Indian payments industry to grow to $49 trillion by 2028, offering growth potential for investors.
Source and citation: Based on the article from ET Bureau, dated October 17, 2024
TLDR For This Article:
The Indian payments industry is set to hit $49 trillion by 2028, with transaction volumes and revenues growing steadily, fueled by credit cards and fund transfers.
Analysis of this news for a layman:
The payments industry in India is booming. By 2028, the total value of payments is projected to reach $49 trillion, growing from $30 trillion in 2023. This is huge! Essentially, more people and businesses are making payments digitally, and the sheer number of transactions will also skyrocket by 25%, from 144 billion to 434 billion. Credit cards and fund transfers are leading this growth, but there’s a catch—older payment methods like cheques and debit cards will decline. What’s also interesting is that revenues for payment companies will only grow at 11%, meaning companies will need to optimise their operations to stay profitable. This is a sign that the industry is getting more competitive, and margins are shrinking.
Impact on Retail Investors:
- Growth in Digital Payments Companies: With the industry set to grow by 10%, companies in the payments space will likely benefit. Retail investors should look at companies involved in digital payments such as Paytm, PhonePe, and traditional players like HDFC Bank, which are all key players in the sector.
- Potential Opportunities in Credit Card Issuers: The predicted surge in credit card transactions by 2028 could make companies like SBI Cards and HDFC Bank’s credit card segment attractive for investment.
- Shrinking Legacy Payment Methods: The drop in cheque-based and debit card transactions indicates that older methods are losing popularity. Investors should be cautious about companies heavily dependent on these methods.
- Cost Optimization Focus: With revenues growing at a slower pace than transaction volume, retail investors should focus on companies that are improving operational efficiency to maintain profitability.
Impact on Industries:
- Financial Technology (Fintech): The biggest impact will be on fintech companies that operate in digital payments and fund transfers. Companies like Paytm, Razorpay, and PhonePe are well-positioned to capture the growing volume of transactions. These businesses might see stock price growth as they expand their customer base and market share.
- Credit Card Issuers: The rise in credit card transactions will benefit companies like SBI Cards, ICICI Bank, and HDFC Bank, which dominate the credit card market in India. With projected growth in both value and number of transactions, these companies could see higher revenues and stock price appreciation.
- Banking Sector: Traditional banks will need to keep pace with digital payment innovations. While debit cards and cheque transactions decline, banks with strong digital platforms could benefit. HDFC Bank and ICICI Bank, with their focus on digital banking, are examples of potential winners.
- Payment Infrastructure Providers: Companies providing payment gateways, like BillDesk or CCAvenue, will benefit from higher transaction volumes. Businesses offering back-end infrastructure for processing payments might see higher demand for their services.
Long Term Benefits & Negatives:
Benefits:
- Digital Payment Dominance: The long-term outlook is extremely favourable for companies that are at the forefront of the digital payments revolution. Investors in this sector can expect sustained growth as digital payments become the norm.
- Increased Financial Inclusion: As more people adopt digital payments, India’s overall financial inclusion will increase. This can lead to more products and services being offered by companies in this space, benefiting both businesses and consumers.
- New Business Models: As traditional payment methods decline, businesses will innovate. Subscription models for financial services or value-added services related to payments might emerge, opening new revenue streams for companies.
Negatives:
- Shrinking Margins: The BCG report highlights that “margins from interchange will continue to shrink,” which means companies will have to work harder to make a profit. This could lead to cost-cutting, layoffs, or a focus on automation, which might reduce short-term profitability.
- Legacy Systems Decline: Companies dependent on cheque payments, debit cards, or prepaid cards might struggle. The projected decline in these methods suggests a shift away from legacy systems, impacting companies that haven’t modernised.
Short Term Benefits & Negatives:
Benefits:
- Stock Price Surge for Leading Players: In the short term, companies that lead in digital payments, such as Paytm and SBI Cards, could see a rally in their stock prices as investors anticipate growth.
- Increased M&A Activity: With the payments industry growing rapidly, there could be short-term mergers and acquisitions as bigger companies buy out smaller, innovative fintech firms to strengthen their digital offerings.
- Fund Transfer Growth: The fund transfer category is expected to see significant growth, which means companies that facilitate these transactions, like banks and mobile payment apps, will benefit in the near term.
Negatives:
- Short-Term Overvaluation: Companies in the payments sector could become overvalued as the market prices in future growth, leading to corrections in the short term.
- Immediate Pressure on Traditional Payment Systems: Businesses reliant on older payment methods could face short-term revenue hits as the use of cheques and debit cards declines faster than expected.
Analysis of India’s Growing Payments Industry
Indian Companies Likely to Gain
- Digital Payments Companies:
- Paytm, PhonePe, Razorpay, BharatPe: These companies are expected to benefit significantly from the rapid growth in digital payments. Their market share and revenue could increase substantially.
- Banks:
- HDFC Bank, ICICI Bank, SBI: Banks offering digital payment solutions could see increased transaction volumes and revenue. They might also benefit from the growing demand for credit cards and other financial products.
- Fintech Companies:
- CRED, Slice, OneCard: Fintech companies specialising in credit cards and other financial products could see increased customer acquisition and growth in their businesses.
- IT Services Companies:
- Infosys, TCS, HCL Technologies: These companies could benefit from increased demand for IT services related to digital payments, such as payment gateways, fraud detection, and data analytics.
Indian Companies Likely to Lose
- Traditional Payment Providers:
- Cheques, money orders: These traditional payment methods are expected to decline, potentially impacting businesses that rely heavily on them.
- Prepaid Card Providers:
- Companies offering prepaid cards: The market for prepaid cards is expected to shrink, affecting companies operating in this space.
Global Companies Likely to Gain
- Global Payment Networks:
- Visa, Mastercard: The growth of the Indian payments industry could lead to increased transaction volume and revenue for these global payment networks.
- Global Technology Companies:
- Google, Apple: Companies offering digital payment solutions could benefit from the growing Indian market, potentially expanding their user base and revenue.
Global Companies Unlikely to Lose
- While increased competition from Indian digital payment companies could impact global players, the overall growth of the payments industry is likely to benefit all major players.
Note:
- The potential impacts on these companies depend on various factors, including their individual business strategies, market positioning, and the competitive landscape.
- The growth of the Indian payments industry could create new opportunities and challenges for both domestic and global companies.