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Cashing in on cashless transactions: The threats to m-wallets

After digital wallets, mobile wallets and UPI interface are the newest additions to nation-wide cashless movement.

By Priya Kumari

While the buzzing of “Paytm Karo” in the corridors of street shops and large vendors alike, post demonetisation, is a welcome step for financial inclusion, questions are being raised on the future of mobile wallets with the entry of new players in this segment.

Firstly, how have the mobile wallets been making money?

Mobile wallet companies integrate the customer’s wallet with the e-payment enabled online sellers. They retain 1-3% of transaction value as their revenue. As expected, this channel offers wafer-thin margins. However, post demonetisation, Paytm has recorded 5 million daily transactions with a total business of over Rs 100 crore.

Another revenue source is the settlement time for the payments. There is a time lag between the customer paying the wallet and the wallet provider paying the vendor. This allows the wallet provider to earn interest on the deposits lying idle in the meanwhile.

Mobile wallets are digital wallets on mobile handset.

Mobile wallets are just digital wallets on mobile handset. | Photo courtesy: Shutterstock

Advent of m-commerce

Established players like Paytm have diversified to offer m-commerce facilities as well but are quite far from breaking even. Majorly because in the case of such diversification, it is challenging to gather support from other e-commerce companies. A case in point is Flipkart’s payment avenue PayZippy, launched in 2013, which had to be shut down for such reasons.

Mobile wallets have low customer retention and no inter-operatabilty, hence, making them a failed diversification attempt.

Like any other business opportunity, mobile wallet space is filled with external threats and internal weaknesses. Much of the revenue is reinvested in giving cash-backs and discounts. Despite this, customer retention is significantly low because a majority of the users don’t store any balance in their mobile wallets. This leaves them free to switch from one company to another for a better deal. The biggest limitation of mobile wallets is the lack of inter-operability, i.e., money cannot be transferred between Paytm and Mobikwik. This becomes inevitable since these companies are essentially competitors who are fighting to snatch others’ market share by giving lucrative offers. Further, mobile wallets involve a two-stage process of transferring money from your bank account to the wallet and then eventually to the vendor. That’s where the United Payments Interface (UPI) makes a wild card entry.

BHIM and UPI: The gamechangers

Partnered by 27 banks across India, the UPI enables hassle free, real time transaction directly between your bank account and the vendor.

The government has launched the BHIM app which transfers money directly between accounts and is linked to the Aadhaar number, which will help to authenticate users through stored biometric records. BHIM, having direct access to the bank account, circumvents the issue of mobile wallets allowing storage of a limited amount of money. Currently, the RBI has allowed only banks to become Payment Service Providers of UPI service, keeping mobile wallets out of the battleground. So, UPI comes as a boon for banks which were losing ground to mobile wallets like Paytm, Freecharge, Mobikwik, etc.

Like any other android app, the UPI-based BHIM app gives an easier method of payment and fund transfer.

Like any other android app, the UPI-based BHIM app gives an easier method of payment and fund transfer. | Photo Courtesy: Bhimapps

Mobile wallet companies have appealed to the banking regulator to include them as service providers, which hasn’t been allowed yet. It’s only a matter of time before UPI’s burgeoning popularity starts giving mobile wallets a run for their money.

Mobile wallets are also competing with platforms like HDFC’s PayZapp which have an edge due to the large existing user base and wide networks to acquire new customers. Adding to these signs of trouble is the fact that mobile wallets, unlike financial institutions do not offer interests to customers for parking their money in the wallet.

BHIM and other UPI-based apps pose a threat to the existing players of e-commerce.

Call it an opportunity or threat, there will come a period when people look towards avoiding the hassle of creating accounts, entering bank details, creating passwords. That will be the era of frictionless transfers facilitated by innovative enablers like biometrics.

Nevertheless, in a country where 41% of the population is unbanked, according to an RBI report, and three-fifths of which lives in villages, mobile wallets have an opportunity to develop a niche by constantly innovating. Problems like low internet penetration, lack of smartphone affordability, lack of skills needed for operating online need to be addressed in order to serve the rural market. Meanwhile, M-Pesa and Paytm have been granted payment bank licences by RBI, which ups their game over others. It all boils down to the survival of the fittest.


Featured Image Source: William Iven via Unsplash
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