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.
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.
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.
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.
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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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!
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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