The Future of Indian Digital Wallets

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India is experiencing tremendous growth in the use of Internet as well as mobile. As per various estimates, there are a just under a billion cell phone connections in India and the country adds around 6 million new cell phones every month in usage. Although the number of Internet users is still low in comparison […]

India is experiencing tremendous growth in the use of Internet as well as mobile. As per various estimates, there are a just under a billion cell phone connections in India and the country adds around 6 million new cell phones every month in usage. Although the number of Internet users is still low in comparison – around 200 million users, the conversion of cell phone users to mobile users is fast growing. As per telecom industry estimates, 65% of all new Internet users in India experience their first Internet surfing activity via mobile.

As Internet and mobile penetration continues to increase and result in increased digital commerce, the Reserve Bank of India has been updating the rules associated with flow of money in the virtual economy on a periodic basis. India’s monetary system is tightly controlled by the central bank, which not just looks at the core functions like inflation targeting and rates control, but is also the central regulatory body to which all scheduled and unscheduled banks, cooperative banks and non banking financial companies report to.
Pre Paid Instruments
As the digital commerce grew in India through the first decade of this century, RBI acted on defining how the payment services will evolve. Due to strict Know Your Customer and Anti Money Laundering regulations, India has a limited peer to peer money transfer activity. The role of the agent in the money transfer activity is clearly defined and tightly governed. In line with this regulatory function, RBI set guidelines for prepaid payment systems in India, aligning with the Payment and Settlement System Act 2007 (later modified in 2014). Additionally, RBI has insisted on the two factor authentication principle for all online transactions in India after this act was passed.

These RBI decisions and guidelines substantially restricted the use of prepaid instruments or Wallets in India. The central bank notified 4 types of Wallets, demanding varying degree of adherence from those offering the Wallet services (including entities not regulated by the central bank directly). These types were Closed, Semi Closed, Semi Open and Open. Given the regulatory requirements around end use and withdrawal guidelines, the Closed and Semi Closed Wallets grew in the last 5 years in India, while Semi Open and Open versions had very few takers.
Wallet Services
As mobile commerce grew in the first half of this decade, several payment gateways started operations in India, which could sign up with specific merchants to reduce the pain associated with individual two factor transactions. There was a movement from Closed Wallets (establishment specific) to Semi Closed Wallets (Group of contracted establishments using the wallet) in the last few years given the mushrooming of digital commerce and the blanket implementation of two factor authentication requirements.

Now, the Reserve Bank of India is mulling retiring the requirement for two factor authentication on cards transactions in India. This potential change will apply to both debit and credit cards, used on point of sale (POS), card not present transactions (CNP) as well as Internet based transactions. This change will potentially have a payment value threshold of ₹3000-₹5000 as per various media reports. Given that the low value transactions still make a bulk of this market, this move by RBI may seemingly be a death knell for Wallets – given the ease of single click commerce going forward.

There has been a lot of speculation in Indian tech world in the last couple of months that the impending RBI changes will mean funding and operational challenges for payment gateway service providers. The rumors about acquisition of Freecharge, an upcoming payment gateway by Snapdeal, a leading commerce firm, strengthened these theories. But should Wallets die?
Repurposing Wallets
Wallets so far have performed a need gap function – making it convenient for individual merchants to not invest in two factor authentication by acting as an intermediary. Sure, some of the Semi Closed or Semi Open ones do have other functions like storing card details for easy reloading of money and account and expense reporting, but these value added functions have been very basic and never scaled.

Can the Wallet providers repurpose themselves from an intermediary / utility to a value added service? In my view, this is a huge new business opportunity for the providers which really want to be relevant in the Indian consumer payments space.
Transaction or Trust?
A typical new Indian customer adopting digital commerce, primarily on Internet, will be transacting on average to poor quality telecom networks without much experience in dealing with online firms or with customer service agents in case of issues with payments.

Imagine a situation where millions of new digital commerce users are shopping from websites or via mobile apps who they have no idea about. Imagine the burgeoning in-app purchases playing games or upgrading features.

The user can provide the credit or debit card details to every such merchant. Or the user can choose to keep these details secured only with one or a limited set of Wallets. The merchant can in turn invoke the Wallet APIs for payment processing. Maybe the number of clicks will increase by 1, but the customer will be certain that the Wallet will ensure the sanctity of the money transfer and in case of an issue, there will only be one phone number to call – the Wallet provider’s. The Wallet can move from a transactional service to a trusted customer partner, accounting for financial safety and best efforts fraud protection, rather than just a processing service.
Thinking Like A Bank
This brings us to the second point – which is Wallet providers thinking like a no frills, limited service bank, rather than an e-commerce interface. In fact, RBI now gives them an option to actually become a bank – a payment bank. Such a bank will boost remittances and banking for the unbanked, while primarily focusing on payment services.

Although the financial qualifications of becoming a payment bank are stringent, this may be the eventual future of various Wallet service. Why remain a Wallet only for digital commerce? Why not look at a payments bank business – which can be operated as bricks and mortar business or a low touch Internet based business? These possibilities will present themselves to the Wallet providers in the next 5 years, just like 2010-2014 presented the opportunity to intermediate online commerce.

The business opportunity to become a Payment Bank is huge and the long term, committed Wallet providers will definitely keep an eye on it.
Value Added Services
Wallet providers can invest in new services – areas like spend management are very nascent in India. In fact the global leader in this space – Intuit – tried offering an Indian version of its Mint service via a leading private bank, but issues with aggregation and the fact that users were not willing to pay for a service which was not fully mature, resulted in the service being taken off. If a Wallet becomes big enough to sit on top of a large enough ecosystem of money movement, such value added services can easily be offered at a small fee. Categorization of spend, setting limits, setting alerts, setting savings controls – these are functions unknown in the Indian personal finance space, and who better than a big Wallet to tap into these areas?
As RBI finalizes its regulatory guideline on two factor authentication in the next couple of months as expected, Indian consumer payments will undergo a fundamental shift. The low value, high volume market is still ripe for innovation and changes. And Wallet providers should take the lead, rather than shutting shop. By the end of this year, we will have all the answers!

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