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Mobile Money: Users take the digital route to make payments

February 16, 2017
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The rise in internet and smartphone penetration has probably been the most remarkable phenomenon the world has witnessed in the past few years. Together, the two trends have brought about a number of behavioural changes in consumers. Smartphones with internet access are not only being used to meet connectivity needs, but also as a personal computer, a data storage device, a navigation tool and a virtual wallet.

In recent years, the mobile wallet space in India has witnessed significant growth due to the increase in money transfers through phones and specific person-to-merchant transactions like mobile recharges and transit payments. Today, mobile phone users across the country are using their handsets to send, receive and spend money.

The biggest drivers for the increased uptake of mobile wallets are ease of use, reliability and security. Currently, no documentation such as know your customer is required for transactions up to Rs 10,000 in the case of semi-closed wallets. Further, one-click payments add to user convenience and save time. There are also several discounts and cashback offers for customers, which motivate them to use these wallets.

Operator wallets

The mobile wallet opportunity has been leveraged by top telecom operators in India, who have come out with digital wallets and are offering the mobile money service as a value-added offering. Through these wallets, operators allow users to top up their prepaid accounts and purchase digital content. Further, the wallets owned by telecom operators have the advantage of scale with regard to customer acquisition. Most operators have a large distribution network, and hence several touchpoints, which makes acquiring customers easier and less expensive.

As of the quarter ended December 2016, Bharti Airtel had 8.8 million Airtel Money users while Idea’s prepaid payment instrument  had over 5 million customers as of September 2016. Vodafone India’s M-Pesa had 1.3 million active customers as of end-March 2016. Tata Teleservices Limited also offers mobile wallet services under the brand name mRUPEE. Reliance Jio Infocomm Limited (RJIL) has also launched its digital wallet service, JioMoney.

Most of these wallet services are used for making payments and transferring money. Moreover, with the recent demonetisation move, operators have introduced new features in their wallets that allow merchants to accept payments. Airtel, Vodafone, Idea Cellular and RJIL are exploring opportunities in both urban and rural areas, and offering incentives to shop owners and retail chains to sign up with them. Vodafone has already equipped its wallet for merchants.

RJIL is also targeting offline merchants to increase the adoption of Jio Money. The company has already tied up with 50,000 online merchants for the service. Meanwhile, Airtel aims to acquire five million merchant partners by March 2017. Idea Cellular, too, has launched a payment solution application dedicated to merchants.

Demonetisation fillip to mobile wallets

Telecom operators are not alone in the mobile wallet space. They face tough competition from pure-play wallet service providers such as Paytm, FreeCharge, MobiKwik and Oxigen. Some of these wallet services were launched even before telecom service providers considered wallets as a business proposition. Pure-play wallets had a tougher time getting users on board. However, since the government announced the demonetisation of high-value currency notes in November 2016, most wallet providers have witnessed a massive spurt in daily transactions on their platforms. Moreover, both the average recharge amount and the number of recharges have gone up. This indicates the growing acceptability of digital payment solutions amongst consumers for meeting their daily needs. However, it is too early to say whether this change will sustain as the currency crisis eases.

In order to further encourage digital payments, the government has launched the BHIM (Bharat Interface for Money) application. BHIM is a digital payments app based on the Unified Payments Interface developed by the National Payments Corporation of India, the umbrella organisation for all retail payments systems in India. The app can be used to send and receive money and make digital payments. The unique feature of this payment instrument is that it is linked directly to the user’s bank account and there is no need to keep loading money unlike the other wallet services. While this app gives a new meaning to mobile wallets, it remains to be seen whether people are ready to share personal data with third-party apps.

Issues and challenges

While the vibrant mobile wallet space in India offers several opportunities, there are challenges that could hamper its growth. First, there is intense competition in the mobile wallet market. Multiple players including telecom operators, e-commerce sites and pure-play wallet companies are jostling for space. Moreover, the wallets have no big differentiators and essentially all of them rely on cashback and discount offers to acquire customers. Thus, creating a proposition that resonates with customers and is scalable is a key issue.

Industry experts are of the view that the wallet business does not have sound economics from a strategic business perspective. Wallet providers need to ensure customer loyalty, generate revenue and reduce customer churn. However, it is very difficult to ensure customer stickiness in the absence of incentives (cashbacks or discounts).

Another key issue with respect to wallet services is its limited uses. While customers can pay for various services using their wallet and also receive payments, most wallets have imposed a restriction on the balance that users can hold. Moreover, users earn no interest on the money stored and cannot withdraw cash from it.

Security issues and risk perception among users is another major challenge that is hampering the adoption of these virtual prepaid instruments. Since mobile wallets are a fairly new technology, most players in the market are ill-equipped to address security issues associated with it. Wallet service providers collect huge amounts of personal data on a regular basis, thus, putting at risk the privacy the users. Mobile wallet companies, therefore, need to incorporate more advanced security features in their platforms, without compromising on the user experience and convenience. Lastly, the acceptance of mobile wallets as an alternative to cash still remains a challenge.

Going beyond wallets towards payments banks

Notwithstanding the above challenges, the mobile wallet market in India is set to grow given the government’s thrust towards digital payments and a cashless economy.

Many players are going a step further and are launching payments banks to create a more viable business proposition. Telecom operators have been the first movers in this space. Airtel rolled out Airtel Payments Bank in the country in early 2017. The bank is offering an interest of 7.25 per cent on savings accounts, but charges a fee of 0.65 per cent on all cash withdrawals from the account. The payments bank will initially have 250,000 banking points across the country. The bank has committed an initial investment of Rs 30 billion to further develop its banking network and digital payments ecosystem. Vodafone too, is planning to launch its payments bank by March 2017. Idea Cellular was granted the payments bank licence along with Aditya Birla Nuvo Limited and is soon going to roll out its payments bank services.

A payments bank licence gives operators the advantage of a new revenue stream, which is key in the current scenario of intensified competition. Moreover, the economics of a payments bank is much better as there are several third-party products such as credit and insurance that can be sold through these banks. From a consumer perspective too, payments banks work. They are likely to feel more comfortable parking large sums of money in a bank or other financial organisation as compared to a mobile wallet.

The interest shown by the top three operators in the country indicates that operators are willing to go beyond their traditional businesses and exploit synergies in order to expand their offerings. However, the key to success lies in the ability of a company to differentiate its services from those of its competitors. To this end, it is crucial to develop an ecosystem to provide customers easy access to a wide range of services.

Going forward, the mobile wallet space is expected to witness traction as more people go the digital way to make payments. Meanwhile, the wallet players will innovate their offerings to broaden their customer base.

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