By Ashish Lall | March 21, 2.00pm SGT
I am not sure phygital is an Indianism, or, “a word that Indians have ‘kindly adjusted’ into the English language”. But it’s a more accurate characterization of what is typically referred to as the ‘digital economy’. Amazon is phygital and so is Grab. In our pandemic-induced techno-exuberance we forget that we took taxis before Grab came along. Without roads, taxis, and restaurants, what would we ‘grab’?
Phygital is a particularly important notion for developing and emerging economies, where the physical is inadequate – the roads may be narrow and congested; and the cabs may be rickety. Grab or a similar variant may still better solve the coordination problem by efficiently matching buyers with sellers, but it can’t help to reduce journey time or improve riding comfort. The digital helps, but the binding constraints to the ‘digital economy’ are often physical.
Digital payments have grown at a remarkable rate in India. Over the last five financial years (2016/17 – 2021/22) the compound annual growth rate (CAGR) of the value of payments processed on the Unified Payments Interface (UPI) exceeded 150% and the volume of transactions grew by over 140% per annum. Urban and semi-urban areas, the main users of UPI, have also seen an increase in transactions due to the six payment banks. Approximately 66% of India’s population lives in rural areas which rely mainly on the Aadhaar enabled Payment System (AePS) using Micro Automated Teller Machines (Micro-ATMs). On the AePS platform, CAGR of value and volume of transactions was approximately 97-98%.
Estimates from the National Payments Corporation of India indicate that in the financial year 2021-22 about 45 billion transactions, valued at over 1.1 trillion USD were conducted using UPI; and over 1.1 billion (financial) transactions, valued at over 45 billion USD using AePS.
According to the Reserve Bank of India (RBI), in March 2021, there were approximately 52,200 rural bank branches in India and this network had only registered a CAGR of 0.15% over the previous five years. Service expansion both in urban and rural areas was driven through the Business Correspondent (BC) or agent-based model. In March 2021 India had about 540,000 BCs in rural areas and over 600,000 in urban areas. Most of the growth has been in urban areas and is driven by private sector banks.
Clearly, digital platforms have helped India with ‘reach’. One study estimated that in 2020 207 million people in India did not have access to a banking outlet within 5 kms of their home. But the remaining 1.17 billion did – so India has made very good progress over the past five years. Digital platforms and Aadhaar based transfer payments have helped India with ‘reach’.
What’s missing, particularly in rural areas is ‘churn’. Many BCs have viability issues because they are doing little more than cash-in cash-out transactions, balance enquiries and printing mini statements. Of course, rural credit products can be pushed through this channel, but demand will ultimately depend on local economic activity and population density. Another issue is the prevalence of fraud and a lack of trust in BCs. This is not just a problem in India but also in Kenya, Nigeria and Uganda where poor customer service and unexpected and unclear charges are identified as challenges with the agent-based model. In India, the RBI has helped initiate financial literacy programs and financial education in public schools; launched a complaint management and dispute resolution system and is considering a registration and formal certification program for BCs. In some ways then, the runaway success of the digital has brought the physical into sharper focus.