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Mobile payment users to reach 800 million in India by 2025

A survey of 1,000 merchants by RedSeer found that retailers believe their share of digital payments is going to increase significantly in the next 12 months.

Photo by Matthew Kwong on Unsplash

The number of Indians using smartphones to make digital payments is expected to reach 800 million by financial year (FY) 2025 from the current 160 million, growing five-fold in five years, according to a new report by Bengaluru-based consultancy firm RedSeer.

According to the report, mobile payments will drive about 3.5% of total digital payments in the next five years, from the current 1%. By then, digital payments would have reached USD 96.5 trillion, said the report called “Indian Mobile Payments – 5x growth by 2025,” which was released on Monday.

Some of the factors that have contributed to the digital payments’ growth include India’s financial inclusion scheme, Jan Dhan Yojna, and growth of micro, small, and medium enterprises, the report said. The recent formation of USD 34 million Payments Infrastructure Development Fund by the country’s central bank RBI to encourage merchants in tier 2 and beyond cities to deploy POS infrastructure is “certainly going to boost the sector growth trajectory,” the RedSeer analysts’ feel.

Meanwhile, Indian consumers are increasingly becoming digitally mature, which is “evident from the widening internet funnel,” specifically in tier 2+ cities, according to the report.

More importantly, COVID-19 has acted as a catalyst in terms of driving the mobile payment adoption, specifically beyond metros and tier 2 cities. For instance, the share of digital payments in mom-and-pop stores has increased from 60% to 75% post-COVID-19. It was predominantly driven by mobile-based payments as most consumers have started pushing the mobile modes for payments due to safety concerns with other digital and non-digital modes, the report said.

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The healthcare pandemic has “directly led to an increased use-case for mobile payment modes (both UPI and wallets) due to seamless integration with online platforms,” the report added.

“COVID-19 seems like another demonetization alike catalyst for the industry,” said Anil Kumar, founder and chief executive at RedSeer Consulting. Digital payment providers have been quite hands-on in terms of responding to this situation, by offering enhanced support on essentials such as offering groceries, masks, sanitizers, COVID-19 insurance, offering integration with donations to PM fund and other essential product/services.”

Analysts at RedSeer believe that COVID-19 has paced up the adoption of digital payments, and will bump up the pre-pandemic CAGR of 25% by about two percentage points to 27%.

Amidst the pandemic, P2M (peer-to-merchants) payments have emerged as one of the biggest drivers of growth in mobile payments.

As more offline merchants embrace digital payments, P2M is expected to grow at more than 50% CAGR until FY 25 and will play a pivotal position in driving digital payments growth, the report observed.

A survey of 1,000 merchants done by RedSeer found that retailers believe that their share of digital payments is going to increase significantly in the next 12 months.

“Mobile payments, including UPI and wallets, are expected to be nearly 50% (up from 40% a year earlier in terms of the number of transactions), and other digital modes like cards are also expected to witness a healthy 5% absolute percentage point rise in the next 12 months,” the report said.

In merchant payment space, Paytm dominates with a 50% market share followed by PhonePe and Google Pay.

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The report also noted that the payment gateway aggregator market in India is expected to reach USD 304.6 billion in five years, from the current USD 128 billion, driven by large value transactions, while EDC terminals (Electronic Data Capture) will grow to about 17 million, driven by players like mSwipe, Pine Labs, and the new entrant Paytm, from the current five million.

According to Kumar, “Going forward, integrated play is going to be really important to get it right in this space,” he said.

The integrated play, which involves having multiple financial services, is significantly important for players in the digital payment space.

“It will be tough for standalone business models to sustain in this market, especially since monetization potential is limited post MDR removal earlier this year,” Abhishek Chauhan, head for India consulting business at RedSeer noted. “Integrated play provides the players significant leverage in terms of cross-selling other monetization value-added offerings to the same customer, thereby increasing the monetization potential.”

‘This reflects better on unit economics, placing them on a better and sustainable path to profitability,” Chauhan added.