The payments landscape in India has gone well beyond traditional providers, with a plethora of competitors jockeying for the pole position.
In addition to traditional providers, the payments landscape now includes wallets (Paytm, Mobikwik), UPI (BHIM, Axis Pay), telcos (JioMoney, Vodafone m-pesa), and emerging fintech firms (FTCash, Ezetap).
Mobile Wallets a Convenient Way to Help Small Merchants Go Digital
Of all the alternate payment providers, mobile wallets were in a distinct sweet spot to grab the opportunity, and they grabbed it with both hands. The confluence of low cost smartphones along with the rising internet penetration provided the building blocks. The opportunity was sensed and multiple wallets spread all over, initially targeting the remittance, online recharge and bill payments use cases.
Beyond that, wallets also provided a convenient and low cost alternative to accept payments, which meant that small merchants, who are often wary of ‘going digital’ given their razor thin margins, could finally jump onto this bandwagon.
Currently, 65 percent of Paytm’s transactions come from the offline segment.
Some even touted wallets to have the potential to wipe out card based payments business. Demonetisation provided a further shot in the arm. All this is clearly reflected in the numbers – from a mere 2.7 crore (Rs 892 crore) transactions in January 2015, wallet transactions increased 4x to 10 crore (Rs 3,385 crore) in October 2016, and have gone up 3x since demonetisation to 30 crore (Rs 7,312 crore) in March.
Paytm alone added nearly 10 crore users post demonetisation, taking its total user base to nearly 24 crore.
Not Everyone Happy With Mobile Wallets
However, the wallet space is currently being put through the mill. The market has become increasingly crowded with players offering limited differentiation. Payments processing is a low margin business.
That, coupled with aggressive cashbacks to lure customers, has put a question mark on the viability of the business model. There’s also a heightened sense of anxiety in this space due to external factors – launch of BHIM, Bharat QR, KYC requirements and interoperability guidelines.
Additionally, our recent research indicates that many users have had concerns with wallets around reconciliation, during transfer of funds back into bank accounts.
Some have even stopped using wallets. A small merchant we met, preferred giving credit to customers than reusing wallets. Another preferred accepting cards, even for transactions as low as Rs 40. Both highlighted issues in reconciliation and felt they hadn’t got the desired amount that wallet companies owed them.
Cards Preferred Over Mobile Wallets
Despite increased competition, the card business has been resilient. In the five months pre (June – Oct) and post (Nov – March) demonetisation, total card transactions at POS went up nearly 100 crore, compared to an increase of 80 crore in wallets.
In the same period, average monthly addition in POS terminals increased 10 times from 20,000 to 2,00,000. Clearly, the card form factor has something going for it.
Our research indicates that people want multiple proof points of transactions, and factors like physical presence, receipts, monthly statements play a key role in building trust and confidence while using cards.
Additionally, cards offer some distinct advantages over wallets – higher limits and loyalty points to name a few.
Less tech savvy users who find it cumbersome to jump onto wallets, find cards convenient to use. Positive regulatory and policy action has also helped move the needle. Guidelines have been released limiting MDR on debit cards – for merchants with annual turnover of less than Rs 20 lakh, MDR has been capped at 0.4% while for large merchants, the cap stands at 0.95%. The NPCI has taken a target to more than double the number of POS machines in 6 months, from 24 crore (March) to 55 crore (September).
NABARD has extended Rs 120 crore to banks to deploy 2 POS terminals each in 1 lakh villages, with a population of up to 10,000.
How Mobile Wallets Will Look Like in Future
We think these dynamics imply five specific things on how the industry will shape up:
First, consolidation in the wallets space is inevitable. Crowded market, limited product differentiation, and unsustainable business models are classic traits for an industry to go through periods of consolidation.
Already, FreeCharge has been on the block and Paytm is reportedly close to buying it out.
Second, wallets with killer use cases or having differentiated offerings will succeed. Players might penetrate deep into a vertical and build specific offerings tailored to their needs. For example, an offering for the grocery vertical might have payments at its core, but provide an end-to-end solution taking care of supplier payments, customer relationship management etc.
MobiKwik recently developed a customised, co-branded semi-closed wallet for BSNL to facilitate ease of payments and sell BSNL products in the wallet.
Third, wallets will have to go beyond the payments business. Payments processing is a low margin business, while other financial services like lending, insurance etc are more attractive. Wallet players will add complementary services to their core offering and tie-up with various banks, NBFCs, insurance companies to dole them out. MobiKwik has started doing this with a move to sell fire and shop insurance to shopkeepers.
Fourth, customer service and trust will be vital to build sustained relationships. Investing in building strong customer relationships is important, not only to regain trust of consumers and merchants that have stopped using wallets, but also critical as players try to scale up beyond payments, and tap other parts of the financial services value chain. Not much action has been seen from wallet players in this area so far.
Fifth, writing the obituary of cards maybe premature.
Payments processing through cards is a resilient and established business. Cards offer several distinct advantages over wallets.
They are here to stay for the long run, but they will surely keep a hawk eye on how wallets shape up.
( The authors are with Dalberg Advisors, a strategic advisory firm focused on social impact, including financial inclusion. This piece builds on extensive recent work they have done on digital payments. They can be reached on @varad_pande and @dalbergtweet. This is a blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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