India’s Mobile Wallets — A journey from Goliath to David
By: Manish Jha
Tags: Payments, Wallet, Product, Paytm, Fintech

“Mobile wallets were the instrument that was destined to change how India transacted.”

Anyone who knows Indian fin-tech industry would have agreed with this assertion, at least till the mid of 2018. So what changed? We will come to that. First let us trace back the journey of mobile wallets in India and how they came into being.

The journey of mobile wallets in India mirrors more-or-less that of Paytm — the largest wallet company in India. Paytm pivoted to wallets business like most of its rivals such as MobiKwik, FreeCharge etc., from mobile recharges and bill payments. The instrument of this pivot was Prepaid Payment Instruments (PPI) licenses provided by the Reserve Bank of India (RBI). PPI regulates any form of money that is deemed not be cash or in bank account.

PPI licenses allowed digital wallet companies to fill the gap in the markets as a payment service provider in sectors as varied as P2P transactions, online payments, small offline merchant payments. Digital wallet business increased in volume from under 5 million in 2012 to around 110 million in mid-2016.

Early adopters of wallets were the younger upwardly mobile crowd who was tech-savvy, owned smartphones and was keen to experiment with alternatives to existing and outdated payment solution by banks.

Growth of smartphones and improvement in 4G network quality were big enablers for further adoption of wallets. Expansion strategies for all the players consisted mainly of aggressive marketing, cashbacks and incentives. In December 2014, Uber (in response to RBI directive to include 2FA authentication for credit card transactions) partnered with Paytm to enable passengers to pay for their rides. This partnership proved to be an inflection point for Paytm as well as other companies. Paytm got access to the well-off Uber customer base which gave a bump to its unit transaction size. This also proved to be a template for other players to emulate — partner with new and upcoming businesses with young and affluent consumer base.

By early 2016, the mobile payment industry in India was established. It had started gaining acceptance and trust among its captive user base, situated mostly in tier-1 cities. Paytm was the undisputed leader of the industry that had a transaction size of 110 million by volume and around USD 3 Billion by value.

Demonetization — The White Knight for wallets and cards. In November, 2016, Indian government invalidated 86% of all Indian currency notes in circulation. Banknotes were in short supply as a result of this sudden move and people turned towards non-cash modes of payment. Both cards (pos) and wallets turned out to be big beneficiaries. Between November 2016 and Feb 2017, both experienced a steep bump in transaction as displayed in the graphics below.

Paytm doubled its user base in India post demonetization. One-third of its users transacted on the platform at least once a week. Wallets in general also succeeded in penetrating into tier-2 and tier -3 cities and were becoming popular among both consumers and merchants. Mobile wallet as a product crossed the traditional Chasm and entered into the Early Majority phase of the product life-cycle by mid-2017.

However, transaction volumes as well as average transaction value have stagnated over the last one year. This, while companies keep bleeding cash through marketing, user acquisition, cashbacks and incentives.

UPI — what the doctor (government) ordered. NPCI launched United Payments Interface (UPI) in April, 2016. UPI is an inter-bank transfer system built on IMPS and allows users to create virtual IDs for their bank accounts. It made P2P cash transfer a breeze as the cumbersome account beneficiary addition process was not required. Payment using QR-codes mirrored the merchant-transaction experience of a mobile wallet. UPI gave users an alternative to third-party mobile wallets. Entry and popularity of Google Pay (Tez) into UPI service provider mix also gave incumbents a run for their money.

The 2018 Supreme Court verdict, which banned the use of Aadhaar for KYC by private companies made new customer acquisition costly and time-consuming.

While the mobile wallet companies struggled to update their business models in the face of technological as well as policy changes, UPI thrived. Nothing displays this better than the graphic below.

UPI is not the only problem that digital wallets face today. A business model based on cashbacks, incentives and ridiculously low Merchant Discount Rates (MDR) meant these companies could barely make money. Stagnating growth, post-paid feature provided by many online businesses like Flipkart and high user acquisition cost (mostly due to Supreme Court Aadhaar-KYC ruling) threaten to ground the few remaining players. Some like Paytm and Airtel-money moved into Payment banking space. They have since found themselves in shackles because of the RBI guidelines banning Payment Banks from providing loans.

What the future holds? Survival of wallets in the market depends on product diversification and differentiation. Only way of competing in the B2C space looks to be a payment service provider for UPI. Even this place is set to get crowded as behemoths like WhatsApp and Jio are set to enter market and leverage their existing ecosystem to corner market share.

Innovation in B2B segment, specifically targeting MSME sector holds a good prospect of building a sustainable business with steady revenue stream. Digital wallet companies can use their technical and domain expertise in building products tailored to industry needs and leverage their current goodwill with merchants and businesses to push them through.

Sources:

https://the-ken.com/story/payments-boom-in-charts/

https://www.slideshare.net/mohitmohan904/india-fintech-report-2019-executive-summary?ref=

https://www.livemint.com/Industry/dPlfYx8q0YD4ejGxJke1gP/MobiKwik-to-invest-Rs400-crore-for-KYC-process-in-5-years.html

https://blog.paytm.com/more-updates-on-paytm-and-uber-integration-dd5f75b2b0dd

https://www.statista.com/statistics/731643/mobile-wallet-transaction-volume-india/