I returned to India shortly before the advent of demonetisation in October 2016. Digital payments were all the rage, but nothing prepared me for the frenetic excitement that followed the government’s decision to wipe out 86% of cash in circulation the following month. Digital wallet startups hailed the prime minister’s move as the event of the century.
Overnight, newspaper advertisements, display ads, and retail signage mushroomed everywhere, shrilly announcing that operators like Paytm*, MobiKwik and FreeCharge were open for business. Everyone from grocery stores to paan shops loudly proclaimed they now accepted one or other digital wallet.
These startups—which mostly began their lives as mobile-phone recharge and bill-pay facilitators—were the first wave of the digital payments revolution that has rocked India over the past five years or so. They quickly won over consumers frustrated with the shoddy transaction processing infrastructure for payments offered by banks. As demonetisation spurred them to greater heights—and as they burned ever more money on cashbacks and discounts for consumers—the number of users and transactions soared.
But with the government building the Unified Payments Interface, or UPI, which once again revolutionised mobile payments with the ability to pay directly from a bank account, wallets have stagnated. (Punitive regulation hasn’t helped either.)
Today, wallets face an existential crisis—they spend hundreds of millions of dollars worth of venture capital on acquiring customers and earn next to nothing. Wallet transactions have been largely flat over the past six months, while UPI payments have shot up to more than eight times that of wallets, by value.
Basic payment economics are harsh—especially for person-to-person (P2P) and consumer-to-business (C2B) payments. You have a small window of time in which to convert the initial interest of the consumer into an ongoing, need-based utility that outlasts the value of a single transaction.
To the point that One 97 Communications Ltd, which runs Paytm, reported a net loss of nearly Rs 1,500 crore for the year ended 31 March 2018, on revenues of over Rs 3,200 crore. Wallet rival MobiKwik reported a net loss of Rs 203 crore on revenue of Rs 69 crore in the same period.
Regulations for their part, have played a big role in crippling this payment option. In October 2017 RBI thought wallets’ rapid rise was because it prioritised convenience over security so it mandated two-factor authentication—to finish a transaction much like debit cards. And worse, it said a physical verification of the customer should be done to comply with know-your-customer or KYC norms, just as with bank accounts.
But for wallets, there may yet be a way out—by focusing on the business to business, or B2B, market. Where transaction processing is seen as a valuable service and where every transaction attracts a small fee (as little as 0.1% for large corporations), and the regularity and size of these transactions ensures that processing entities continue to make money.
The Indian B2B e-commerce marketplace is expected to grow to $700 billion by next year. There are at least three segments worth exploring: payments between and to enterprises with turnover less than Rs 100 crore; the large and everyday cash and carry, or wholesale, segment; and intra-industry payments for verticals that are currently cash-heavy.
If they pull it off, mobile wallets may finally discover a sustainable future. But it needs them to cooperate with each other, coordinate with regulators and innovate. And most importantly, they need to learn from their past mistakes.
Who has the money?
The biggest draw for wallets was convenience—their ubiquity and acceptance, ease of use, speed and reliability of transaction processing, and a low participation cost made them easy and rewarding to use. But they have paid a prince’s ransom.
In order to drive merchant acceptance, mobile wallet operators have agreed to ruinously small merchant discount rates. Every day, on my way to the office in the weeks that followed demonetisation, my curiosity was piqued by small shops and grocery stores offering wallet payments. My years in the consumer goods sector told me it made no sense for a Paytm to target these merchants. Just how were they making money? So, I decided to approach them and put all speculation to rest.
Lo and behold, one store in Kolkata revealed an infinitesimal fee—Paytm would not charge for the first Rs 25,000 worth of funds received in a given month, and only 1% thereafter. This paltry charge wouldn’t even have been enough to cover the cost of card interchange fees (many banks made 1.83% on average from transactions on mobile wallets). At another grocery store, with typical Indian ingenuity, the merchant had beaten the system by signing up for a personal account and converting a fee-carrying C2B transaction into a P2P transaction, which attracted no fee at all.
But none of this even comes close to the largesse that has been handed out to consumers. My own study coupled with that of some industry insiders leads me to believe that the average cost to acquire a new customer for an independent wallet like Paytm and MobiKwik is in the range of Rs 300-350 per customer. Not including costs associated with carrying out customer verification to comply with the central bank’s know-your-customer or KYC norms. (For wallets like Amazon Pay, which can leverage the online retailer’s reach, it is nearer Rs 200 per acquisition.)
Separately, the cashback incentives given to customers to ensure that the next transaction happens within the span of a tortoise’s lifetime is around Rs 100-150. Given that both the number of transactions per month (~360 million) and the volume of transactions across wallets (~Rs 15,900 crore) have remained largely steady in the last eight months or so, resulting in an average transaction value <Rs 450, it is safe to say that these incentives are untenable.
When credit cards finally found their way into the wallets of ordinary people, the overriding consideration for using these instruments was the line of credit that was extended to the consumer. With the facility to revolve this “unsecured loan” by making a minimum payment each billing cycle.
For thirty years, this remained largely unchanged in developed countries like the US. Even in developing countries like India, where credit card penetration is insignificant, at least a quarter of all card holders revolve their balances. More than annual fees and interchange, it is the revolving lines of credit, whose annual interest rate in India is north of 30%, that keep the lights on.
Sadly, this is not the case with mobile wallets. The credit cards and debit cards that fund wallet transactions are mostly issued by banks and so the interchange and any associated revolving balance interest accrues to them. Even in those instances where the wallet has issued a debit card the interchange earnings is insignificant and cannot possibly offset extravagant cashbacks. (Paytm for one has through its payments bank subsidiary issued 44 million debit cards running on RuPay, a state-owned alternative to Visa and Mastercard.)
For some mobile wallets, the only significant earnings come from transfers between the mobile wallet and a bank. But the charge to transfer money—which has been pre-loaded into the wallet prior to this transaction—is so steep, it seems unlikely that any but the most uninformed or the most profligate will indulge in this improvident activity.
Paytm has just announced its intention to issue Visa debit cards as well. It’s unlikely to do anything for Paytm as these will be distributed free of charge and will not generate any serious earnings. In fact, Visa will want to tokenise the cards and Paytm will end up paying incremental fees for this as well. (Now that Paytm has announced a co-branded credit card partnership with Citi and Visa, two days ago, there should be fees and data to share.)
In a bid to shore up revenues, mobile wallet operators have tried everything. From online retail to processing transactions like QR codes with which the government has just announced that they intend to perform another demonetisation experiment on the public. Payments bank licences to build a deposit base and increase the digital money footprint.
And now they’ve begun to support the growth of UPI by playing the part of payment service providers (PSPs), or payment gateways, both online and in-store.
But none of the above guarantees any kind of sustained revenues, let alone profit.
Which begs the question…
Any CFO will tell you that nothing makes the bottom line more attractive than a programme that generates predictable and sustainable revenues month after month. For mobile wallets, the only way this can be achieved is for them to find a market that allows a significant volume to be billed regularly or for the wallets to become tools for the disbursement of instant loans. Which is where the B2B market comes in.
While the B2C retail market is expected to reach $1 trillion by 2020 compared to $700 billion for the B2B market, it is interesting to note that, globally, B2B is twice the size of B2C.
The beauty of B2B purchases lies in the fact that they are predictable, frequent and often of significant value. In many developed countries like the US, a transaction processing business—like Citi’s Global Transaction Services—that focuses on corporate disbursements and payments earns a small regular fee that keeps it together.
Separately, the government mandates that smaller MSME vendors need to be paid within 30 days of bill presentment. For large organisations, automating and managing payments to their smaller vendors (which can number in the hundreds for, say, a car maker) through a white-labelled wallet utility would be an attractive prospect indeed.
As opposed to an army of accountants signing off on cheques and bank transfers, and a barrage of systemic fixes and integrations. A costly, painful and imperfect process that results in endless follow-ups and wasteful human resource utilisation.
Already, according to a report by Digital Research 360, Indian manufacturers have announced that they intend to increase B2B e-commerce spending. And more than a third of these manufacturers said they would raise spending in purchases and vendor processes by 25%.
The second potential market segment is the B2B wholesale market—comprising tens of millions of retailers and wholesalers across every geography. Even today, this market is largely unorganised and cash dependent (hence the phrase “cash and carry”).
A mobile wallet solution on UPI rails can help reduce risk while promoting marketing and costs efficiencies. The combination of convenience and low processing cost provided by the wallet interface and UPI respectively could be a real winner here.
Paytm and MobiKwik need to re-introduce themselves to this base of retailers and wholesalers. And fast, since the government allows 100% foreign investment in wholesale companies—presenting an opportunity for the likes of Amazon and Walmart. Both own payment utilities in India, Amazon Pay and PhonePe (a subsidiary of Walmart-owned Flipkart).
Lastly, for many large B2B industry verticals—such as logistics, which makes up more than 10% of India’s GDP—that are fairly cash heavy, a customised wallet that allows the growth and proliferation of a digital marketplace could hugely benefit from such an offering.
Operators in the transportation industry, for example, still tend to distribute cash to truck drivers, hub managers, truck brokers and the like to manage working capital requirements. And for a trucking company, there’s no way to track or verify the amounts spent in the field. A wallet could provide these operators greater control and oversight over these cash flows that make up 80% of their costs of operations. By virtue of being both transparent and prepaid.
Wallet operators first need to found a consortium and work together on making a case to the regulator—the Reserve Bank of India—for B2B payments. Especially since they will need policy changes to lift the spending and deposit caps on wallets, given the scale of B2B transactions.
In fact, the government and regulators may also find that allowing wallets to operate in this space provides a greater degree of transparency and compliance enforcement—on vendor payment timelines, taxes, etc.
The wallets will also need to be more cautious on security and KYC norms. Now, with mobile wallet interoperability, the risks and costs associated with anti-money laundering, fraud and policy adherence to both UPI and the payment networks will only increase. There is little chance that a serious regulator will back off from demanding anything less than a full and robust authentication process.
And then, the wallets will have to tailor their tech to solve for B2B problems—which means transaction processing services across currencies, fund remittance, transaction matching and fraud services. No small task.
What this would open up for wallets—apart from reliable, recurring revenue—is an opportunity to partner with banks. And in doing so, capture a share of fees and charges.
Banking on lending
With data generated from their hypothetical B2B business, wallets will be in a position to work with banks to provide the right loan products at the right time to small and medium operators in this space. Given their penetration of the consumer and merchant space, coupled with their digital interface and PSP credentials, they should tie up with one or more banks to offer instant instalment loans at point-of-sale. This has some advantages.
First, it provides mobile wallets the ability to convert a single transaction into an interest-bearing set of transactions. Which would always be more profitable, either through the use of a co-branded card (such as Paytm’s one with Citi) or by promoting bank cards in wallets.
Second, wallet operators could allow issuers of credit and debit cards to compete for these transactions and subsidise the cost of the cashback offers while earning a share of the upside. Paytm has already had some small measure of success in using and promoting Paytm Score, a risk profile that can be used in lieu of any traditional credit bureau data. (After all, Paytm and Mobikwik are brands, much like Mastercard and Visa, and should be in a position to earn a small fee for value-added services without carrying any transaction or funding risk.)
And as a final note, there’s been a lot of talk about how mobile wallets have been diversifying to ensure that they find that ever-elusive profit pool. Including a lot of chatter focused on data-mining and monetisation.
Paytm and MobiKwik, for instance, are using this “data-mining” to offer “new-to-bank” customers offers from financial institutions, and other loyalty programmes like Zomato Gold. But my own experience with Hudup led me to the realisation long ago that it may be easier to guess why your spouse is suddenly irritated, after a candle-lit dinner full of laughter, than to predict your customer’s next online purchase.
While all of this is commendable, mobile wallet operators need to develop a sustainable and profitable utility that will allow them to differentiate themselves from payment gateways, payment networks and UPI-based services like Google Pay and PhonePe. All of whom are experimenting in the same space.
Otherwise, mobile wallets, no matter how flush they are with VC money, will well and truly die.