Newer trends to drive India’s payments industry, says PwC

While India’s homegrown payments system and the unified payments interface (UPI) will continue to drive digital transactions in India, newer avenues such buy now pay later (BNPL), digital currency, corporate payments and offline payments will shape the industry, predicts a report by PwC India.

India’s domestic digital payments market is currently growing at a compound annual rate (CAGR) of 23% by volume and is expected to reach 217 billion transactions by the financial year to 31 March 2026 (FY26).

The Indian Payments Handbook – 2021-26 – a follow-up to PwC’s first annual publication in December 2020 focusing on India’s digital payment industry landscape – offers insights into India’s current and future digital payments landscape and the key factors that are influencing the country’s customer spending behaviour and transactions.

The report also reviews upcoming trends in the payments ecosystem such as (BNPL), the digital payment system e-RUPI introduced in 2021, central bank digital currencies (CBDCs), offline payments, and how ecosystem players are likely to adapt to these new payment trends.

“We expect the payments industry to focus heavily on enhancing customer experience and providing customer options for payment, enhancing security, undertaking innovations in technology like distributed ledger technology (DLT) and emerging tech like internet of things (IoT) over the next couple of years,” said Mihir Gandhi, partner and payments transformation leader at PwC India.

UPI has contributed significantly to this growth, with a record 22 billion transactions in 2020–21 reports PwC said. The report adds that UPI transactions are expected to reach 169 billion by 2025–26, based on a CAGR of 122% since 2018.

The report also identifies key trends that will contribute to the growth of India’s digital payments industry. Existing products are expected to continue to make inroads and gain additional wallet share from Indian customers, while the enabling of new use cases on UPI, Fastag and cards will maintain growth in adoption and transaction numbers.

In addition, the Reserve Bank of India (RBI) has expanded the scope of tokenisation to cover additional use cases including laptops, desktops, wearables, the Internet of Things (IoT) devices and card-on-file tokenisation. PwC says that along with enhancing card-related security, it will ensure that the overall customer check-out experience remains intact.

Offline payments are also likely to contribute to the growth of digital payments in India. Poor connectivity and lack of access to online payment methods, the report states, have opened up an opportunity for offline payments. “The recent RBI guidelines on offline payments have provided a much-needed impetus to the segment,” it adds.

Last month, the RBI launched UPI for feature phones – basic phones that typically provide voice calling and text messaging functionalities – bringing about 400 million feature phone users under its ambit.

The report concludes that the RBI’s upcoming CBDC could also be a game-changer, with the government announcing a rollout by the central bank in FY23. “The Indian payments landscape has multiple rails that can be accessed through several channels,” the report notes. “Given the present scenario, CBDC will need to co-exist along with the existing rails rather than replace them.”

Among the prominent use cases of CBDC that are applicable for India’s market are programmable direct benefit transfer (DBT), online and offline retail payments and cross-border remittances. 

RBI cautious in India state of the economy report

India's foreign exchange reserves are still close to their record high, but the country’s rapidly widening trade deficit and capital outflows could test the sustainability of external strength, the Reserve Bank of India (RBI) said in its state of the economy report.

The central bank believes that India is able to tackle its economic challenges from a position of relative strength but the RBI has already had to dig in its reserves to prevent a steep fall in the rupee’s value against the dollar.

Disruptive spillovers from geopolitical hostilities have led to a surge in commodity prices, tightening financial conditions and terms of trade shock to India, the report says. The hardening oil import cost and portfolio outflows continued to put pressure on the rupee, which depreciated 1.6% against the dollar in March 2022.

In addition, foreign portfolio investors (FPIs) turned net sellers in domestic equities in March for the sixth consecutive month with large outflows from financial services and software services sector.

“Rapidly widening trade and current account deficits co-existing with portfolio capital outflows weigh on external sustainability, although the strength of underlying fundamentals and the stock of international reserves provide buffers,” said the report, prepared by the RBI’s research unit.

Higher commodity prices are already posing inflation risks, especially through the conduit of surging imports. India’s wholesale price-based inflation rose to 14.55% in March from 13.11% in February as fuel prices rose. Retail inflation for March also climbed to 6.95%, a 17-month high, as food prices rose. According to a government rfelease: "The high rate of inflation in March, 2022 is primarily due to rise in prices of crude petroleum and natural gas, mineral oils, basic metals, etc owing to disruption in global supply chain caused by Russia-Ukraine conflict,"

The report strikes a more positive note when it adds that India faces these challenges from a position of strength built on broadened anti-Covid vaccine coverage, financial sector resilience, robust export and remittances and the government's push to spur capital spending on infrastructure.

India’s foreign exchange reserves were at $604 billion as of 8 April equivalent to about 12 months of imports. That represents a reduction of $29 billion since 18 February, just before the outbreak of the Russia-Ukraine war. Forex reserves peaked at $642.453 billion on 3 September last year.

The RBI comments that the near-term global outlook appears grim with strained supply chains and the quickening pace of monetary policy normalisation.

“Emerging market economies are bracing up to contend with swift shifts in risk sentiments and tightening of global financial conditions that could produce real economic consequences which may thwart incipient recoveries or even precipitate rocketing inflation and economic downturns,” the report states, and the Indian economy is not immune to these negative factors.

Brazil ready to pilot CBDC

Brazil is preparing to move ahead with the next stage of its central bank digital currency (CBDC) initiative as the head of the country’s central bank confirmed plans for a pilot of the digital real to go live later this year.

Roberto Campos Neto, president of the Banco Central do Brasil, confirmed that a pilot CBDC programme could go live in the second half of 2022 and said that the value of the upcoming CBDC would be pegged against the national fiat payment system STR (Reserve Transfer System). Neto also confirmed that “Digital Real” would have a fixed supply and only a certain amount of it would be minted, quite similar to Bitcoin:

“This [using the STR in Real Digital] is a way of creating the digitalisation of the currency without creating a rupture in the banks' balance sheets. This project should have some kind of pilot in the second half of the year,” he added. The pilot could see, Brazil advance to the vanguard of countries that have CBDC programmes in South America.

Campos Neto also commented on the state of the cryptocurrency market in Brazil, suggesting that cryptocurrencies are viewed more as investment assets than as a payment method. However, this could change as more adoption is achieved globally and locally.

The Banco Central do Brasil kicked off its digital real project in May 2021 when it outlined the guidelines that a Brazilian CBDC would have to follow but added that it was still studying and debating the possibility of the issuance of such a currency. Last month it selected nine private sector proposals to progress the project and determine the opportunities that a hypothetical digital real might offer in different sectors.

Brazil has also been working on a unified cryptocurrency legal framework, with deputies and senators working to combine several proposals into one that can be presented to the Brazilian Congress for approval over the coming months.

Ukraine war lifts commodity trading exposures at US banks

Commodities trading exposures at major US banks are rising, potentially leaving them vulnerable to large swings in asset values following Russia’s invasion of Ukraine, a Reuters report suggests.

Citing first quarter earnings disclosures, the news service notes that Goldman Sachs and JPMorgan Chase both reported an uptick in their commodities trading risk measure, with that of Goldman at the highest in a decade, according to a review of bank filings. Oil, gas, wheat and precious metals markets have grown more volatile since 24 February, when Russia invaded Ukraine and Western countries responded with sanctions on Russian trade.

According to Reuters, results so far suggest that banks are managing the risk effectively. The London Metal Exchange (LME) temporarily suspended nickel trading on several occasions last month after prices doubled to more than US$100,000 per tonne. Sources blamed the price surge on short covering by one of the world’s top producers.

Wall Street was for a long time the home of major commodities traders, but they scaled back activities after the 2007-09 financial crisis as tighter regulations restricted their ability to trade with their own money and led to rising costs and shrinking profits. However, Reuters adds that banks’ commodities trading exposures have been gradually rising over the past two years while the Federal Reserve pumped liquidity into capital markets.

The Fed's actions pushed asset values higher and triggered massive investor purchases, rupturing the normal workings of the market and creating a bonanza for investment banks dealing in gold, silver and other precious metals.

Goldman Sachs’ average daily Value at Risk (VaR) in commodities totalled US$49 million in the first quarter of 2022, up from US$32 million in Q4 0f 2021 and its highest for over a decade, the bank reported last week. It comfortably exceeded the US$33 million average VaR which the bank had in equities trading and the US$25 million in currency trading.

A bank’s VaR indicates how much money it could lose trading a particular asset in a single day. For commodities, that covers physical assets like gold and nickel and investment and hedging tools like derivatives which allow investors to profit from commodities without owning them.

JPMorgan Chase’s average daily trading VaR in commodities rose to US$15 million in Q1 this year, up from US$12 million in Q4 2021 and surpassing US$12 million for equities and US$4 million for foreign exchange. “Price increases across commodities resulted in higher counterparty credit and market risk,” Chief Financial Officer Jeremy Barnum told analysts on a conference call.

While commodities trading exposures are rising, results so far show banks are making money says Reuters Goldman reported a 21% increase in fixed income, currencies and commodities (FICC) trading revenues. JPMorgan’s fixed income trading revenues fell 1% from an exceptionally strong performance a year ago.

Citigroup does not report VaR alongside its earnings, but most recent disclosures showed the bank's VaR in commodities was up year-on-year for each quarter in 2021, peaking at US$48 million at the end of Q2. Morgan Stanley has reduced the size of its commodities trading business since the financial crisis and does not break out its VaR by asset class.

Deloitte service links AI to supply chain planning

Smart Planning, an artificial intelligence (AI)-powered supply chain planning service, is being launched by Deloitte in partnership with o9 Solutions, an AI software planning provider for enterprise decision making.

The new service, which will be a subscription offering, is described as “an AI-powered, cloud-based digital insights, connectivity, and workflow automation solution that drives strategic- and tactical-level supply chain activities across the enterprise value chain. Combining o9’s technical scale and solution architecture with Deloitte’s production-ready environment and planning-as-a-service capabilities, Smart Planning can help companies level up their planning capabilities in a matter of months versus years.

“Global supply chain disruption has been compounded by an ongoing pandemic, blowing up production schedules and manufacturing and creating significant bottlenecks. Today’s business landscape underscores the need for faster and better decision-making,” said Igor Rikalo, President and Chief Operating Officer, o9 Solutions.

“Supply chain management is one of the most crucial albeit challenging roles in an organisation and attracting and retaining planners with skills that go far beyond traditional analytics is harder than ever. Smart Planning ensures enterprises remain rightsized resource-wise by providing them with demand, inventory, supply, and integrated business planning services on a single, scalable platform that is designed to automatically adapt to evolving supply chain conditions.”

The solution’s best-in-class predefined planning configurations are created with target business models in mind to increase its speed to value. It also allows Deloitte to perform a multitude of data-intensive activities on the user’s behalf, allowing them to leverage the firm’s proprietary modes to deliver more accurate, higher-quality results than what could be achieved in-house. As the company’s business needs change, the Smart Planning platform quickly adapts to drive continuous value.

“High global supply and demand volatility have revealed weaknesses in planning capabilities, requiring planning processes to be nimbler and more responsive than ever before,” said Adam Mussomeli, Principal and Supply Chain and Network Operations Offering Leader, Deloitte Consulting LLP.

“To address performance gaps, companies are looking to define and deliver next-generation supply chain planning capabilities. What’s needed is a dynamic, flexible, and tailored solution like Smart Planning, which can provide companies across a variety of industries with a fast and cost-effective mode for addressing complex planning challenges across various supply chain functions.”

Australia’s CBA promises cheaper international money transfers

Australia’s CBA is stepping up competition between the country’s Big Four banks by offering to bear correspondent bank fees for international money transfers and thereby save business and retail customers collectively millions of dollars.

CBA says that businesses will have greater certainty on International Money Transfers (IMTs) as it absorbs correspondent bank fees on foreign exchange (FX) transfers for its business customers. “Encouraging greater international trade and activity, the announcement is particularly important for trade and supplier payments when an exact transfer amount is required,” the bank adds.

“By CBA absorbing correspondent fees on cross-currency IMTs, enterprises will benefit from reduced costs and complexity, alongside improved FX risk management and fee transparency.

“CBA’s FX platform gives customers fast and 24/7 access to overseas transactions from NetBank, CommBiz or the CommBank app, so they can send money around the world in moments. It’s also secure, with powerful digital security to provide the assurance that customer’s funds are safe.”

CBA will absorb correspondent bank fees for customers sending cross-currency IMTs via CommBiz, excluding Japanese Yen (JPY) and same currency AUD transfers in NetBank or the CommBank app. The IMT fee waiver applies to transfers from an Australian account in Pacific currencies that include the Fijian Dollar (FJD), Papua New Guinean Kina (PGK), Solomon Islands Dollar (SBD), Vanuatu Vatu (VUV) and CFP Franc (XPF).

“IMTs support the needs of our customers and communities, so we are constantly looking for ways to improve. Customers have told us they want simpler payments and, in particular, that it is important they have greater certainty around what will be received,” said CBA Executive General Manager, Payments, Ethan Teas. “This change gives our business customers this certainty, removes complexity, and reduces their costs to send IMTs, so the business can better manage risk and increase their profitability.”

BNP Paribas invests in Anthemis under fintechs focus

BNP Paribas has made its first investment into a fintech venture capital fund as it looks to strengthen its focus on the sector.

The investment in the Anthemis Group’s global platform is being made through the French bank's Global Markets Strategic Investments unit, which invests in high growth fintech companies. It further strengthens the current portfolio of fintech investments made by Global Markets, which includes the firms that include Kantox, Symphony, Saphyre and Forge.

BNP Paribas is aiming to partner with technology companies to improve its value chain and the services the bank provides to clients. Last month, the bank along with JP Morgan backed Saphyre in a US$18.7 million funding round to support the fintech’s product development.

Established in 2010 with a focus on fintech and insurtech, Anthemis developed an extensive portfolio of start-ups including social trading and investment platform, eToro, and international online money transfer company, Azimo. “For over a decade, Anthemis has been committed to reshaping financial services, cultivating change by investing in, growing, and sustaining businesses committed to improving the world,” said Briana van Strijp, chief executive of Anthemis. “This work cannot be done without partners like BNP Paribas.”

Olivier Osty, head of global markets at BNP Paribas, commented: “We are delighted to be investing in Anthemis which has a strong track record in fintech investments. We are not only investing in the fund but also looking at potential partnerships and co-investment opportunities which will support the capital markets industry and develop the next generation of fintech champions.”

Last December Anthemis closed on several funds with a combined value of US$700 million, bringing the firm’s total assets under management to £1.2 billion. The unit has already established partnerships with Barclays Bank via the Female Innovators Lab, and BBVA through a start-up studio in London.