Current State of Digital wallets in India

This article is a follow up to my previous blogs and revisit the impact of demonetization on small businesses and common man.

It has been 18 months since demonetization and surprisingly, at the street level, India still remains a predominantly cash economy. Only the major industries have moved towards a complete digital economy for a vast majority of their transactions. 

Indian digital wallet companies mainly consists of numerous startups such as Paytm, Mobikwik, and Oxigen Services, etc. These startups along with Airtel and Jio, the two major telecom service providers have played a major role in moving the Indian economy towards digitization and the industry has crossed Rs 12,000 crores of transactions per year in 2017!

While this is a significant number, year 2018 does not seem to be a smooth sailing and I suspect year 2018 will turn out to be a very tough year for digital wallets. 

What Changed?

RBI (Reserve Bank of India) imposed one major guideline for Digital wallet services to fulfill their KYC (know your customer) information & February 28, 2018 was the deadline.

This directive unnerved India's unorganized sector and refused to cooperate and many users were willing to move away from Digital wallets back to cash based transactions. As of march 2018, only 10% of the total customers in the digital wallets industry had submitted their KYC information (which was to link their Aadhar card with the account - by providing biometric information).

This implies that nearly 90% of existing customers were willing to walk away from digital wallets!

A 90% loss in customer base can kill the industry.

But on the ground, things are really not that bad. Though 90% of customers walked away, the total volume of transactions fell by 21.3% and the total value of transactions fell by 16.7% only.

This implies that there is a strong silver lining to the dark clouds and digital wallets companies can continue to grow only if they innovate and develop newer services.

Opportunity Ahead

As per information released by the RBI, 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 and only a minor percentage of all transactions conducted with digital wallets, was used for the purpose of purchasing goods and services.

Digital wallets has now become the first step in formal banking for a whole new generation of customers. For Several young adults, a digital wallet is their first bank account!

It is the nature of this India customer base, which results in such a high skew of the results: 90% drop in customer base results in only 16.7% drop in transaction value. This implies that most customers had very little transactions.

Small & kirana business have returned to cash

Small & kirana business, especially those in small towns and rural areas adapted digital wallets in the initial days on demonetization and now have returned to cash - mainly because of high transaction costs. PayTm charges 3% transaction fees to transfer funds from PayTm account to a regular bank account. 

Majority of small & kirana businesses do less than Rs 2000 of sales per day, and paying 3% transaction fees was unacceptable for small businesses!

eCommerce accounts for a tiny fraction of retail sales

eCommerce accounts for just 2-4% of Indian retail, and only 8% of Indian retail sales happens through organized retailers (such as Big Bazaar, Reliance Retails etc). 

This means that nearly 90% of retail sales is still happening over cash and there is a good opportunity for Indian Digital wallets to win them over - only if the transaction fees are eliminated.

Impact of UPI

UPI or Unified Payments Interface developed by the NPCI. 

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 - all powered by UPI. 

UPI permitted real time money transfer from one bank to another via mobile phones.

This new payment interface was not available in Digital wallets and that has hindered Indian digital wallets.

Future for Indian Digital Wallets

Year 2018 will be marked as the year of "crossing the chasm" for most digital wallet providers. Companies that can innovate and offer lower cost services (when compared to traditional banks), will ultimately win the battle against use of cash for transactions.

Indian Digital wallet providers must provide an alternate banking model that is affordable, transparent & help customers from financial standpoint.

In Indian context, Indian Digital wallet providers may also have to enable independent agents to work/operate as a human interface with whom customers can talk/call/interact when they have problems. A pure 100% online bank cannot win small business owners - many of them are not fully literate or knowledgeable in digital banking terms/technology.

Use of local agent also helps in onboarding new customers, getting their KYC details and initiating new customers into the world of digital banking.

Indian Digital wallet providers have to innovate beyond payment banks and offer a whole suite of banking services - either directly or via partnering with existing banks, while keeping a sharp focus on winning Indian small businesses and kirana stores. For example offer Peer-to-peer lending services (like Monex), offer investments services: Mutual Funds, Debt funds and government investment schemes etc.

Indian Digital wallet providers have to create a completely branchless experiences. Digital wallet companies need to move beyond mobiles and embrace web banking services and offer value added services - such as international money transfers: Global money remittances, insurance, GST filing, tax planning, etc.

Lastly, Indian Digital wallet providers have to embrace cash! Customers should be able to convert their money in digital wallets into cash without transaction fees.  Though this sounds counter intuitive, there are customers who need cash for their daily living - for example: to buy a bus ticket in DTC or BMTC busses, To pay traffic fines, To pay for postal stamps, etc. There are thousands of areas where government agencies do not accept anything but cash.

Closing Thoughts 

From a business perspective, Indian mobile wallets sector is currently fighting to survive and overcome its hardest phase. The industry has to innovate and continue fighting

I believe that the effect of the KYC mandate on the digital wallet industry is limited. Over the long term, the mandate will prove to be advantageous and enable them to be more competitive with the current banking systems. New innovations will solve the problems of interoperability between different payment banks, debit/credit cards and banks.

Digital wallet industry will emerge from this crisis stronger and better. 


Read more at:

https://economictimes.indiatimes.com/articleshow/62229424.cms?
https://inc42.com/buzz/mobile-wallets-drop-users-full-kyc-rbi/
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Effect of Demonetization - Indian Digital Wallets will see a surge in Usage

Indian Payments companies like Paytm, Freecharge and Mobikwik will see a huge urge in number of transactions in the comming days - as the government bans the use of Rs 500 & Rs 1000 currency notes.

People in cities - mainly metro cities & tier-1 & 2 cities will be forced to use digital wallets to pay for low value transactions. With the bank ATM shut down for today - November 9th and with limited withdrawals till November 18th (limited to Rs 2000/-), I see a huge opportunity for digital wallets.

Today, I saw many Auto drivers accepting PayTM or Freecharge for payments. At lunch hour, I walked by a roadside push cart fruit vendor accepting PayTM!

Digital wallet companies will see 10 to 15 times increase in transactions in this month alone.

Indian Prime Minister Narendra Modi's fight against corruption and black money will be aided by Digital Wallets - aka "Digital India" another major initiative of PM Narendra Modi.

As on November 1st, Digital wallet companies processed 2-3 million transactions/day, but by November 10th, this number will be around 30-40 million!

This could be a game changing moment for digital payment companies! 

How the ban on Rs 500 and Rs 1000 notes will affect the common man

November 8th 2016  will go down in Indian history as a red letter day. It marks the day, Indian economy moved from Black economy to white.

In what will be known as a ground breaking, historical move, On November 8th,  Prime Minister Narendra Modi  announced the demonetization of Rs 500 and Rs 1000 currency notes.

So what does this mean for the common man?

India had been a cash based economy. Nearly 14 Lakh Crore Rupees is in currency notes - about $220 billion worth, is held in cash notes of Rs 500 & Rs 1000. This implies that the impact to Indian economy will be huge - very huge.

Impact on Common Man

Day-1-10: Near panic in local markets. Number of transactions drop by more than 50%. Today on November 9th, almost all businesses have reported more than 50% drop in transactions. I chatted with a Uber driver and a small coffee shop owner. Both reported the same. Uber driver was willing to give me 10% discount for cash payment in Rs 100 notes vs PayTM!

Common people in cities will rush towards digital payments like PayTM.

Immediate impact: Deep Deflation. The amount of money in circulation will drop dramatically while supply of goods will remain stable - hence prices of goods will drop.

Gold prices, stock prices, commodity prices will drop. People will congratulate government for making this bold move. BJP will win elections in UP and Punjab.

Day-10-50: People who have legally earned cash, will start depositing it in bank. This will help improve bank's Cash Reserve Ratios and increase bank deposits. This will lead to more lending. Increase lending activity will make it easier for legal businesses to raise capital and economy will grow.

People who have earned their money illegally, such as bribes, smuggling, Narcotics etc. will have a big problem on their hands. These people will be afraid to deposit it in a bank.  Some of them will find ways to deposit this money into a bank, and will declare it as income and pay taxes on it.

Many of these guys - who had easy money flowing will continue to stay out of legal system and will count on their luck or bad luck and sit on their stash of Rs.500 and Rs.1000 notes. This money will be effectively taken out of circulation and that aids deflation.

Day 50-200: Deflation will ease out, and inflation will return. Inflation will happen slowly because lending activities will not happen overnight and will take time. Lending will broaden money supply, creating demand for raw materials and capital goods. This leads to a steady growth of Indian economy.

Real Estate prices will crash. Builders & developers who were eager to sell for cash can no longer sell. They will be forced to lower the price by 10-20%. Already by 1 PM on November 9th, Share prices of DLF is down 21%!

Real estate developers will have to wait for demand from white economy to pick up. Once the economy picks up and with easy availability of bank loans, real estate prices will come back to pre Nov. 8th levels, and by end of 2017, the robust demand will ensure real estate prices to go up.

Real estate developers will be forced to go with legal transactions and play in white economy.

Big Losers

The biggest losers in this are corrupt government officials & Politicians who are sitting on tonnes of cash. They cannot convert the older de-monitized notes to newer ones to avoid risk of tax investigations, and will be willing to lose their illegal money.

Real Estate businessmen, who cannot convert all their hordes of cash will also be hurt by low demand.

Other illegal business owners: Money lenders, hawala finance transactions. These people will find it difficult to conduct their business in the new system. Particularly when government can track newer Rs 2000 currency notes via RF chips.

Closing Thoughts

This is just my opinion based on my knowledge of economy. I may be wrong in some aspects, but overall I am sure Indian economy will go through a cycle of deflation, followed by robust growth and the some creeping inflation.

Let's wait and see how things pan out!