Shrinking wallets
Between choosing double scoops at half the price or burger jumbos and paying for them are countless poste with offe that might make you smile. Caf Coffee Day, the favourite hangout of the young, accepts payments from mobile wallet Paytm, which offe 15 per cent cashback. You can also pay with Ola Money and get the same percentage cashback. Or, for that matter, Airtel's Payments Bank which, too, gives 15 per cent cashback, on a minimum bill of Rs275. For a 'hot combo', there is a 16 per cent discount if you use Mastercard card with Samsung Pay.
The tough battle for India's small transactions market has seen the emergence of mobile wallet and payment services companies of all shades. Look around any Caf Coffee Day and you would relate to what Bipin Preet Singh, the founder and CEO of mobile wallet start-up MobiKwik, said at the IAMAI India Digital Summit this February. "Telcos, e-commerce companies, cab aggregato and, finally, the government itself," he said while listing those trying to kill his wallet. The audience cracked up. "I couldn't ask for more."
While such rivalries help merchants and consume get better deals, for wallet companies, they can be a disaster. And if that was not enough, they are facing stiff regulation too. The Reserve Bank of India's, or RBI's, draft guidelines, which propose higher minimum capital and stricter compliance with know-your-customer, or KYC, norms, could choke growth (more of this later). In a slide titled "Too Fast and Too Furious", Techsci Research, a consulting firm, mentions the compounded annual growth rate, or CAGR, of India's mobile wallet industry - 140 per cent between 2012 and 2015, when it touched $2.6 billion in value. It was around $5 billion in 2016 and could touch $43 billion in 2021, a CAGR of 53 per cent. The research firm says Paytm, ITZCash and Mobikwik dominate 80 per cent of the market, which got a mega push from demonetisation in November 2016. RBI data say mobile wallets accounted for 18 per cent of India's cashless transactions in September 2016 in volume terms - the largest chunk was cards, at 50 per cent, used at point-of-sale, or PoS, terminals. By February this year, the share of wallets nearly doubled to 32 per cent, while card usage dropped to 44 per cent. This growth, say experts, is at risk. Some industry watche, in fact, paint a doomsday scenario.
Tough Times
Business Today met Amrish Rau, the CEO of PayU India, in January, when mobile wallets were at an all-time high. The frenetic pace of merchant acquisition post demonetisation was keeping employees on their toes. Wallet firms also competed in dispatching press releases - Paytm averaged one press release every two days.
Rau, however, sounded an alert: "Hear me loud and clear," he said, maintaining a poker face. "The end date is very, very near. I think the sell date for wallets has already arrived."
Rau had co-founded payment gateway solutions and wallet company Citrus Pay, which was acquired by Naspe-owned PayU in September 2016 for $130 million in a deal that proved the possibility of profitable exits from India's fintech start-ups. But what made him so pessimistic in January? Several things, it turns out. Fit, he believes that the government of India's Unified Payments Interface, or UPI, which powe multiple bank accounts into a single mobile application, has been a huge disruptor. "I believe wallets are not going to be needed in the future. The concept that money resides in individual banks and only gets debited at the time of transaction from the account is the way forward. If the RBI mandates second factor authentication and Uber allows storing of debit cards directly and that money gets debited from the cards, I think that will kill the wallet," he said.
And, more competition is brewing. WhatsApp, the ubiquitous messaging platform, recently advertised for the post of 'Digital Transactions Lead, India' on its website. If the Facebook-owned company launches a UPI-based payments service, it will emerge as a major threat to incumbents, considering its large user base in the country - it had 200 million monthly active use as on February 2017. "The only threat is that WhatsApp has a large base in India. But technically, they aren't launching anything that other people can't," says Anshul Kheterpal, CFO of Freecharge. "All wallets can launch the UPI-based service in partnehip with banks. However, UPI is not used anywhere apart from bank transfe. WhatsApp may be a good way of doing bank-to-bank transfe or P2P payments. But when it comes to paying merchants online or offline, they are yea away," he says.
Apart from WhatsApp, even Hike messenger, which claims registered use of more than 100 million, can make a foray into payments - although the company, officially, prefe to remain mum.
There are also newer services such as Samsung Pay, but they are aggregating both cards and wallets onto their system (Paytm is already a partner). Samsung Pay works on technologies such as Magnetic Secure Transmission, which transmits data using magnetic waves.
Regulatory Headwinds
In March, the RBI came up with draft guidelines which, if implemented, will definitely make the case for wallets less compelling. There are at least four major headwinds blowing from Mint Road. Fit, the RBI wants new capital requirements. "All entities, seeking approval/authorisation from the Reserve Bank of India under the Payment and Settlement Systems Act, 2007, henceforth shall have a minimum positive net worth of Rs25 crore as per the last audited balance sheet." The earlier requirement was Rs5 crore paid-up capital and Rs1 crore net worth. Wallet companies will have to comply by September 30, 2020.
The second and third guidelines stress on customer due diligence. Existing wallets need to be KYC-complaint within 60 days from the issue date. To re-load wallets, "the minimum details shall include One Time Pin (OTP)-verified mobile number", among other requirements. Also, wallets with zero balance for one year must be closed.
These have serious implications. New capital requirements imply that the companies may have to raise fresh capital, particularly the smaller wallets. Closure of wallets with zero balance means the number of active use will come down.
"More than 50 per cent custome have zero balance. The new KYC rule will increase the cost of acquisition. It is like reinventing the wheel - if banks have already done the KYC, you are spending on a second KYC. If you combine all these things, it is debatable how wallets will fare in the long run," says Sony Joy, CEO of fintech start-up Chillr, a multi-bank mobile payment app that links directly to one's bank account.
For wallet companies such as Paytm, in the process of becoming payments banks, KYC isn't a big deal as banks anyways require custome to be KYC complaint. That is why this requirement will be particularly tough on independent wallet companies such as MobiKwik or Freecharge. Agencies that collect KYC documents charge Rs50-100 per peon, which increases the cost of customer acquisition significantly. Already, wallets operate on wafer-thin margins. They do not bill the user but charge a commission from the merchant (for MobiKwik, it is 1.8 per cent on an average). However, when a consumer debits his bank to move money into the wallet, banks charge a 1.5 per cent service fee to the wallet company. Wallets dont recover this charge since at present they are incentivising the consumer and bearing the cost. One doesn't know how long this can be free given the tough funding climate for these companies. On the other hand, money transfe via UPI apps could cost only 50 paisa in the future, making it an attractive option if private playe start charging for this transaction. Again, while UPI-enabled banks do not charge the user when he moves money back to a bank, some wallets levy a rate - 1-3 per cent. Kheterpal of Freecharge says this is done to prevent use from misusing the system. "Many consume use wallet to their advantage - for instance, to get credit card points. They load money and transfer it to the bank. We have a 45-day holding period before they can transfer the money," he says.
But more than the margins, KYC strikes at the heart of why wallets flourished. RBI-authorised semi-closed wallets, where a consumer can use the money deposited to shop at merchants linked to the wallet, started surfacing around 2013. Wallets can receive up to Rs20,000 with semi-KYC norms (mobile number and e-mail are used for verification and use receive a one-time OTP) and use don't have to go through the OTP stage every time money is deducted from the wallet. This soon took over the credit/debit card experience. This is set to change. "The RBI's new guidelines propose to introduce second factor authentication and KYC. Once that is implemented, the second factor arbitrage goes away. Effectively, wallets then will not be better off than any other payment instrument. Wallets are today loaded through credit/debit cards. For a user, there is no reason for parking money into another KYC account and do the same second factor authentication," says Jitendra Gupta, Founder, Citrus Pay, and Managing Director of PayU India.
The RBI, in April, held a workshop in which all wallet companies participated and raised their concerns. "The RBI cannot do away with KYC because it is a home ministry directive. We said allow e-KYC, which can be OTP-based. But the problem is that not all mobile phones are linked to Aadhaar," said a wallet company executive who did not wish to be quoted. "However, the RBI was more forthcoming in extending the dates for KYC - from 60 days to between six months and a year." Most wallet firms find the 60-day deadline rather hah.
Time for Wallet ++
We pop a question to Kiran Vasireddy, Senior Vice President at Paytm. If wallets do not have a business case any longer, what is the future of wallet firms? Only the strong with scale will survive, he says. It has to be wallet ++. "It is also about those who can get a certain scale. Both facto are equally important," he says, his answer intepeed with the sound of drilling as nails are driven into new desks in Paytm's office in Noida that is being renovated.
"Sustainability will be a question for many playe but not for playe like us. We already have 220 million people on our platform. We have a large user base, and when we combine that with a large merchant network, there is a huge network effect. That will drive the growth of wallet transactions," he says.
Paytm launched its wallet in January 2015. It has set a goal of 500 million accounts by 2019. "We process 7-7.5 million wallet transactions a day. We want to go from 5 million merchants to 10 million merchants by the end of this financial year," says Vasireddy.
Apart from Paytm, MobiKwik could also gain from the network effect, as it is among the few companies in the industry with scale.
MobiKwik claims 1.5 million merchants on its platform. It is adding 10,000 merchants every day. It has about 55 million use; of this, 41 million are active, according to the company - those who have transacted at least once a month.
Companies with smaller scale are likely to shut down or get acquired. Freecharge, which was acquired by Snapdeal for $400 million in 2015, is on the block again, according to some reports. Indeed, Freecharge now has a fix-and-sell artist at the helm, Jason Kothari. He is the former CEO of Housing.com, which merged with PropTiger earlier this year.
To offset the low-margin wallet business, the playe must diveify into higher-margin services by leveraging the transactions data generated over the yea. "Payments is generally a low-margin business. How do you make it sustainable? By growing it to a scale where even a small margin makes it viable. When you top it up with other services where margins are higher, you are in the game," says Vasireddy.
"This will be tough for playe who are only thinking of wallet as a use case. For us, it is a lot more. It is about the large user base and the merchant network. We can combine them and offer a lot many services and offerings. We will offer loans, insurance," says Vasireddy. "If you go beyond 100 million, people dont have Cibil scores, credit cards. So, they cant get a loan. It's a vicious cycle. But people on our platform have a transactions history. We can offer them a lot many services based on their data and pattern. Of coue, with the launch of the bank, they will have savings account with us too." The Paytm wallet will become part the payments bank.
Upasana Taku, Co-founder of MobiKwik, wants to launch a lending product this year. And the company doesn't want to be called a wallet company any longer - it wants to be known as a payments company. "Once there is so much user data, it makes sense for us to go deeper. We can offer more fintech-related services on the app. If you want a loan to buy TV, do you want a new app to get that loan? People will do it with the app they are already using frequently. We will be able to service them better because we already have so much data about them," she says.
MobiKwik doesn't want to evolve into another marketplace for comparisons such as Policybazar and Paisabazaar. "We will have a few strategic partne and work out models with them. The model will churn out data in real time and we can get approval decisions for loans. We will work with banks and non-bank financial institutions - but just one or two," she says.
Industry watche, meanwhile, are speculating on the quality of loan services wallet companies can come up with. Loan segments broadly include prime, sub-prime and new to credit. Considering that the data with wallet companies are small-ticket transactions data - average loading on MobiKwik's wallet is between Rs900 and Rs1,200 a month and average transaction size is Rs150 for mobile recharges and Rs500 for e-commerce - the loan data could fall into the sub-prime and new-to-credit categories. Their services, by extension, could facilitate only small duration loans.
But a start must be made. And companies with scale such as MobiKwik think it is time to separate the men from the boys. "With the new guidelines, it will become more evident to stakeholde that people who are going deep into payments are the only ones who will survive," Taku says, nearly with a grin. "Because regulation is making it harder."
@Goutam20
