Dealing with change

Upasana Taku, co-founder of MobiKwik, asks us to narrate a joke during her photo shoot. I decide to take a chance and say, ‘wallets are dead.’ Taku breaks into a fit of laughter. But not everyone, unlike Taku, dismissed it as a joke when mobile wallet usage across India fell during the weeks following the KYC completion deadline towards the end of February. 

Wallet transaction volume fell from 326 million in January to 310 million in February. This occurred when all other modes such as mobile banking, credit/debit cards and POS showed an upward trend. In addition to this, the segment operated on wafer-thin margins and with the players nowhere close to profitability, balance sheets went for a toss. Suddenly the segment was flooded with predictions of doom.

In the recent past, the space witnessed multiple instances of shutdown, consolidation and scaling down. Naspers-owned PayU exited in January. BookMyShow — although not a core wallet player — followed suit next month. FreeCharge merged with Axis Bank, Trupay was acquired by The Mobile Wallet and Chillr became part of Truecaller Pay. MobiKwik, which was anticipated to be the next Unicorn after Paytm in the fintech space, saw erosion in its valuation. Meanwhile international players stepped into the Indian fintech segment with Google taking the lead. 

“Recent regulations are making it expensive for mobile wallet players to acquire new customers. It is also not an intuitive process for existing customers to complete KYC for mobile wallet accounts. Therefore it is becoming harder for mobile wallet players to sustain merely as payment service providers,” says Pavel Naiya, senior analyst at Counterpoint Technology Market Research. Also, increasing competitive intensity from deep-pocketed players such as Paytm, Google, Amazon and Facebook leaves existing wallet players with two options; either raise more funds to survive or diversify the existing portfolio but fortify expertise and leadership in a core area. Given that the fintech space consists of multiple sub-segments and each vertical is yet to be overcrowded, the second option not only offers a way to survive but enough headroom for growth. 

Among the core as well as non-core wallet players, a significant change in their strategy has been seen post the RBI regulation. Some diversified their portfolio, some started looking at segments other than wallets for consumer engagement and some tweaked their wallet strategy itself.

Hype and reality

Before the scenario turned bleak the wallet space had been seeing major action with several players entering the fray (see: First mover advantage). The space was getting crowded and wallets were not just about Paytm and MobiKwik anymore. E-commerce players, cab aggregators, telecom providers, banks, financial service providers, even Mahindra and Micromax were vying for a share of the pie.

Demonetisation was a watershed moment for the wallet players but what emerged unnoticed was the government-backed Unified Payments Interface (UPI). In August 2016, the National Payments Corporation of India (NPCI) launched UPI. If convenience was what wallets were riding on, UPI upped the ante offering bank-to-bank transactions. Wallets required the user to go through multiple steps such as downloading the wallet, loading money on to it from her bank account and then transferring it to the beneficiary and lacked interoperability. UPI, on the other hand, allowed her to transfer money from her account to another instantly.

While the BHIM app launched by the government couldn’t make a big impact on the mobile wallet ecosystem, the scene changed with the entry of international players such as Google, which launched its UPI app Tez in September 2017. Tez accounted for about 52% of UPI transactions in December 2017 in the country. Soon news of WhatsApp attempting to enter the space emerged. Overall, UPI set off a slow drain from the wallets. A blog published by Razorpay shows that in October 2016 over 96% of digital transactions took place using mobile wallets and less than 4% was with UPI. By March 2018, the trend reversed with wallets constituting 36% of the transactions and UPI being the boss with 64% (This excludes wallet transactions on Paytm platform). 

Next was the turn of KYC. Stipulated by RBI, KYC is a verification process in which companies are required to collect information from their customers such as their identification and biometric details. This posed a major challenge to the convenience factor offered by wallets as customers were now required to furnish details, documents and get their accounts verified to proceed with their transactions. In February 2018, KYC compliance kicked in and wallet transactions dropped steeply. The fall was quick and painful, at a time when mobile wallet transactions had been pacing ahead and looked unstoppable with transaction volume expected to grow at a CAGR of 94% between FY17 and FY21 according to a 2017 Deloitte report. 

Plotting survival 

Wallets have been degrowing, says Jitendra Gupta, co-founder of CitrusPay and MD of PayU. “Consumers are favouring UPI and that is clear from RBI numbers. This came across as a big dampener for wallet guys, because suddenly there is a 30-40% drop in transactions. From a consumer’s point, why should he take extra pain of KYC?” asks Gupta.

Naspers-owned PayU acquired Citrus in September 2016 for $130 million making it the largest ever deal in the fintech segment in India. In January 2018, it announced it was shutting down its wallet. However, Gupta clarifies it had nothing to do with KYC. Post-acquisition, the company ended up with two wallet licenses and had no option other than surrendering one. “That being the primary point, we anyway had reduced our focus on wallets during the Citrus days, that is early 2016 itself,” says Gupta citing two reasons for it. There was UPI emerging on one side whereas on the other the big guys were pushing a lot of money into the consumers’ pockets making it more of a cashback and discounting game. “Fundamentally we were not convinced that we should be pursuing that path as it wasn’t sustainable,” notes Gupta.

After the shutdown of the wallet, what remained with PayU was a B2C payment business. So in order to grow, it decided to look at the credit space, which they felt was adjacent to payments and in need of a fix. “Not everyone is eligible for a credit card, but at some level 250 million people deserve credit. For us, it was more of a strategic change and also a regulatory-driven thing. Now everybody is talking about credit,” says Gupta who believes credit is going to be the next big thing. PayU’s focus currently is on LazyPay, which allows the customer to pay later for a purchase. Launched in April 2017, it currently has more than 100 plus merchants and has crossed 50 million customers. Credit currently comprises about 2% of PayU’s business which it plans to aggressively push and increase 10x over the next three years. 

Post demonetisation, Page-1 campaigns in newspapers by Paytm was a regular affair. MobiKwik joined the fray announcing an investment of Rs.800 million over the following six months for marketing and promotion. Strangely there was not much noise from PayU. Gupta explains, “Everyone thought demonetisation was a big boon for wallets and a long-term opportunity. It was very evident that it was a temporary phenomenon, but the rest thought otherwise.” 

Pramod Saxena, founder of Oxigen, was also among those who anticipated the need for a change in strategy despite the lure of demonetisation. “Our strategy for mobile wallet has changed since demonetisation. During that period they opened up UPI and also created BHIM. Now people wonder why to store money in wallets,” says Saxena. “Also they opened up to others such as Google and WhatsApp. The purpose of wallet as a payment instrument has lost its significance after this,” he adds. 

Saxena therefore tweaked his strategy to offer wallets only to corporates. He was convinced that the huge amount spent on customer acquisition would bring back very less revenue. Oxigen thus created two wallet products — a loyalty-based wallet deployed by Future group that has found 5 million subscribers under a year of launch, and an expense management product for corporates. The latter comes with a pre-paid card and generates a single MIS for all transactions. This minimises paperwork for the finance and accounting departments. 

Apart from its tweaked wallets, the company has also been running pilots for offering credit to MSMEs, and has plans to set up a separate NBFC for the same. Another core offering is its micro-ATM product, which is agnostic to all payment systems and whose deployment is the main focus now. It has so far deployed about 20,000 micro-ATMs across the country.

Fixing the core

Wallets constitute only 5-10% of Oxigen’s revenue. For PayU, too, wallets were never a core business. But that wasn’t the case with Paytm or MobiKwik, which were understandably keen on milking the opportunity thrown up by demonetisation. The number of users which stood at 35 million prior to demonetisation shot to 45 million immediately after the move, merchant base rose to 3 million and a 400% increase in transaction volume was witnessed. Despite all that, MobiKwik, which was in talks to raise $100 million at a valuation of $1 billion, has seen steep erosion and in January 2018, it was valued at $279 million. 

Taku says neither UPI nor KYC has affected MobiKwik’s business. “UPI is great, it is creating awareness and I’m not worried about international players either. If they are going to get into this, they should also build the merchant network the way we built it. Then, the new RBI circular says they need to have servers in India. And none of them have their servers here,” exclaims Taku. As for KYC, MobiKwik as well as Paytm had been running cashbacks and discounts well before the deadline to lure existing customers to adhere to KYC norms. She contests doomsday reports suggesting significant fall in numbers, saying that the hit was only in the range of 5-10% during early March. 

Meanwhile MobiKwik has been diversifying. The company, which aims to be a full-fledged financial services provider, is now offering a corporate expense management product and a lending product to issue instant credit to its customers. It is also working on an alternate credit score that could be used by banks. 

MobiKwik’s rival and market leader Paytm, which pivoted to a payment bank license in November 2017 is currently focusing on its merchant network, according to senior vice president Deepak Abbot. “We are building the acceptance side really aggressively. That is where our USP lies because no one is investing on that side. More and more merchants accepting us means we would continue to hold our advantage, because it’s not something which can be replicated overnight,” he says. Towards the end of 2017 the company had announced investments to the tune of Rs.5 billion to conduct merchant training and awareness initiatives to expand reach. It has introduced QR codes that allow the merchant to directly receive payments to their bank accounts and which also enable him to accept payment through Paytm wallet, UPI, cards and net banking. Paytm currently has about 8 million offline merchant partners and claims to have crossed about $4 billion in monthly gross transaction value. “I think another growth engine is the payment bank, we have 100 million users. So we continue to push it,” says Abbot. 

Given that Paytm’s wallet has been integrated with its payment bank, are mobile wallets past their prime? “Let the users decide that,” answers Abbot agreeing that mobile wallets are now in an identity crisis. “90% of our active base has done KYC. Our idea is that the consumer should be able to pay another consumer or merchant using Paytm — doesn’t matter which mode they use for it,” he adds. 

While Abbot rules out any threat from international players and is confident that multiple seamless offerings provide it an edge, Paytm founder Vijay Shekhar Sharma seemed to have been rattled at the prospect of international competition as he scathingly tweeted about WhatsApp’s UPI offering. 

Rahul Chari, co-founder, PhonePe, feels competition from international players is good as it would push the local players to innovate further. Acquired by Flipkart in 2016, PhonePe has been sounding the battle bugle against Paytm. The company claims to have powered roughly 3/4th of all merchant UPI transactions in FY18 in India. “As far as merchant transactions on UPI are considered we have a massive lead  — 78% of merchant transactions on UPI is PhonePe,” says Chari. PhonePe’s annual total payment value (TPV) as of March 2018 was $13 billion. He points out that the space needs significant innovation and cannot rely on cashbacks and discounts, but the segment has been driven by the latter so far with players including PhonePe as well as the international players encouraging it. 

Staying positive

Although the financial services players are trying out different strategies across verticals, the common notion is that credit is the next big thing. Be it credit to merchants or to consumers, the space is wide open. Apart from that, UPI is another big opportunity. For now, competition is yet to intensify in each of these segments and the future seems bright for those out there. “This is the best time in my view,” says Gupta of PayU. “Our company grew 2.5x last year, the fastest in five years. This year we are hoping for 60% growth. There’s only one segment that’s impacted — that’s wallets.”

However, not everyone thinks it’s time to sing a eulogy for wallets. “We believe wallets do have certain use cases which are done best through them — say instant refunds,” points out Chari of PhonePe. “Wallet does have its advantages – for smaller value transaction it is a great instrument,” Chari suggests.

The July RBI bulletin, too, suggests that it might not yet be time to say goodbye to wallets. According to it, although the April numbers are lower than December 2017, January 2018 and February 2018, there’s an uptick from March when the numbers plunged. In April, wallet volume went up by about 11 million to 279 million. Multiple factors such as cashbacks and promotions, signing up new users and KYC completion by high-end users who had bigger amounts in wallets and therefore were left with no choice, contributed to it, feels Naiya. But in the long run it might not be feasible for any player to survive on a mobile wallet alone. Indian mobile wallet providers have realised this. In Taku’s words, “Only when you are pushed against a wall you realise if are you going to survive or not. From that point of view we have survived a few deaths,” she smiles.