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Payment firms look for new pastures after UPI levels the playing field

India has now at least a dozen players in the payment space grappling with a lack of revenue model, volatile government regulations and customer onboarding.

Mar 17, 2019 by Moulishree Srivastava
Payment firms look for new pastures after UPI levels the playing field

Delhi roads are lined with Paytm billboards screaming offers. The Rs 700 cashback offer for seven Unified Payment Interface (UPI) transactions is the latest in the digital wallet firm’s desperate fight for existence.

The payment space in India has been in a state of flux. Since 2016, demonetisation, BHIM app and UPI have ensured Indian fintech companies stayed on their toes to remain relevant.

Payment companies have evolved with the mass adoption of UPI. The firms are pouring oil into the burn rate to get users hooked and come up with new use cases. India has now at least a dozen players in the payment space grappling with a lack of revenue model, volatile government regulations and customer onboarding.

Of late, Amazon, Google, WhatsApp, Truecaller, Xiaomi and Samsung have started offering payment services through UPI.

“The companies are providing larger offerings, and within that, they are integrating (UPI-based) payments options,” said Ashish Taneja, managing director of early-stage investment firm GrowX Ventures.

Neil Shah, partner and research director at Hong Kong-based Counterpoint Research, said the strategic move would give companies access to users’ payment data.

“UPI has lowered the barrier to enter payments space. It was walled-garden proprietary solution earlier. Now that the government is giving this platform, it is easier for everyone to get in,” Shah said.

Everyone wants to become a mini-bank now, he said. “For example, if everything goes by Amazon Pay, it will have customer data to create users’ profile. Then it can use that to cross-sell and do targeted advertising.”

According to a 2018 report by Google and Boston Consulting Group (BCG) titled Digital Payments 2020, digital payments in India will exceed USD 500 billion by 2020, up from USD 50 billion in 2016. Meanwhile, Credit Suisse projections put the number at USD 1 trillion in the next five years.

The competition from companies without a payment DNA, like Google, WhatsApp and Amazon, is jeopardizing the business of the incumbents in the USD 200-billion-plus industry.

The core players had already committed a good deal of money and time to keep up with government rules. Case in point: In 2017, Reserve Bank of India made full KYC (Know Your Customer) formalities mandatory for all wallet users.

“It was a huge cost for wallet companies,” said Ram Rastogi, a Mumbai-based digital payments strategist and former head of real-time payment services, including UPI at National Payments Corporation of India (NPCI). He is currently a consultant with World Bank organisation CGAP (Consultative Group to Assist the Poor).

Rastogi points out Paytm had around 220 million wallet users after demonetisation. “But it was struggling with user KYC when the Supreme Court (in September 2018) ruled that private companies can’t do the e-KYC using Aadhaar.”

Rastogi said such deterrents have slowed down the growth of payment firms.

Hunger games

In April 2016, NPCI introduced UPI, a payment system that democratised how people transfer money or pay for services digitally. Six months later came demonetisation of high-value notes of Rs 1,000 and Rs 500. As a result, wallet companies saw a spike in the number of users as well as transactions.

A month later, NPCI rolled out own payment app, BHIM for UPI payments, making wallet services obsolete. It took some time for payment companies to realise that the government was competing with them, along with the banks.

Running out of options, fintech companies partnered with banks to incorporate UPI in their apps.

Two years later, UPI still has an upper hand. It has become the underlying technology for direct bank transfers for the payments players. Since money cannot be directly transferred between wallets issued by different payments services providers, the core proposition of wallets have become irrelevant.

Between April 2018 and February 2019, UPI transactions accounted for a whopping Rs 7,453.82 billion (USD 108 billion). The credit goes to the government’s push to drive adoption and wallet services for incentivising UPI transactions to retain and gain users.

Needless to say, UPI transactions shot up at the expense of their original wallet offering.

Rastogi said India has around 92 million users making payments through mobile, and “this is the user base all payments services are after.”

“It costs payment companies Rs 1,600 to acquire a new user. If that same customer is shared by 20 people, then you lose business. So you need to have a unique value proposition.”

Harish HV, partner at research firm Grant Thornton, who is now on sabbatical, believes Indian users usually do not like to change the service they have been using for long and this has helped companies retain their user base.

“With its marketing and branding, Paytm and other wallet services have built a large customer base that trusts them for safe transactions at the local level,” said Harish. “Now, instead of saying UPI and BHIM are my competitors, they are saying if you want wallet we will give you that. If you want UPI, we have that as well.”

The evolution

According to Taneja, pure wallet play model is done for. “Payments will essentially be a commodity, and they alone will not be differentiator since the underlying tech is common across all the products."

Besides, companies like Amazon, Google Pay, WhatsApp, Truecaller and Xiaomi are creating an ecosystem complete with UPI-enabled payments.

Indian wallet service providers, on their part, have tied up with third parties to provide services such as ride-hailing, hotel booking and food delivery. For instance, PhonePe claims to have about 30 such apps including Oyo, MakeMyTrip, GoIbibo, RedBus and Grofers on its platform.

Flipkart's PhonePe has been aggressive about onboarding of merchants on its platform. It has two million retailers using its services across 60-70 cities and is looking to double the presence over the next three to four months.

Hemant Gala, head of payments, banking and financial service at PhonePe, said they have met over 1,000 merchants in last the two years. “Merchants do not want to use digital payments. They are comfortable with cash. What they want is to reach more customers. We are doing that with the segment in the app that helps users locate shops in their neighbourhood.”

“We have a large share of peer-to-merchant transactions on UPI. We saw this and broke out of the peer-to-peer game, and stopped incentivising customers to send money by giving loads of cash randomly,” said Gala. “We are now focusing on merchant ecosystems because as more merchants start using PhonePe, customers will come.”

Payments companies are also lining up more services to woo customers including lending, gold trading, mutual funds and insurance.

“To capitalise on the large user base, wallet companies are diversifying their offerings,” Harish said. “They are getting into financial services and e-commerce instead of trying to remain pure payment players, in case there is another regulatory issue which may make it difficult for them to operate.”

A-year-old Paytm Money, raised Rs 28 crore from its parent company One97 Communications. Last October Mobikwik, acquired (a first) Mumbai-based mutual funds company Clearfunds. Even Google Pay has plans to get into lending business. Truecaller bought out payment company Chillr and is already beta testing in wealth management space.

Late last year, PhonePe too incorporated a subsidiary to offer wealth management. Gala said PhonePe is taking it slow.

“Our strategy is to grow in a phased manner. We have built use cases around payments and around in-apps. Over the next 12 months, we will be launching our financial services. We will not be offering all the service to all the users. They will be customised.”

The companies are haemorrhaging cash to get users without any substantial returns as most services are offered free of cost. It goes without saying the strategy is not sustainable in long term.

The road ahead

Experts believe the payments sector will undergo consolidation just like the e-commerce space.

“Only the strong player with deep pockets will survive and others will become a part of these bigger players," Rastogi said.

Taneja of GrowX Ventures agrees. “Going forward, 80% of the market will be controlled by few players.”

The industry sources said the consolidation could happen in 18-24 months. But, all is not lost for payment companies.

Last month, India allowed private companies to use Aadhaar voluntarily for KYC, while the RBI has laid guidelines for interoperability between wallets using UPI.

Harish said it is too early to predict winners. “There is also the probability that if interoperability starts happening, we would be transacting across different payment services,” he said.

Meanwhile, the payment firms can cash in on the buzz around the digital payments to get new users.

“Everyone will have their own space and experience on which they will solve problems for customers. The ones who come up with great products will eventually lead the market,” said Gala.

“And that is where we see interoperability play a very interesting role,” he added.

But a huge customer base alone won't cut it, unless the firms come up with a way to monetise the service.

Once these companies gain a huge user base, there will always be ways to make money, Taneja said. “Be it selling insights to affiliates or using those to offer more services. There are gaps in the industry which need to be filled.”

Paytm and Mobikwik did not respond to the mails sent by The Passage.

Moulishree Srivastava

Moulishree Srivastava is a Bangalore-based tech journalist. She focuses on emerging Indian startups and unicorns. She can be reached at

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