some commodities, for their utility, came to be more sought than others are. Due to this lack of availability of the value of the goods exchanged, was born the lack of double coincidence of wants. This hurdle led to the discovery of fiat currency,which in simple words is nothing but paper currency. Any change or reform comes with resistance initially, which then turns into acceptance. On similar lines, paper currency was fully accepted only after centuries.
The concept of currency has hence come a long way, from barter to paper. Now, paper currency is swiftly being converted into its digitized form. This has given way to E-Wallets aka. Digital Wallets, which have been termed as the “Future of Pay”.
Digital Wallet is an e-device or online service which allows one to transact digitally eliminating the need to carry physical cash or cards. Digital wallets are similar to debit cards, because they operate through pre-loaded money. Digital Wallets have marked their presence in every area encompassing flow of money. Right from mobile recharges to DTH recharges to payment of utility bills to making various other payments online, the usage of these wallets has increased tremendously.
Demonetization which, resulted in the invalidation of high currency notes had an extensive positive impact on the Digital Wallets industry. With more than two-thirds of the currency taken out of circulation, there was a huge spike in non-cash payments. This forced everyone to move to Digital Payments, as the sudden surge in the debit and credit card transactions had crashed the banking networks which further added to the effect of cash crunch. The sudden surge in the number of PayTmfrom 150 Million registered users to 170 Million users in 40 days is a clear indication of how the demonetization has benefitted this industry. Though the easy-to-use digital payment tools had been in existence, demonetization became the key catalyst that made the average consumer realize the convenience of using digital wallets in simplifying everyday transactions. While the private players were enjoying the benefit of demonetization, the government decided to catch up. The government launched a payment app called BHIM that facilitates electronic transfers between bank accounts.
The increase in the use of digital wallets has forced them to create customer perks for retention purposes such as promotions, cash backs, discounts and most importantly they have greatly helped consumers to channelize their savings and create a digital trail for monitoring their expenses and planning their finances.
Despite all the enhanced uses and advantages of digital wallets, there is one common thing missing out i.e. Interoperability. Interoperability is the exchange of information between two devices and Information Systems. And a simple example is when you connect your phone to your car’s Bluetooth for playing music, the Bluetooth device in your phone and car synchronize with each other and exchange the music which you play on your device. Similarly Interoperability with regards to the wallets is the ability to exchange the money stored digitally in one wallet with another digital wallet.
No doubt that the discounts and cashbacks are attracting the users and benefitting them, but the users are failing to realize that paper currency is being converted into a lesser liquid asset as the acceptability by the retailers is seeing a downfall. What demotivates a retailer from supporting the large gambit of Digital Wallets is the increasing difficulty in handling multiple transactions in different wallets against the old practice of single PoS (Point of Sale).
Also as the number of transaction errors increase, he might have to deal with multiple wallet companies against his old practice where he could get all his problems resolved with a single player i.e. his bank.
Lack of Interoperability being the sole reason which makes the Fiat currency lesser liquid, the RBI is planning to soon release the guidelines for Interoperability of wallets to restore the value to all the funds which are lying in multiple wallets. But there are definitely some roadblocks which are to be addressed and few are as follows:
a.Linking the Wallets: All the Digital Wallets run in-house built platforms. When it comes to integrating these Wallets with each other directly, it would be a really difficult task and the simple way would be to issue the Digital Wallets permission to use UPI Address which at present is allowed only for Banks. Will the RBI and NPCI be ready for it?
b.Error Handling:When it comes to developing the Applications which are bug free, it is still close to impossible.. At times these bugs might hamper the smooth functioning and result in few errors when there is an Inter-Wallet transaction. How would this be dealt with?
- Increased Liquidity Still a Problem: Increasing the liquidity in the digital wallets will undoubtedly lead to the higher use of the Digital Wallets and contribute towards making Digital banking widely accessible. But this market which is expected to grow to $500 Billion by 2020 contributing to 15% of India’s GDP as per a recent research by Google and BCG.
Increased usage in turn will result in a greater chunk of the currency being stored in the Digital Wallets, which means lesser funds available with the banks for the lending purpose. Will RBI be ready to issue Payments Bank licenses to these Digital Wallet operators and amend the current regulations which do not permit the Payments Bank to lend and accordingly let them lend
While RBI’s has inched close towards its deadline, it would be interesting to see how the ‘The Banker of the Banker’s’ would come out a win-win solution for all.
Author
Nitish Reddy
Nitish Reddy is an article associate at KVA LLP. He is tech savvy and is regularly updated with the latest happenings in the tech world. Being inquisitive in nature, he seldom lets any opportunity pass which comes his way. Nitish is also a domain investor with almost two years of experience in the industry.
