Online payments: wallet to credit

In 2009, the RBI issued licences for non-banking entities to issue Prepaid Payment Instruments (PPI).

Over the next three years, a number of companies applied and got three different variants of these — cards that can only be used at their own premises (closed system); cards that can be used for a clearly identified set of merchants (semi-closed) to cards that can be used at any merchant but not for cash withdrawal (semi-open); and the last category of open system was reserved for banks using Visa and Mastercard.

In 2012, smartphones and venture capitalists entered the scene. The semi-closed system license was used by three large players — PayTM, Mobikwik and FreeCharge — to facilitate phone recharge and quickly expand into paying for all kinds of things.

Smartphone users found it very convenient to pay using wallet. Of course, loading the wallet balance from one’s bank account or credit card remained clunky, but users had a reason to do it because of the freebies and discounts they got.

The next year, Uber launched in India and Vijay Shekhar Sharma of Paytm closed a legendary deal that sealed the fate of his rivals and turbocharged adoption. Anyone wanting to ride an Uber got a PayTM account and found a reason to keep it loaded with money.

The word ‘fintech’ actually took on some meaning around this time. In 2016, demonetisation and the already stupendous growth of smartphones and ride-sharing, coupled with the notion of a cashless economy changed user behaviour remarkably. PayTM emerges as the leader.

Payment Gateways (PGs in industry slang) had been around since the first online transaction. Once dominated by industry giants like BillDesk & CC Avenue, significant new players like RazorPay, Citrus/PayU, JusPay, etc came in. All of them were designed to have online merchants accept credit, debit or net-banking transactions.

No thanks to the arcane regulation of two-factor authentication for all transactions (as opposed to say, just risky/high-value ones), the pain for customers had not really gone away despite the investment of hundreds of millions of dollars.

Enter UPI. In it, a completely tech-led but absolutely cool product innovation met demonetisation and greater government goals and changed everything. The need for loading a wallet and keeping a balance in it became passe. PhonePe and PayTM jumped on the UPI bandwagon, but Google and WhatsApp also entered the fray along with a number of banks, each with their own UPI solutions, while the government introduced the Bhim app.

By November 2018, in astonishing growth, UPI transactions had crossed even the debit card transactions in the country, accounting for 16% of overall transaction volumes!

Lending, the way to go

All payment gateways, wallets (only PayTM & PhonePe remain) sort of merge into one stream in their UPI offering. The future of cards seems wobbly. While Google and Facebook have other forms of monetisation, the question of how any of the payment players are ever going to make money is being asked. UPI has made transaction cost-free for now, and the margins on card transactions are tiny anyway.

The answer is lending. With more and more customers using UPI or otherwise transacting online but very few having any credit, this is the most obvious problem to solve. Not to mention, there is a lot more money to be made in credit than payments. PayU, PayTM, GooglePay, RazorPay, Mobikwik have all announced or launched some form of credit product, either on their own or in partnership with someone else.

The wallets players have a direct relationship with the customers and PGs have a direct relationship with the merchants. These are two critical building blocks in the credit infrastructure. But unlike payments where banks played a very minimal (or no) role, credit is the bread and butter of banks for two reasons.

Firstly, lending involves tapping into large pools of capital, larger than what even the largest venture capitalists can fund. For example, providing Rs 1 lakh per year of credit to one million customers will involve 1 billion dollars. And one Million is a drop in the bucket.

Secondly, the regulations for credit are far more stringent than what it is for wallets or payment gateways. However, these are solvable problems which is why credit will be the most exciting area in the years ahead.

Expect a combination of partnerships with banks, innovation from banks and large NBFCs like Bajaj Finance, flameouts by some of the wallet/PG players (who can’t find the revenue model), and lateral entrants like WhatsApp/Google to shake things up.

(The writer is co-founder & CEO MoneyTap)

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