Digital wallets are teetering on the brink of obsolescence.
I returned to India shortly before the advent of demonetisation in October 2016. Digital payments were all the rage, but nothing prepared me for the frenetic excitement that followed the government’s decision to wipe out 86% of cash in circulation the following month. Digital wallet startups hailed the prime minister’s move as the event of the century.
Overnight, newspaper advertisements, display ads, and retail signage mushroomed everywhere, shrilly announcing that operators like Paytm*, MobiKwik and FreeCharge were open for business. Everyone from grocery stores to paan shops loudly proclaimed they now accepted one or other digital wallet.
These startups—which mostly began their lives as mobile-phone recharge and bill-pay facilitators—were the first wave of the digital payments revolution that has rocked India over the past five years or so. They quickly won over consumers frustrated with the shoddy transaction processing infrastructure for payments offered by banks. As demonetisation spurred them to greater heights—and as they burned ever more money on cashbacks and discounts for consumers—the number of users and transactions soared.
But with the government building the Unified Payments Interface, or UPI, which once again revolutionised mobile payments with the ability to pay directly from a bank account, wallets have stagnated. (Punitive regulation hasn’t helped either.)
Today, wallets face an existential crisis—they spend hundreds of millions of dollars worth of venture capital on acquiring customers and earn next to nothing. Wallet transactions have been largely flat over the past six months, while UPI payments have shot up to more than eight times that of wallets, by value.
Basic payment economics are harsh—especially for person-to-person (P2P) and consumer-to-business (C2B) payments. You have a small window of time in which to convert the initial interest of the consumer into an ongoing, need-based utility that outlasts the value of a single transaction.
To the point that One 97 Communications Ltd, which runs Paytm, reported a net loss of nearly Rs 1,500 crore for the year ended 31 March 2018, on revenues of over Rs 3,200 crore. Wallet rival MobiKwik reported a net loss of Rs 203 crore on revenue of Rs 69 crore in the same period.
Regulations for their part, have played a big role in crippling this payment option. In October 2017 RBI thought wallets’ rapid rise was because it prioritised convenience over security so it mandated two-factor authentication—to finish a transaction much like debit cards. And worse, it said a physical verification of the customer should be done to comply with know-your-customer or KYC norms, just as with bank accounts.