Of late, businesses have gone all out to woo customers with cashbacks, discounts and personalised notes. But when some customers tried to pull a fast one on them, a few companies indicated that they wouldn’t take it lying down. Vijay Shekhar Sharma, founder and CEO of Paytm, the largest mobile wallet company in India, sent that message last week when he tweeted that Paytm would block users from using the wallet if they misused it.
Sharma was referring to credit card users, and he wanted to do no business with those who gamed the system.
There were about 27 million credit card users in 2016, according to the Reserve Bank of India (RBI) data. And these users make up nearly 35-40% of the mobile wallet user base. However, this large base of users is also somewhat of a sore point for mobile wallet companies. Because every time someone transfers money to a wallet, they pay a Merchant Discount Rate (MDR) to banks. MDR is pegged at 2% on credit cards and only 0.75% on debit cards. But wallet companies are willing to bear the MDR fees, in anticipation that the users will spend more money willingly.
So when users devise schemes to use mobile wallets other than their intended purpose, Paytm, or any other wallet provider, has no incentive to serve them. And Paytm made that amply clear in a blogpost dated 9 March 2017.
To quote from it:
“Paytm pays fee to card networks or banks whenever you use any payment instrument like any other online commerce company. Paytm pays a hefty charges when you use your credit card to card networks & issuing banks. If user simply adds money and takes to bank, we lose money. Our revenue model requires users to spend money within our network and we make money from the margins available to us on various products/services we offer.”
In a move that briefly exposed the company’s vulnerability, it said that it would pass on the MDR fee—which it was previously bearing—to the credit card user. It also added that it would reimburse the 2% charge as a voucher that had to be spent within the Paytm ecosystem.
The fact that Paytm decided to bring this up revealed two things:
- That it desperately needed to manage the unit economics and couldn’t afford to waive MDR just to retain all types of customers
- It was concerned about the number of credit card users misusing the payments platform, which predictably increased post-demonetisation
In a sense, many of these credit card woes for mobile wallet companies surged after November 2016.