Despite all the efforts of central government to create a cashless economy, India still remains a predominantly cash economy. However, one of the major industries that has been able to somewhat erode the hold of the cash-based economy is the digital wallets sector.
The fast innovating industry consists of numerous startups such as Paytm, Mobikwik, and Oxigen Services, etc. It has played a major role in moving the Indian economy, slowly but surely, towards digitization. It has been attracting customers with discounts and cashbacks, providing proper and complete guidance to customers, and taking all necessary steps to make customers shift from cash transactions to digital transactions.
February 28, 2018 was the deadline for the digital wallets sector to meet the RBI (Reserve Bank of India) requirements of gathering all its customers’ information. The INR 12,000 crores industry was unable to meet the deadline and is now stuck in a really bad situation. The inability of the digital wallet companies to meet the deadline in effect means that all the customers who have not provided their full KYC (know your customer) information, as required under the new norms laid down by the RBI, will be unable to keep using their respective digital wallets. The unverified customers can however use the amount of money that was present in their wallets till Feb 28.
The process of gathering all the details of customers, which includes the biometric information, can be a rather tedious process. As of March 2018, digital wallet companies have managed to collect the complete KYC data of not more than 10 percent of their client base. This means that nearly 90 percent of the total customers in the digital wallets industry were wiped out (unable to use their digital wallets) after the Feb 28 deadline.
The world of finance and banking is strictly regulated by agencies and other watchdogs. In such a world, mobile wallets were a welcome relief for both providers and customers. Digital wallet companies were the country’s first category of players belonging to the financial technology sector and they caused significant disruption to the banking sector in several different ways. In fact, several young adult customers in India had their initiation into formal banking via use of a mobile digital wallet.
The best benefit of PPIs/prepaid payments instruments or digital wallets was that they offered simple and convenient onboarding. A user/customer just had to download a mobile wallet app, confirm and validate the mobile number, use a credit or debit card to link a bank account, and then start their transactions. The process could not have been any easier! Now, customers are required to link their Aadhaar information to their digital wallets, provide photo ID evidence, and submit KYC biometric information; all of these make the procedure just like the cumbersome process of opening an account in a bank.
It is however important to remember that providing complete KYC details and submission of other proof were made mandatory by the RBI to decrease fraudulent transactions in the digital wallet system and ultimately usher in interoperability between different digital wallets.
Presented below is detailed information about the beginnings of the mobile wallet industry and the future of the industry post Feb 28.
The initial period
The process of transferring money underwent a sea change after the introduction of IMPS or the Immediate Payment Service by the NPCI/National Payments Corporation of India. Payment firms such as EbixCash (formerly ItzCash) and Oxigen started using IMPS for money transfers while banks continued to use NEFT/National Electronic Fund Transfer for transferring funds. The payment companies created a use case program for the domestic business of remittances and it permitted migrant people working overseas to transfer money to their Indian bank accounts in an instant without the need for the workers to queue up at their respective bank branches.
Oxigen carried out its first transaction (using IMPS) between a bank account and a wallet via direct connection with NPCI. This was in the month of May, 2013. Subsequently, the company also launched ticket booking for airlines via SMS with Air Deccan being the airline partner. Mobile phone recharging and booking of train tickets were some other key use cases of payment companies.
ItzCash had begun their first digital payment transaction system for the famous Siddhi Vinayak temple located in Mumbai. Their use case allowed worshippers to donate small sums such as INR 11, 21, or 51 and receive a receipt for the payment.
Digital payments may have started out as a simple way to remit money and carry out transactions of small value. It however slowly turned into an option of digital payments for e-commerce shopping. Mobile wallet firms such as Freecharge, Citrus, Mobikwik, and Paytm soon entered this booming industry.
Digital wallets and demonetization
In November 2016, the central government decided to demonetize notes of INR 500 and INR 1000, i.e., these notes could no longer be used as legal tender for transactions. Demonetization was used as a tool by the government to remove these high-value currency notes from circulating in the cash economy of India. Demonetization was a defining moment for the digital payments sector.
Subsequently, there was rise of more than 690 percent in the overall traffic on Paytm. Also, there was a growth of more than 990 percent in the total sum of money that was added to accounts in Paytm, within a few days of the announcement of demonetization. Other companies in the digital wallets industry also experienced nearly the same kind of growth.
However, as per information released by the RBI, only a minor percentage of all transactions conducted with digital wallets, was used for the purpose of purchasing goods and services. The effect of demonetization was at its peak in January 2017 and the overall number of transactions via digital wallet during this period was reportedly about 295.5 million. Despite such a significant rise in digital wallet transactions, the percentage of transactions used for purposes of buying goods and services remained at just about 29 percent, at around 86.8 million transactions.
The effect of UPI
Increased convenience of transactions for consumers was one of the big plus points of digital wallets. It however also caused disruption in the payments business which the banking sector dominated.
The disruptive effect of digital wallets was met with a rapid and effective response by the banks; they quickly launched their own mobile wallets. SBI came up with SBI Buddy, HDFC Bank launched PayZapp, and ICICI Bank offered ICICI Pockets digital wallet. The greatest advancement to the payments business of banks however came via the UPI or Unified Payments Interface developed by the NPCI. UPI permitted real time money transfer from one bank to another via mobile phones.
The new interoperable immediate settlement system called UPI did not include digital wallets. This was a big boost for all banks. Subsequently, with help from the advanced technology systems provided by global tech conglomerates such as Google and Facebook’s WhatsApp, the banks slowly began reclaiming the payments business territory that had lost to the digital wallet companies for a brief period.
One year after the note ban, in November 2017, the total transactions carried out using UPI jumped from around 76 million in October 2017 to more than 104.9 million. This was the first time that UPI payments transactions overtook the transactions done via digital wallets, which in November 2017, was trailing at about 92.8 million transactions just for goods and services. The newly gained domination of the banks in digital payments was further extended in December 2017, which saw a rise to more than 144.8 million UPI transactions as opposed to the 98.9 million digital wallet transactions.
The effect of KYC on digital wallets
The Reserve Bank of India changed the PPI guidelines laid down by it and made it compulsory for all digital wallet customers to provide full KYC details by February 28, 2018, so as to be able to continue using the services of their digital wallets. This revision in the rules turned out to be a deathblow to the digital wallets industry. It demolished the use case program of minimal KYC for instruments of digital payments. Customers who had used the wallets for making small-value transactions were not too keen to provide full KYC details, which consequently resulted in a drop of 80 to 90 percent of the user base in the industry.
Currently, there are several banks that are providing accounts with zero balance and full KYC. This brings digital wallets in direct competition with the banks. Several digital wallet companies are not too happy with the KYC-requirement changes and the current industry scenario.
Certain companies like Atom and PayMate have given up their licenses for digital wallet operations and have cited altered business models for being the cause of their decision.
The future of digital wallets
The mobile wallets sector is currently fighting to survive and overcome its hardest phase. The industry has always asked the correct questions and generated its own solutions. The providers of digital wallets have resolved to remain strong and firm and continue fighting, with the hope that they will ultimately win the battle against use of cash for transactions.
There are many digital wallet companies which have begun planning different paths for their businesses. EbixCash has forayed into sectors like inward international remittance, insurance, and other business areas. The Mobile Wallet, which is a pure-play mobile wallet company, is making efforts to diversify into the UPI network via its purchase of Trupay.
It is believed by many digital wallet providers that the new norms will cause pain to the industry only for the short term and that it is possible to overcome the altered business models. The loss of business volume can be recovered via volume gains that can be made through the facility of interoperability.
The effect of the KYC mandate on the digital wallet industry is most likely to be limited. Over the long term, the mandate will prove to be advantageous as PPIs will have the opportunity to behave like banking systems with complete KYC consumers as well as interoperability between cards and banks.
The digital wallet industry has been left for dead several times in the past. The UPI, banks, the regulator, and global technology companies have written it off multiple times in the past. It has however survived all crises in the past and it is believed that the industry will survive the current crisis as well.
Major digital wallet companies in India
Provided below is a list of the better known digital wallet companies in India:
- Paytm: It has converted into a payments bank and made the mobile wallet into a subsidiary inside the system of payments bank. It has also forayed into other activities like banking, e-commerce, and investments. It is estimated that Paytm will continue to lose a considerable share of the user base for its mobile wallet services.
- Mobikwik: It is one of the main digital wallet companies in India that has continued to be just that, a digital wallet provider. Since it has a pure-play wallet platform, it is estimated that Mobikwik will experience the most pain due to the RBI rule changes. The company is looking towards diversifying into corporate payments, employee benefits, and the payment gateway sector.
- ItzCash: It was acquired by Ebix, a company headquartered in the US, for $123 million. Now called EbixCash, the new company has forayed into inward international remittance, corporate payments, insurance, and other areas. It is estimated that the domestic remittance section of the company will bear the brunt of the changes. The company has plans to open as a financial exchange in India.
- Freecharge: It was a very well known company with a big customer base. Now, it is virtually non-existent. In 2015, the company was sold by its founders to Snapdeal for $400 million. Snapdeal could not add any value to it and subsequently sold it to Axis Bank for over INR 380 crores. Freecharge is now a distinct entity of the bank.
- Amazon Pay: The best use case of Amazon Pay was its ability to pass refunds for returned items into the mobile wallet. Now, it will be severely hit as customers with no full KYC will have to undergo inept, laborious, and time consuming processes for getting refunds.
- Citrus: Headquartered out of Mumbai, this digital wallet provider was once a major player in the industry. It failed to get a payments bank license. In 2016, it was acquired by PayU backed Naspers for $130 million. The company has given up its mobile wallet license and is looking to get into the merchant aggregation and payment gateway businesses.