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As UPI Transactions Rise, Paytm, PhonePe and Other Online Payment Apps in India Struggle to Make Money

Aug 6, 2020 6:54 AM 4 min read

“What do you think of the commercial model for digital mobile payments? How do we make money?” Vijay Shekhar Sharma, Founder and CEO, Paytm asked Nandan Nilekani, one of the key architects of the Unified Payments Interface (UPI) that created a digital payments revolution in the country. A revolution that disrupted the early movers in the digital payments industry.

It’s a million-dollar question that numerous other startups are scrambling to answer as many of them aggressively shift their focus to serving merchants and building lending products and other financial services, having ceded power to UPI.  


UPI - Leading the Way

As per the National Payments Corporation of India (NPCI) data, the number of payments transacted on UPI hit an all-time high of 149 crore in July this year, with the value of transactions reaching ₹2.91Lcr ($38bn).

For some perspective, this number stood at 82.23 crore, with a cumulative value of ₹1.46Lcr ($19bn) in July 2019.  

The previous high was in the preceding month of June - with the number of transactions at 134 crore and their cumulative value at ₹2.61Lcr ($34bn).



PPI - The Struggling Kin

While UPI is moving from strength to strength, it’s close kin Prepaid Payment Instruments (PPI) - including both Mobile Wallets like the earlier avatar of Paytm and PPI Cards combined - is having some trouble keeping up. 

In May 2020, the number of PPI transactions stood at 30 crore at a cumulative value of ₹12,808cr ($1.7bn), plunging 30% from a year earlier. Of this, the amount of mobile wallet transactions stood at ₹11,080cr ($1.4bn).

The average amount per transaction for mobile wallets in India stood at a paltry ₹438 vs ₹428 an year ago.

Evidently, UPI platforms have been outperforming mobile wallets - both in terms of value and volume of transactions.

Before we proceed any further, it is important to lay down the fundamental difference between a UPI platform and an e-wallet

Unified Payments Interface (UPI) is a Government-built system that powers multiple bank accounts into a single mobile application, merging several banking features under one app at practically no cost to the consumer. It caters to “Peer to Peer” (i.e. From one bank account to another directly, instead of going through a “mobile wallet” - described later) collection requests which can be scheduled and paid as per requirement.

A mobile wallet, as the name suggests, is a virtual mobile-based wallet where one can store cash for making mobile, online or offline payments. With UPI’s open and interoperable architecture, peer to peer convenience, and government backed legitimacy and security, multiple payment applications such as Paytm, MobiKwik, PhonePe and Amazon Pay, which started as mobile wallets are now operating on the UPI backend, thus losing their business model. 


Death of Mobile Wallets in India

Vijay Shekhar Sharma’s concerns are not unfounded and have been voiced by many others. 

At an event in Bangalore late last year, Sajith Sivanandan, Managing Director and Business Head of Google Pay, said current local rules have forced Google Pay to operate in India without a clear business model.

Sivanandan went on to urge local payment bodies to “find ways for payment players to make money” to ensure every stakeholder had incentives to operate.

To make matters worse, NPCI has now capped the number of UPI transactions that online payment apps in India such as Google Pay and PhonePe and their partner banks can execute, in an attempt to limit the damage to the payments ecosystem in case one of their systems collapses. 

One of the ways being considered is to cap the transaction share for payment apps at 50% for the first year of implementation, reducing it to 40% in the second year and 33% from third year onwards. 

In case the limit is breached, the NPCI may send warnings to companies to stop onboarding new customers and disable new transactions – else incur a penalty.


Pivot or Perish

Unable to make much profit in the highly competitive market, online payment apps are now branching out.

Paytm has expanded to several new businesses in recent years, including Paytm Mall, an e-commerce venture, social commerce, financial services arm Paytm Money and a movies and ticketing category.

This year, Paytm has expanded to serve merchants, including launching new gadgets such as a stand that displays QR check-out codes that comes with a calculator and a battery pack, a portable speaker that provides voice confirmations of transactions and a point-of-sale machine with built-in scanner and printer.

In an interview with TechCrunch, Sharma said that the company is offering these gadgets to them as part of a subscription service that helps it establish a steady flow of revenue.

Amazon Pay recently announced tying up with Acko General Insurance to offer insurance for two- as well as four-wheelers. Amazon has also tied up with online mutual fund platforms Orowealth and Kuvera to offer saving products to customers. 

Google Pay has partnered with digital lending startup ZestMoney to offer credit to consumers and is looking to form partnerships with more fintech firms. 

With WhatsApp Pay being stuck in the regulatory maze, WhatsApp is planning to offer credit, insurance and pension products to lower-income individuals and those in rural areas in India and help digitise local small and medium-sized businesses.

But these pivots are not without struggle. Expansion into newer categories would mean that they now have to face other financial service distributors, albeit their digital-first nature grants them a certain advantage. 

Nevertheless, it would be mighty interesting to see them rise, or perish.


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