For Indian consumers, cash is still king, accounting for about 98% of the volume of consumer payments, but a relatively new set of companies that operate digital wallets are trying to take it down a peg or two.
Digital wallets, which have been around since at least 2006, have started to take off in the last 12 months, thanks in part to the convenience they offer, a change in consumer behaviour, and their close integration with e-commerce and other services available in the internet economy.
Wallet companies such as Paytm (rn by One97 Communications Ltd.), MobiKwik (One Mobikwik Systems Pvt Ltd) and Oxigen (run by Oxigen Services (India) Pvt Ltd) have also raised massive amounts of venture capital which helps them lure customers to make transactions through their platforms by offering lucrative cashback incentives.
The most popular wallets, like the ones mentioned above, are what are known as semi-closed wallets – with which you can transact with various merchants but cannot withdraw money from. There are also closed wallets, which are for purchasing from a single merchant – like an e-commerce portal, and there are open wallets, like M-pesa by Vodafone India Ltd in partnership with ICICI Bank Ltd., that allow you to withdraw money as well as make regular online transactions.
Wallets, which are categorised as Prepaid Payment Instruments by the Reserve Bank of India, have seen a significant jump in usage, accounting for Rs 211 billion in 2014-15, up from Rs 81 billion in 2013-14, according to the latest RBI data.
But this is just a starting point, say wallet firms.
“We’re still in the early growth stage. The entire groundwork for the payments to go digital is being created by this consumer habit of moving from a feature phone to a smartphone. As more and more transactions go digital, there will be tremendous value add in terms of security, providing a customer relationship management software, and customer data options. Our objective is to ensure we act as an operating system to power all these,” said Govind Rajan, chief executive officer, FreeCharge, the payments arm of e-commerce marketplace Snapdeal (Jasper Infotech Pvt Ltd.)
FreeCharge, which launched last year, is the latest entrant in the wallet business, having operated as a recharge platform before that.
While wallets started off with offering consumers a way to make retail payments like phone recharge and bill payments, the vision going forward, is much larger. These companies are gearing up to usher in financial inclusion by providing reliable service to the hundreds of millions of unbanked and under-banked.
Having raised over $500 million in venture funding from the likes of Alibaba-owned Ant Financial, Paytm, which is one of the biggest wallet companies, for instance, is one of the 11 recipients of a payments bank licence. Payment banks will provide basic savings, deposit, payment and remittance services to people without access to the formal banking system and will not be in the business of lending.
Apart from the payment bank, Paytm, which started as a wallet in 2014, is targeting merchants across categories, like Kirana stores, Milk-cooperatives, Auto-wallas, taxi drivers, parking operators, and bringing them onto the wallet platform to expand the usecases for its consumers and create stickiness.
“Currently, we have 132 million wallets. We’re targeting 500 million by 2020, hopefully we’ll reach this number much before our targeted timelines. Our focus right now is to build the largest payment network in this country. We have very aggressive plans to get four million offline merchants on our platform by the end of 2017,” said Kiran Vasireddy, senior vice president, Paytm.
MobiKwik, launched in 2013 and which raised about $87 million so far, is also betting on growing as a platform for financial inclusion. It recently conducted a pilot where it tied with an NBFC to offer micro-loans to some of its wallet users, a pilot which it says has been successful, and will launch more financial services soon.
“In the future when people want to take loans, when they want to invest in funds, take insurance, we won’t be the best company to create these products for them, but we will be the best company to match diff providers to consumers based on the consumer credit history that we have, and the trust factor,” said Upasana Taku, co-founder, MobiKwik.
“The market is large enough and fragmented enough. There will be more than one dominant wallet company in India,” said Taku.
It isn’t just start-ups that operate in this space though. Banks such as the State Bank of India, ICICI and HDFC too, have woken up to the opportunity and began offering open wallets to their consumers, but they haven’t taken off as much as the rest.
For banks, wallets are one among a number of products they serve, and won’t have the razor-sharp attention that wallet-only companies can give their users and product. Banks that provide wallets have to work on their user interfaces and experiences and offer compelling usecases for consumers to switch to them, say experts.
“Strict KYC norms, unwelcoming bank branch staff, absence of any strong brand-pull have always pushed away a segment which had never understood what a bank account is. This is where standalone wallet service providers have hit the jackpot. On the contrary, the customer base of traditional banks can easily be used by them for deeper penetration. Whichever provider understands customer needs will emerge as the winner,” said Neha Punater, partner, Fintech, KPMG in India.
However, a lot of things still need to fall in place for wallets to gain more widespread adoption.
They lack inter-operability for one, consumers need to go through a KYC process to transact more than Rs 10,000 a month on these – which could prove a point of friction, and the merchant network that accepts wallets also has to significantly increase in size.
Although most wallet companies are quick to dismiss the impact that the Unified Payments Interface, an initiative of the National Payments Corporation of India which will allow fund transfer between banks with the help of a single identifier, and say that UPI will just be another way to add money to their wallets, some experts say we have to wait and watch.
“While the future looks promising for wallets one of the caveats is the impact of UPI - but how this will work and what it will mean in terms of experience for customers in the real world, remains to be seen as the UPI products are yet to be launched commercially,” said Vijay Mani, partner at Deloitte India.
“Another caveat is whether customer awareness and adoption can truly be achieved for newer use cases, the way it has been for some of the other more popular usecases, and each additional usecase represents a new challenge where a lot of work is needed,” added Mani.