India's payment melee resumes: how to access India's four-way payment

As one drives away from downtown Delhi on the way to the airport, one can't help but notice prominent Paytm advertisements touting various offers and discounts. The digital wallet company, which has 300 million users, recently launched a new campaign that offers a cash rebate of Rs 700 (about Rs 70) for completing seven transactions through UPI (Unified Payment Interface), in a bid to maintain its market leadership.

The e-payments market in India has been vibrant in recent years. Since 2016, the currency demonetisation policy, BHIM (a payment app launched by the National Payments Corporation of India), and UPI have posed significant challenges to Indian fintechs, which have to remain vigilant to maintain their market position.

Widespread adoption of UPI has created new challenges for payments companies.UPI has essentially removed the barriers to creating payment platforms, allowing international giants like Google, WhatsApp and Amazon to launch UPI-based payment platforms. Recent reports have even claimed that WeChat is in talks with RBI officials.

India's fintech market represents a golden opportunity for internet tech giants aiming to attract the "next billion users". To gain an edge, these companies are investing heavily in attracting users and launching new payment scenarios. Currently, at least a dozen payment companies are grappling with limited revenue models, unstable government regulations and customer churn.

Recently, companies like Amazon, Google, WhatsApp, Truecaller (a spam call blocking app with over 100 million daily active users in India), Xiaomi and Samsung have started offering payment services through UPI.

Ashish Taneja, managing director of GrowX Ventures' Early Stage Investments, told ZhiXiang Wang, "These companies are offering more services and discounts, and on top of that, they are integrating UPI-based payment options."

Neil Shah, partner and research director at Counterpoint, believes that this strategic move will give the company access to users' payment data.

"UPI has lowered the barrier to entry in the payments industry. It used to be a proprietary solution, but now the government is providing the platform so it's easier for everyone to get in," Shah told ZhiXiang Wang.

He added that every player now wants to be a mini-bank. "For example, if all payments are made through Amazon Pay, it will have the customer data to create user profiles. It can then use that data for cross-selling and targeted advertising."

According to the 'Digital Payments 2020' report released by Google and Boston Consulting Group (BCG) in 2018, digital payments in India are expected to exceed $500 billion by 2020, up from just $50 billion in 2016. Even Credit Suisse predicts that the figure will reach $1 trillion within five years.

The entry of companies such as Google, WhatsApp and Amazon, which do not have a payments DNA, has led to major challenges for existing players in the $200bn industry.

These companies already have a huge user base. After Peer-to-Peer transfers and bill payments, Google Pay is reportedly trying to enter offline retail shops.

Key players have also invested significant money and time to ensure compliance. For example, in 2017, the Reserve Bank of India required all wallet users to complete full KYC (Know Your Customer) verification.

"It's a major expense for wallet companies," Ram Rastogi, a Mumbai-based digital payments strategist who is a consultant with the World Bank's Consultative Group on Aid to the Poor (CGAP) and who led a real-time payments company, told ZhiXiang Wang.

Rastogi pointed out that Paytm had around 220 million wallet users after currency demonetisation. "However, it ran into major difficulties when the Supreme Court ruled in September 2018 that private companies cannot use Aadhaar (a biometric authentication system) for e-verification."

Rastogi said the hurdle has slowed the growth of payment companies.

In April 2016, the National Payments Corporation of India (NPCI) launched UPI, a payment system that allows people to transfer money or make digital payments. Six months later, high denomination notes of Rs 1,000 and Rs 500 were demonetised, leading to a surge in the number of users and transactions for the payments company.

A month later, NPCI launched its own UPI-based payment app, BHIM, which allowed users to make direct payments, making third-party wallet services redundant. It took some time for payments companies to realise that the government and banks were competing with them.

Inevitably, fintechs are forced to partner with banks and integrate UPI.

Two years later, UPI still dominates. It has become the underlying technology for payment platforms and bank transfers. The dominance of third-party payment platforms is rapidly being eroded by the inability to transfer money directly between different payment platforms.

Between April 2018 and February 2019, UPI transactions reached Rs. 7,453,820 crore (approximately $108 billion) thanks to strong government promotions and third-party payment platforms pushing UPI transactions to attract and retain users.

Needless to say, the surge in UPI transactions came at the expense of their original wallet service.

Rastogi said that about 92 million Indian users are using mobile payments, "a user base that all payment services are competing for."

He added: "Payment companies need to spend Rs 1,600 (about Rs 160) to attract a new user. If the same customer is shared by 20 platforms, you have no business. So, you have to offer a unique value proposition."

Grant Thornton's partner Harish HV believes that Indian users are often reluctant to switch services they have used for a long time, which has helped the company retain subscribers.

"Through marketing and branding, Paytm and other wallet services have built a large base of users who trust these services for secure local transactions," Harish told ZhiXiang Wang. "Now, instead of saying UPI and BHIM are my competitors, but rather say, if you want wallet services, we have them; if you want UPI, we have them."

Taneja of GrowX Ventures says that a pure wallet model is not viable because "payments will essentially become a commodity and there is no difference between them because the technology behind all the products is the same."

In addition, companies such as Amazon, Google Pay, WhatsApp, Truecaller and Xiaomi have launched UPI-based payment platforms, creating a complete ecosystem.

Pure wallet services companies have begun to partner with third parties to offer services such as taxi hailing, hotel booking and food delivery. PhonePe, for example, claims to integrate around 30 similar mini-programmes on its platform, including OYO, MakeMyTrip, GoIbibo, RedBus and Grofers.

Flipkart's PhonePe has been aggressively trying to bring offline merchants onto its platform. The company currently has 2 million retailers in 60-70 cities and plans to double the size of its service in the next three to four months.

Hemant Gala, Head of Payments, Banking and Financial Services at PhonePe, says they have met over 1,000 merchants in the last two years. "Some merchants don't want to use digital payments; they are very happy with cash so they want to know how to attract more customers. We help shops attract customers by enabling users to search for nearby shops in our app," he told ZhiXiang Wang.

"We have a lot of individual-to-merchant payments on UPI. We noticed this and abandoned our previous strategy of using generous cash rebates to incentivise individual transfers," said Gala. "Now, we're focusing on the merchant ecosystem because as more and more merchants start using PhonePe, customers will soon follow."

Payments companies are also introducing more services to attract customers, including loans, gold trading, mutual funds and insurance.

"To capitalise on their large user base, wallet companies are diversifying their offerings," Harish said. "They're moving into financial services and e-commerce, rather than trying to remain pure payment players in case another wave of regulation makes it difficult for them to gain a foothold."

For instance, Paytm's financial services arm, Paytm Money, received Rs 280 crore (about Rs 28 million) from its parent company One97 Communications a year after its inception. In October last year, Mobikwik acquired its first mutual fund house, Clearfunds.

Even Google Pay plans to get into the lending business.Truecaller has acquired payments company Chillr and is testing it in the wealth management space.

Late last year, PhonePe also set up a subsidiary to provide wealth management services.Gala said PhonePe is slowly growing.

"Our strategy is to grow in phases. We've built up usage scenarios within payments and apps and over the next 12 months we'll be rolling out our financial services. We will not be offering all users