Indian Payment Industry – Changing Behaviour

Posted in Finance Articles, Total Reads: 3477 , Published on September 02, 2015

The introduction of coins in India around 6th Century B.C. brought first standardizes means of financial exchange between consumers and traders. Ease of carrying and quick exchange with correct value, complemented trade expansion. Later the coming of paper money in 1770 and Paper Currency Act of 1861 eased doing business further. Cash or fiat money had been the undisputed king of consumer payment market for 340 years. Until the recent developments in payment card industries and digital payments system started shifting monopoly of paper notes.

Last 10 years saw evolution of a new section of consumers in India; this group’s preferences being technology savvy and they show inclination to cashless means of financial transaction. A large section of this group is urbanized working population (Age 15 -60) with access to private banking, payment cards, and they have eternal companionship with internet and Smartphone. They are the most preferred clients of Dalal Street and business responded with capital investment and technological investment in areas pertaining to their need and preferences.


The below article is an attempt to understand the evolving banking behaviours of the customers that is contributing to the growth of the cashless economy in India, and investigates the challenges that have slows the progress from cash to cashless solutions.

Why this change:

The change in behaviour of consumer is result of two major factors, namely demographic and digitalization.


The availability of required infrastructure like Internet, connectivity by road and air, a continuous source of income and etc has largely influenced the purchasing behaviour of urbanized customer base.


Internet penetration, Smartphone penetration, Internet banking and growing e-commerce have proved to be the main drivers for changing purchasing behaviour. Digitalization and automation being seen as the next game changer by industry and huge investment in these areas, they have more scope to influence consumer purchase behaviour.

Demographic and Digitalization working in sync have championed the cause for cashless economy and consumer behaviour in last few years.

Understanding Indian Payment Demographic Map:

Before discussion the customer spectrum let us first look into the distribution of the consumer portfolio in current Indian market. We will try to filter out the urban population and see how it factors changing consumer payment behaviour. Reason for concentrating on the urbanized population is their exposure to technology and modern banking system. According to World Bank, 68% of the Indian population of total 1.26 billion lives in rural India and the rest 32% lives in urban India. We cannot consider the complete urban population, as they will have a section of population that does not contribute productively to market, so we have to concentrate on productive or working population. Percentage of urban population, which comes in the productive group of 15 -59 age bracket, is somewhere near 60% or 241 million. In other words it is more than the combined population of Australia, France, Germany, United Kingdom and Canada.

The productive urban population with increasing disposable income and complemented by stabilized Indian economy have emerged as darling for business. They are the target for big banks promoting payment cards, namely debit and credit cards.RBI in its April 2015 report of ATM and Card Statistics, pegged outstanding credit card as 21 million in number and debit card as 564 million in number. What report did not mention explicitly was that 73% of the total credit card holder and 75% of the total POS transaction volume from credit cards are done by the customers of Axis Bank, HDFC Bank, ICICI Bank, IndusInd Bank, Kotak Mahindra Bank, CITI Bank, HSBC and Standard Chartered Bank. Even in case of Debit cards, 46% of the total volume of POS transaction is done by customers from private banks. Now, it is well known fact that private banks have major presence in urban regions of country and significantly less presence in rural regions. So it is quite evident that most of the cashless financial transactions are initiated by urban population and industry data reporting that credit cards will experience a growth of 27% YoY, reflects believe of banks on the urban population, that they are ready to move towards cashless means.

Federation of Indian Chambers of Commerce and Industry (FICCI) and Indian Banks’ Association (IBA) -FIBAC, reported in 2014 the behavioural difference between the customer of private banks and PSU banks using debit card.


Private Bank

PSU Bank

% Active Account



% Account with ATM/Debit Cards



% Account that use ATM/Debit card at ATM



% Account that use ATM/Debit card at POS



Above table informs on two important facts. Firstly, we see that debit card is mostly used for ATM withdrawal and have very minimal usage at POS for both Private and PSU banks. Considering this, banks have to engage in ground work to educate customers for using debit cards for cashless transaction as well.

And secondly, we see a trend between private bank and PSU bank account holders, private bank customers tend to use both debit and credit cards beyond merely withdrawing cash from ATMs. This makes a case for a better marketing initiative from PSU Banks to promote cashless transactions on both credit and debit cards. A recent report pegged the total consumer spending in first quarter of 2015 at $251 billion, considering a number on this magnitude the payment card industry has a huge opportunity scope to cover.

Banks are working on the above stated problems by providing varied attractive offering or compensation to customers. Indian Oil – Citibank Petro Card, HPCL – ICIC Petro Card, CITI Cash Back Card, HDFC Rewards Card, etc pioneered the marketing strategy were the customer preference for a card product is leveraged by compensation. Launching credit cards with loyalty offers have realized quantitative increase in customer retention and increase in spending (Increases the virtual spending capability). The changing lifestyle of the urban working population has also contributed to increased demand and willingness to pay for high end product and services. Offers like cash back cards, discounts with selected merchants, EMI and reward points have presented an opportunity to consumers to marginally decide on their disposable income, in turn influencing their spending behaviour. Plans like cashback and EMIs have increased the volume of transaction and same time encouraged the consumers to spend beyond their disposable income. In a nutshell, banks till some extend have shifted the consumer financial transaction behaviour from cash to cashless.

January 2015, ICICI launched contactless debit card and contactless credit cards. The concept of the contactless card is to ease the transaction closure at POS and this is accomplished by a simple tap of card on NFC enabled POS terminals.  Such technology driven deliverables are aim to bring in more customers and shift marketing strategy from compensation to customer experience and delight.

Some examples of loyalty programs in India:

  • Jet Airways, which struggled to make money amid fierce competition for fares and high operating costs, reported net profit of Rs 69.8 cr in September 30, 2014, after it sold its frequent flyer programme for Rs 350 Cr

Jet Airways offers co-branded cards “Jet Privilege” in partnership with American Express, HDFC, ICICI and Indus Bank.

  • In February 2011, Kotak Bank in India entered into a co-branding arrangement with PVR, the cineplex leader in India. Under this arrangement, the cardholder gets two free tickets to a movie of their choice every month.

  • In September 2013, Air India, India’s national airline, partnered with SBI Cards to launch a co-branded travel credit card. The Air India SBI reward card can be used by a customer to redeem air miles against flight booking

  • In June 2013, Axis Bank of India rolled out a travel card in association with MasterCard and Miles and More, Lufthansa’s international frequent flyer program.

Understanding Indian Payment Digitalization Map:

July 2015, Digital India campaign was launched by the government of India. One of the main objectives of the program is to automate the Indian economy and encourage electronic transactions. But, the fact is that digital economy cannot be realized without cashless means, as they are the first by products of digitalization.

When discussing digitalization, two buzz words are commonly used Internet Penetration and Smartphone Penetration. There is extensive report in public domain about the high expected growth of above factors, but our interest area will be to analyze how they have impacted the consumer financial transaction behaviour.

India has 317 million internet users and counting every second. Impressive growth rate of 32% YoY is highest in the world. But this cannot be taken as a baseline to answer the consumer cashless financial transaction report card. First let us break this into rural and urban user. Urban population has an internet subscriber base of 177 million users and rural India has 101 million users. Further, the number of mobile internet users reduces to 143 million for urban population and 53 million for rural population, rest are assumed to be non – mobile internet users.

So we have 143 million urban users who have the possibility of exposure to mobile banking/NEFT/RTGS/ECS. But this number dips further when we consider the consumers awareness of e-banking or mobile banking. So the first challenge is of unawareness in different means of internet banking and payment channels.

Consider RBI April 2015 report. It shows total transaction volume of 8.2 million customers, who used NEFT/RTGS/ECS and mobile transaction for outward transactions, and the value pegged at $1.2 trillion for the month. Though the volume of value seems to be a significant number, but the volume of number of customers is way below the number of internet user we have in urban population.

Federation of Indian Chambers of Commerce and Industry (FICCI) and Indian Banks’ Association (IBA) -FIBAC in 2014 reported in greater detail on digital banking. Out of total transaction in banks, 26% were cash, 19% cheque, 37% ATM , 4% POS and rest 14% were electronic transfers, including mobile, internet, NEFT and ECS. So the total exposure to digital banking is only 14% of the total customer base. Though, the report had a silver lining that digital banking is growing at a healthy rate of 42% in comparison to traditional transaction means like cash and cheque that are growing at 3%.

FIBAC report highlights the performance of PSU and Private Banks on digital banking.


PSU Bank

Private Bank

Internet Activation

% Active Accounts



% Accounts on internet banking



% Accounts financially active on internet banking



Mobile Activation

% Active Accounts



% Accounts registered for mobile banking



% Accounts financially active on mobile banking



The above table presents a significant difference in exposure to digital banking, when we compare customers from private bank with customer from PSU banks. Although the same table highlights that actual financial activity of customer have low percentage for both the sector of banks. A prime for this low usage percentage will be the lack of awareness among customers for digital banking facilities. If understand the writing on the wall, above table presents an opportunity for both the private and PSU banks to work on strategy to cash in more customers under the cashless economy net.

Another determinant factor is low penetration of banking or financial inclusion in India. By numbers we have 700 million or only 53% of total country population as account holders.

The recent initiative of government “Jan Dhan Yojana” is aimed at improving figures for financial inclusion. One of the key features of the program is to make available RuPay payment cards to customers. Considering that usage of Rupay card will ease the way of financial transaction and doing business, the potential to boost cashless economic transaction is more probable.

Above facts should be discussed and worked on by PSU and Private Banks, backed by strategic design to facilitate the cashless transaction and banking.

Lead Points:


One of the by products of internet penetration is the growth in Smartphone market of India. It is reported that number of Smartphone users in India by end of 2014 reached 140 million. With the current growth trend this is expected to reach 651 million by 2019. But how attractive are these stats to banking sector?

FIBAC reported that as of FY 2014, of total 343 million active bank account holders in India 162 million are Smartphone users. The numbers are expected to grow at the rate of 70% and by 2020; 625 Million of 629 Million bank account holders will have access to Smartphone.

Smartphone combined with banking apps will help in performing banking activities with increased availability and mobility. Also, considering that banks do not have proper infrastructure in rural areas, net banking can be a solution to connect rural population to banks. This will also boost the financial inclusion and in turn cashless economy in rural India.


A new evolution of payment industry is the introduction of E-wallets. The concept is presently catering need of urban population and it has been well received by young working professionals. Its growing popularity can be very well understood by the facts that investors are interested in pumping huge cash into start-up e wallet initiatives like PayTM. PayTm has emerged as in house e wallet platform for India. An investment of $500 million from Alibaba for expansion dictates its success story.

PayTM partnered with IRCTC, Uber India, Book My Show and other preferred merchants to facilitate payment though e wallet. PayTM being only less than 2 years old has registered 50 million users with more than 16 million unique transactions a month. Growing at the current rate, PayTM is pegged to be for India what Alipay is for China.


The vibrant and growing Indian e-commerce business is the new buzz word and talk of boardroom meeting. Majorly the payment on e retailing is done with COD or cash on delivery option, but vendors have started shifting to card and e wallet payments. Currently, E-retailing is expected to grow at a robust 30% annually. Recent news that talked of a decision taken by Flipkart and Myntra to go all mobile is a clear indication that vendors want to reach out to maximum people and have leveraged on Smartphone penetration. E retailers have started facilitating POS machines at the point of delivery. Making POS available at delivery end, ease out the payment mode and also encourages the customers to use payment cards and in turn cut off the cash transaction. Considering the above factors and expected incremental growth, the e-commerce industry can play a major role in leveraging the cashless economy and in influencing customer purchase behaviour for next few years.


As we conclude, let me now introduce the Cash to Cashless Weighing Scale

Consumer payment behaviour, sooner or later, will shift from cash to cashless. The above model shows the balance between cash and cashless payments at present Indian scenario. Cashless factors, though lighter than the cash factor, have immense possibilities to balance the scale.


NEFT/RTGS/ECS - Important application for financial transactions. Banks should increase consumer awareness about electronic channels of transfer.

Payment Cards – A convenient and secure means of financial transaction. Banks should assure customers of safety and improve on standards. Payment cards backed by compensation and new technology like contactless, enhances user experience and must be promoted.

Mobile Banking – With the ease of availability, banks must increase the awareness of mobile banking. It will accelerate banking activities from rural regions that lack in banking infrastructure.

Smartphone – Backed by technological innovation and customer experience, banks must invest to improve on availability of banking on click. Provide better safety standards and increase customer awareness.

Internet Penetration – Backbone of the modern banking system. Government must improve infrastructure to increase the reach to rural population.

E-commerce – Willingness to improve customer experience will be key factor of success. Banks must explore the opportunity to leverage on the growing trends of e-commerce and promote cashless financial transaction with customer initiative like EMI, cashback and etc.

E-wallet – The next generation of financial transaction. Should get regulated, work on increasing customer experiences and explore the possibilities in rural India.

Customer Experience – Above factors will work and build customer base if customer experience is enhanced with new products and safety standards.

Cash Factor:

Financial Inclusion- Government must work towards the success of financial inclusion. Promoting payment cards and other channels of financial transaction will help in improving availability and ease of doing business.

Unawareness- An important factor to work on. Unawareness of different financial tool and banking practices deprive customer of the benefits. Advertisement and more customer connect initiative is required to mitigate this.

Dormant Account – One of the main challenges after financial inclusion. Dormant accounts must be monitored and proper process must be in place to understand customer challenges and take necessary steps to improve customer operation on such accounts.

Urbanization- The cashless methods have experienced popularity among the urbanized youth. A large group of untapped population in rural area is mostly unaware of such development. Awareness and bringing more products specially designed for rural population will increase the demand.

PSU Banks- 17 public banks do not offer credit card product to their customer.  PSU banks must tap the potential of the credit card market and promote the cashless means of financial transaction. HDFC, ICICI have experience success stories in payment card industry. PSU back should invest in technology to improve customer experience and increase the availability of payment cards.

Thanks for patient read. Comments and thoughts are invited.

The article has been authored by Arijit Chowdhury, XIMB Bhwaneshwar. The author has 5 years of work experience in the payment industry.


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