It’s been a year since the introduction of demonetization in India. A decision that took everyone by surprise. Once it became effective, almost 86% of the value of currency in circulation was no longer legal tender. The non-availability of cash was an issue for many. But one consequence was that it helped catalyze digital payments adoption. There was a huge jump in mobile wallet usage immediately after the announcement. And after the dust had settled, further follow-up initiatives from the government, like the introduction of the Bharat Interface for Money (BHIM) – a mobile app developed by National Payments Corporation of India, promotions from mobile wallet players, and new initiatives from tech giants, were responsible for maintaining the steady flow in digital payments.

Payments using mobile wallets almost doubled in the one-year post demonetization, clocking $1 billion per month in 2017. They contributed 8.3% (1.6 billion) of the overall volume and 0.02% (US$7 billion) of the overall value within the Indian digital financial system in 2016. We expect m-wallets to surpass 3.1 billion transactions worth more than US$13.0 billion in 2017.

Mobile is becoming the main Digital Payment Platform

Credit and debit card usage for digital payments has been limited due to the lack of available infrastructure in non-urban areas. Customers in metros and urban areas are saturated by multiple credit/debit cards and digital wallets. However, there is a huge untapped market in semi urban and rural India. With the increase in smartphone penetration as well mobile broadband connectivity, India will largely skip the use of credit and debit cards and move instead to an environment where mobile payments become the largest form of non-cash payments. This process will be quicker compared to other countries like China, mainly because of the following factors:

Digital India Initiatives:

The Digital India Program by the Government of India and other awareness programs, will help to build confidence among rural consumers. With growing awareness and an additional push from the Government, we expect the Unified Payments Interface (UPI) will take another two years to become the main digital payment platform in rural India, with an estimated share of around a half of all digital payments.

Increase of 4G data network availability

After the launch of Reliance Jio in March 2016, the usage of internet has increased manifold. Free data offers during the initial launch period as well as follow-up offering of 4G data at very low costs, further pushed the adoption of digital transactions through mobile phones.

4G Population Coverage

Source: GSMA Intelligence

Aggressive mobile wallet strategy

Paytm is leading the mobile wallet race with a reported user base of 250 million. Paytm had an initial investment from Alibaba Group. It also obtained recent backing from SoftBank, bolstering it further. Paytm enjoyed the first mover advantage with an aggressive push, marketing discounts and cashback strategies. Mobikwik ranks second among the top mobile wallets in India, with 65 million users and 3 million daily transactions.

The efforts of the top two players are largely concentrated in the top eight cities. Other players like Oxygen are focused on remittances, while players like Ezetap are concentrating on last mile payment solutions for ecommerce.

Comparison of Top Wallet Players

m-Wallet Strategy: Wallet Players playing to their core advantage

Currently, most users have multiple wallets to take advantage of the discounts and cashback offered by different players. This was a short-term strategy, we believe players with better user experience and maximum touchpoints will prevail. The difficult task will be to penetrate rural areas, where customers have limited knowledge and are not in the habit of using digital payment services.

Wallet players are working on two different short-term strategies:

• Wallet with payment bank license: Players like Paytm, Airtel Money, Idea Money are moving toward providing remittances and financial services in rural areas by bridging the infrastructure gap.
• Wallet without payment bank license: Players like Mobikwik have partnered with companies from financial service sector to work as technology facilitators and catalyze mobile payment and digitization of their existing service offerings.

Building a good partner ecosystem will be key for both strategies. With limited differentiation, wallet players with regular use cases and large ecosystems will survive in the long run. Mobile wallets are becoming one of the main drivers of digital payments in India.

Bottlenecks: Why India is difficult to conquer?

• We have seen wallet players succeed in P2P money transfer as well as merchant payment in China by developing platform ecosystems and seamless online to offline (O2O) integrated networks. Recently, Kakao talk succeeded with mobile banking in South Korea, due to its “hassle-free” user onboarding and one touch services. However, replicating any model in India is a difficult task, mainly due to cultural and language diversity as well as low penetration of mobile broadband services. However, smartphone penetration is rapidly changing after 4G services launched.
• Reaching consumers in semi-urban and rural areas is a tough task for any player. It takes investment as well as a service support system to create a loyal customer base. It will be an uphill task for players like Paytm with a payment bank license to create offerings in sync with the needs of rural customers. Without the option to lend money, they need to make ease-of-use a key selling point by bridging the physical infrastructure gap. Mobikwik can work as a technology enabler for partner banks with an existing user base. Mobikwik however, will have limited flexibility to modify existing offerings from its partner banks.
• The psychological barrier. There is a misconception that digital transactions are costlier than cash. People usually don’t attribute a high value to their time, thus spending time on depositing currency in a bank is considered as a low cost/cost-free activity. Changing behavior requires continuous awareness and habit building.

Going Forward:

• Mobile wallets are expected to see further penetration in rural India using methods like QR code and mobile number payments.
• Going forward competition will be even tougher, with WhatsApp set to enter the fray by offering person-to-person payments through its messaging app.
• Also, adoption of Google’s Tez app might also play a significant role as Android operating system completely dominates the Indian smartphone market.
• In case of existing wallets, we can expect them to diversify their service portfolio and evolve as into e-commerce, booking (travel and leisure), and/or financial services platform.
• With the development of infrastructure and access to banking and spending behavior histories, machine learning and artificial intelligence (AI) driven personalized banking service offerings will evolve. Players like Google and Facebook will be in a very competitive position with their existing cloud platforms as well as expertise in developing data driven services.
• We believe there will be many small players who survive in the long run, with specific specialized service offerings in different regional areas. While two to three big players will dominate most of transactions, backed by huge investment and platform support.