How banking apps are giving tough time to digital wallets

E-wallet startups have been counting on more users to justify their high valuations, but it's good old-fashioned banks that are really gaining in the digital payments space. In the months after demonetisation, e-wallets rode a wave as customers short of cash download ed them to pay digitally for everything from mobile phone recharges to groceries. Digital wallet providers like Paytm, Mobikwik and PayU played to the gallery, making customers and investors believe they were raking in the moolah. The numbers tell a different story.

RBI data shows that the share of the eight standalone e-wallets in total wallet transactions fell to 31% in February 2017 from 42% in November 2016. Payments startups have been telling investors growth in volume will make up for loss in revenue even if RBI does not increase transaction rates. Again, RBI data tells another story: The digital wallet industry actually contracted by 30% to 221.63 million transactions in June from 320.87 million transactions in April 2017.

Tapping old advantages 

The real beneficiaries of the push to go cashless have been big banks. Banks have been quick to develop technology as well as acquire other startups -a prime example is Axis Bank's buyout of Freecharge -to capitalise on the inherent advantages their size and network of customers and infrastructure give them.The launch of UPI, BHIM and Bharat QR gave banks a boost, making their apps more convenient, faster and cheaper than wallets. Banks also kept the `cool quotient' in mind -their apps let you play PokemonGo-like AR games to hunt for dining offers, discounts and cashbacks. India's digital transformation is definitely taking place -1,813 million transactions worth Rs 2,07,552 billion were done digitally in June 2017, but this is spurred by debit cards, NEFT, IMPS and RTGS. Not necessarily wallets, which at Rs 53 billion form less than 0.02% of India's Rs 207 trillion digital bandwagon.

In terms of value of transactions too, wallets are trailing.Marketshare dipped to 27.5% (Rs 19 billion of total transactions of Rs 69.1 billion) in February from a high of 39% during demonetisation in November 2016 (Rs 13 billion of Rs 33 billion transactions).

Another aspect weighing down e-wallets is RBI regulation post-demonetisation. The government has lowered merchant discount rates to make them affordable for customers -and expensive for banks and e-wallets. "Banks can absorb this loss as digital is one of many verticals. For wallets, whose bread and butter is digital transactions, this will be a heavy load," says Deepak Sharma, chief digital officer, Kotak Mahindra Bank.

Benefits with banks

"The margins were 0.75-1%. This is now 0.25% to 0.65%, and rates are likely to remain steady as the government tries to promote digital transactions," says Damodharan Sampathkumar of Renovite Technologies.

With the government introducing UPI, BHIM and Bharat QR and banks offering mobile banking innovations, experts say they do not see a need for standalone wallets. "There is not much differentiation in terms of ease of transaction or convenience offered by wallets," says Sharma."Banks have come a long way and offer a frictionless experience with more benefits," he says.

Experts point out that banks have a ready customer base for their mobile apps, while wallets are still in acquisition mode.Banks offer a range of financial services, including credit cards, loans, fixed deposits, insurance and MFs. Wallets only offer a solution for making payments.

Freecharge founder Kunal Shah doesn't see payments as a long-term business plan. "Payments alone may not be a sustainable business model, and will need to piggyback on financial services to be more viable." Digital wallets are hampered by the fact that regulation does not permit interoperability between wallets. Government payment methods such as UPI, Bharat QR and Aadhaar Pay are all interoperable systems.

Diversifying business 

Payments companies are diversifying to make up lost ground. Paytm has transformed into a small finance bank like Airtel Payments, and has started selling gold. Mobikwik has decided to enter lending and insurance.

"When we got into gold on the retail front, it was to provide a more comprehensive wealth management product," says Vijay Shekhar Sharma, CEO, Paytm. "We always wanted to be a diversified payments company .For us, payments was just the starting point," he says.

Payments company Mobikwik is also diversifying. "For us, it was a natural step to grow beyond payments, and expand into loans, insurance and other services. We recently partnered with Bajaj Finserv and will become a debit plus credit wallet, where people can have credit lines, credit cards and EMI cards mapped through the app," says Upasana Taku, cofounder, Mobikwik.

An investor who recently exited a wallet startup says, "Time is running out for e-wallets. And they know it. There can only be one Flipkart and one Paytm that everyone will be willing to pump money into. For the others, it is close shop or sell out. The road to profitability isn't in payments.The banks know it best."