The coming UPI battle in mobile payments

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It’s 9pm on a Wednesday and late evening shoppers are rushing through their midweek purchases before shops close in Chittaranjan Park, a south Delhi neighbourhood where you are likely to hear Bengali more than any other language. Fish seller Krishna Pada Roy is busy on a call with a regular customer.

Taslima Nasreen, the Bangladeshi author living in exile since 1994, is on the line asking of the fish available. She settles on fresh water fish and some prawns. The bill is close to Rs2,500. “Taslima didi pays once or twice in a month by cheque, but I accept all sorts of electronic payments from Paytm to Google Tez, and all kinds of credit and debit cards,” says Roy, who has been in the fish business for 32 years.

Roy was introduced to digital payments by his son, who joined his father’s business after doing his MBA. “It’s easy for many customers and sets me apart from others,” Roy continues in Bengali. “With time it’s important to change… cards, Paytm, Google are changing the way people transact. I don’t expect people to carry wads of currency notes anymore.”

Convenience is what digital payments are riding on. Not far from Roy’s fish shop is Suraj’s tea stall. A couple has just had two cups of tea. To pay, the man takes out a Rs500 note. Suraj frowns. “Change nahi hein (You don’t have change?),” he asks. When told no, the tea maker asks, “Paytm hein (Do you have Paytm)?” The man nods, takes out his mobile phone, and transfers Rs20 to Suraj’s Paytm account.

Paytm is India’s largest mobile payments platform, widely known for its mobile wallet and less so for its recently-launched payments bank. Suraj knows none of this. “How do I know? I just accept the money and the next morning I pay for milk using it,” he says in Hindi. He started using Paytm during demonetisation and used to clock 15-20 transactions a day. Today, the number is less and he asks for it only if customers don’t have change.

The demonetisation Suraj is referring to is the 8 November 2016 announcement by Prime Minister Narendra Modi withdrawing the legal status of Rs500 and Rs1,000 notes, invalidating 86% of the country’s currency in circulation by value then, forcing citizens to shift to non-cash modes of transactions including credit and debit cards, electronic banking and mobile wallets, among others.

All non-cash transactions (immediate payment service, electronic clearing service and national electronic funds transfer, credit and debit cards, usage at point-of-sale, all prepaid instruments, m-wallets and mobile banking) in December 2016 grew by 28% from the October figure— sharply higher than the 10% in the preceding months.

UPI: the new battleground

Suraj, the tea seller, is not literate. Both he and Roy don’t speak or understand English. Yet, the ease of mobile wallets has made them—over half of India’s population use mobile banking—loyal to payment interfaces. The uptake of mobile payments in the country has been so sharp that top policymakers such as Amitabh Kant, chief executive officer (CEO) of NITI Aayog, the top economic policymaking government body, has predicted that banks, as they are known today, will be irrelevant three years from now.

Yet, there’s a twist in the tale: mobile wallet transactions are slowing, UPI-supported payment platforms are fast emerging as the gold standard in mobile payments. UPI, short for the Unified Payments Interface, is a new payment system backed by the National Payments Corporation of India (NPCI) that obviates the need for a mobile wallet and directly connects to a bank account. In other words, any one among the 525-550 million bank accounts in India could easily get on board UPI.

India’s 1.3 billion people make it the only remaining country to offer a China-like expansion of its middle class. For every sceptic who says the Indian middle-class is an anaemic act yet, there are others from Mumbai University to OECD researchers who insist the numbers are for real.

This made UPI compelling for companies waiting to enter the mobile payments game—increasing, in turn, the competition in the space. So, today, Google has Tez in the market, Amazon has Amazon Pay, WhatsApp is expected to launch its payments platform soon, and there is a host of Indian players such as Paytm, Mobikwik, PhonePe (backed by Flipkart), among others in the space.

Between April and November last year, the volume of UPI transactions grew more than 14 times to 105.02 million. The sharp uptick came in September when Google Tez launched with attractive cash-backs and consumer incentives. “With large players in the payments space, there is a lot of competition. The smaller ones will either pivot and differentiate or they will be bought out or be out of the market,” says Neha Dharia, analyst with London-based consultancy Ovum. “One or two of the players will be strong. Paytm will continue to be there because it is already large.”

India’s 1.3 billion people make it the only remaining country to offer a China-like expansion of its middle class. For every sceptic who says the Indian middle-class is an anaemic act yet, there are others from Mumbai University to OECD researchers who insist the numbers are for real. Regardless, with 300 million smartphone users growing at a rapid pace, firms expect mobile payments to sky-rocket as digital transactions offer compelling unit economics to both financial intermediaries and consumers at large.

A strong start

“Last year this time, UPI had gone live. BHIM had just entered. All the banks had just come in,” says Sameer Nigam, co-founder of PhonePe. “We were very clear that UPI would make banking interoperable.” BHIM, short for Bharat Interface for Money, is an NPCI-owned wallet.

UPI is doing well for Paytm with three million payments being recorded on a single day this month. “We have access to a lot more money. Consumer space will move towards UPI… we are already looking at 40-45% of the UPI market share,” says Deepak Abbot, senior vice-president, growth markets, Paytm.

“UPI’s contribution to digital payments has increased to 5% (in the second quarter of 2017-18) versus 3% the previous quarter and 1% in 2016-17,” securities house Morgan Stanley wrote in its report Tracking Digital Payments; ~85% YoY Growth in F2Q18. On a monthly basis, that number has already climbed to 13.8% going by December data from the Reserve Bank of India (RBI).

For Google, too, building on UPI was evident. “There are 600 million bank accounts in India. There are only a couple of markets with that kind of numbers,” says Diana Layfield, vice-president, product management, Google. “The money is safe in your bank account and doesn’t need another storage mechanism.”

For WhatsApp, again based on UPI, the launch is already delayed by a few months. FactorDaily reported that it has already started trials among Facebook employees and will be soon starting its 1% beta.

Hike, a SoftBank Group-Bharti Enterprises joint venture company, claims to be doing 10 million transactions per month on the platform. “That’s because we launched late in July last here,” says Kavin Mittal, founder and CEO of Hike, a messaging platform. Right now the app is limited to peer-to-peer money transfers and recharges.

Hike has partnered with Airtel Payments Bank as its banking partner. Mittal, son of Bharti Airtel group chairman Sunil Mittal, says that Airtel Payments Bank will establish the merchant ecosystem and Hike will benefit from it because of UPI.

However, the bigger questions are: will wallets vanish once UPI becomes more mainstream? Will there be consolidation in the industry?

Will the wallet vanish?

A conversation with PayU, a payment gateway company with a wallet, helps. “Having a conversation on the future of mobile wallets is wasteful. Consumers don’t want to be told which mechanism to use while making a payment,” says Amrish Rau, CEO of PayU. “They just want it to be easy. They want money transfer to happen as fast as sending a message.”

Some believe that initially what was often referred to as the war of mobile wallets is over. In fact, for some, the wallet story is passe now. Trupay is dead, Freecharge has merged with Axis Bank, Mobikwik’s value is down from $327 million to $269 million. Many wallet companies, which got funded between 2014 and 2016, are slowly losing steam. Zeta has gone into a partnership, PayU is moving away from wallets, and Chillr has scaled down.

The battle of mobile payments has shifted to UPI. “As a consumer play, the wallet has gone. Wallets as a category are down about 40% in the last six months according to RBI numbers. The value proposition of wallets was convenience because earlier you had two-factor authentication. UPI has vaporized that for wallets and topped it by increasing the limit to Rs1 lakh per day which is 30 times in a month,” says PhonePe’s Nigam.

Still, there are some use cases that score over UPI like refunds from e-commerce companies, or issuing Sodexo for corporate entities, and cash-backs. Some companies such as Ola Cabs are using the wallet for other purposes as well. Ola is giving credit to its consumers, which can be collected later, just like a credit card. Rau predicts the average Indian will leapfrog credit cards and credit over mobile payments will be the thing of the future.

Amazon (Amazon has a UPI licence) wants to use Amazon Pay for more than just a wallet inside Amazon. Its long-term vision is to improve the payment experience and reduce friction with Amazon Pay. “We are now extending the availability in other online shopping categories as well such as recharges, food delivery, travel, movie tickets and home services. As part of the solution we provide the user with payment options of using their Amazon Pay balance or stored cards and net banking options,” Sriraman Jagannathan, vice-president at Amazon Payments, told FactorDaily in an interview in October.

Without UPI, the only way an electronic transaction could be made at a retail point of sale (POS) was by swiping a debit card. But in India, there are only about three million POS machines installed. UPI takes away the need to have a card machine.

Still, a Delhi store merchant’s experience shows how some shop owners like to stick with the tried and tested. “I went to Canara Bank to get a card machine, and they wanted a Rs1 lakh deposit. Finally, I got it from HDFC Bank,” says Basudev Chowdhary from the Greater Kailash locality in south Delhi.

Why an expensive POS machine? Because Chowdhary had a bad experience with Paytm in mid-2017 when he lost over Rs7,000 with no explanation. “If the money comes directly into my bank account, I will start accepting mobile payments,” he says, adding he hasn’t heard about UPI. Upon being told about it, he says he will try it.

Playing on strengths

Paytm’s Abbot says that mobile payments without a network effect are useless. “Having 100,000 shops or users doesn’t even make a dent in payments. It’s not a domain for niche players, it’s a large volume business,” he explains. He claims Paytm has six million merchants, 300 million registered users, 165 million active wallets, and clocks 10 to 11 million transactions a day.

Google, on the other hand, added 7.5 million users in the first month after its launch in September 2017. Abbot acknowledges Google has given a boost to the market. “Google Tez has educated people sending money from their bank accounts (using UPI),” he says.

Paytm, however, is not giving up. To start with, it is working towards popularizing QR (quick response) codes, which will allow users to scan a two-dimensional unique image and make the payment in a matter of seconds. The company has already installed five million QR boards with merchants and has already got two million on UPI. “Our scanner can scan any QR—BHIM, Tez, PhonePe…” Abbot says.

Google believes that building an ecosystem around payments is core, like it has done with its other products—search, video or maps. “It is important to allow a user to pay with whatever (instrument) and wherever he wants,” says Layfield. The company has started working with wallets, banks and card companies.

Diana Layfield, vice-president, product management, Google.

Diana Layfield, vice-president, product management, Google.

The internet giant is working on how to use geo-locations to make payments easier. “It will be like an entry into the map and that will be built over time for merchants, you will be able to see where the merchant is and if you can make mobile payments,” says Layfield.

Some of the other things that Google is working on is to take mobile payments beyond UPI. It will introduce Google pay cards, bring features linking debit and credit cards with Tez, and introduce tokenization. “We will be a neutral platform. Others have a bias towards one payment mechanism,” says Layfield.

PhonePe also wants to be a platform play. Nigam believes that payment companies will spend much of 2018 building intellectual property and digging deeper into data to embed intelligence in their platforms and for personalization. Any company can use PhonePe is Nigam’s pitch. For example, if a company wants to start subscription service, it can list on the PhonePe platform. “We make discovery easy for both parties,” says Nigam.

Discovery is a very big problem for Indian businesses. On the internet, about 70% of the marketing dollars are spent on Google and Facebook for discoverability. But, while they give installs, it doesn’t translate into transacting customers. Nigam wants to take a commission once the transaction happens. “That’s where all the matching and data comes into play,” he explains.

Amazon, on the other hand, is focussing on relationships with banks and the e-commerce company’s large user base. “We are now integrated directly with Citibank, ICICI Bank, State Bank of India enabling us to do away with third party processors (like BillDesk),” said Jagannathan.

HIke CEO Kavin Mittal. Photo: Sunny Sen/Factordaily

HIke CEO Kavin Mittal. Photo: Sunny Sen/Factordaily

Hike is betting on bringing payments into an offline mode with its Total app. CEO Mittal says Hike will launch taxi booking and movie ticket reservation, among other services, this quarter. “People are transacting, they are paying cash. The question we are asking is: have we made the experience simple enough… If we have, we are on to something big,” he says.

A contrarian view

WhatsApp, unlike anyone else, it betting on its large number of installs. According to App Annie, it ranks number one in active users—more than Facebook, Messenger and Instagram, which are all part of the Facebook family of apps.

In India, WhatsApp has more than 200 million active users: that’s two-third of all smartphone users in the nation. The firm wants to make payments as simple as sending a message. A person close to Facebook, owner of WhatsApp, said that there have been no glitches so far in in-house trials the company is running among selected employees. “But the real fun will begin when they go to the market, to merchants… Most of them use WhatsApp, that’s an advantage,” said the person.

“Payments need to move like messages and a messaging platform like WhatsApp will make a massive difference,” says Rau of PayU.

But PhonePe’s Nigam points to the example of WeChat. Tencent Holdings Ltd, the firm that owns WeChat, has 800 million daily active users for chat. All 800 million transact at least once a day. “The only path to payment was through the account section and not chat,” says Nigam. What he is saying without referring to WhatsApp by name is that there is very little flexibility a chat platform has with payments riding on chat.

The market will evolve to meet the needs of different types of customers, predicts Nigam. “Tencent’s WeChat has overtaken Alipay on P2P but Alipay is still the biggest in merchant payments,” he says.

The mobile payments ecosystem is just opening up, the real competition hasn’t yet begun. But there already have been some casualties; much more will happen in the next couple of years. “China is a $5 trillion mobile payments market, the US is at $150 billion, and India is scratching the surface with $5 billion,” Rau says. In 2018 that number will double, he predicts. The war of mobile payments is just beginning.livemint