Digital payment opportunities in emerging markets

Emerging markets landscape

The burgeoning digital payments industry has scaled up rapidly over the last few years across South Asia. The rise of affordable smartphones and subsequent Internet and mobile penetration have led to significant growth in the digital payments space. According to research conducted by Forex Bonuses,¹ Canada tops the list of most cashless countries in the world, followed by Sweden (only 2% cash transactions²), the UK, Australia and a few leading Asian countries. The people in these mature markets are aware of digital payments and have steadily embraced non-cash methods over the years. 

Emerging markets in South Asia, on the other hand, are witnessing a slow transition from a cash-driven to a digital payments society. Governments and regulators in South Asian emerging markets like Bangladesh, Nepal and Sri Lanka have a clearly defined roadmap for digital transformation and encouraging citizens to go ‘less cash’. The current usage of cash in these countries exceeds 90%.³ Nevertheless, they have seen some traction in the last few years, primarily due to mobile and Internet penetration and a focus on financial inclusion through mobile-based services.

Mobile financial services (MFS) targeted at the underbanked and unbanked population are a huge success and they now account for a majority of digital transactions in Bangladesh by volume. Nepal is heavily dependent on inward remittances, which amount to as much as 30%⁴ of the GDP. Smartphone-based mobile money services are slowly gaining momentum as part of the payments ecosystem. However, debit cards dominate the plastic card market, and the recent association with international payment networks for QR-based payments has paved the way for players to offer new solutions in this space. In Sri Lanka, more than 80% of adults have access to financial services.

Regulators and governments of emerging countries can set up a separate entity like the National Payments Corporation of India (NPCI) to promote retail payments. Moreover, a truly open domestic cards scheme like RuPay in India or UnionPay in China may be set up to expand the digital payments ecosystem.

Key challenges

The payments industry has grown increasingly complex and fragmented over the last few years. However, there are a few challenges that must be addressed to create a thriving digital payments in these countries. 

Lack of interoperability: Today, enabling interoperability is key for emerging digital payments offerings. In all the countries mentioned, customers are required to have multiple wallets for purchase transactions. This hinders existing wallet users from using these services at merchants where another wallet is accepted.

Lack of adoption: As mentioned before, the uptake of digital payments has been slow in these countries. For example, digital payments still comprise only about 5% of total transactions in Sri Lanka.4 In addition, low investment in acceptance infrastructure by financial service providers has contributed to low awareness and, consequently, low adoption of digital payment instruments.

Merchant service pricing not clearly defined: For certain payment instruments, merchant service pricing is not capped. In all the three countries, the acquiring bank/digital wallet providers levy charges ranging from around 1–4%. While large business set-ups can absorb this cost, small businesses with low profit margins tend to pass on the commission cost to consumers. This, in turn, puts a burden on the merchant and reduces the incentive to use cards at the PoS.

Slow regulatory change: While some changes have been made in the recent past to facilitate mobile money transactions and QR transactions, other regulations still hinder the uptake of mobile payment services. These include low wallet limits which obstruct use cases like remittances and business-to-business (B2B) and business-to-consumer (B2C) payments like disbursements. Lack of awareness about the regulatory framework along with low clarity on licensing and regulations for non-bank players issuing cards and wallets also affects the uptake of these instruments by merchants and other service providers.

Fewer value-added services/innovative use cases: The mobile financial services/wallets of these countries have a greater focus on standard services like mobile recharge, utility bill payment and fund transfer. Service providers can look at innovative use cases by offering unexplored financial services on their platform and introducing rewards/loyalty programmes.

Limited collaboration with other FinTech players: FinTechs can play a vital role in building solutions to reach the unbanked population in emerging countries. Currently, very few payment players/banks are collaborating with FinTech companies to launch new/diversified offerings.

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