PAYMENTS: THE NEXT BIG WAVE
With heavy venture capital interest and
billion-dollar valuations, the digital payment business is set to boom. The
segment is expected to touch Rs. 1,20,000 crore in 2014, growing at 40% a year
on rising transactions in e-commerce, utility bill payments and more. The next
wave for this market is payment on delivery through the mobile and building a
consumer facing story
More than a year ago, activist investor Carl
Icahn pushed for a split of eBay and PayPal, saying the payment business on its
own could grow to $100 billion. eBay eventually agreed to the split and now
some valuation estimates floating for Paypal put it at around $40 billion. As a
business, Paypal is now growing faster than eBay's e-commerce business. That's
the writing on the wall that several investors are looking at in India, as
action in the payments business hots up.
In India, Naspers, which has several Internet
investments, backed entrepreneur Nitin Gupta to set up payment firm PayU in
2011. Early this month, mobile wallet firm One Mobikwik Systems announced a
$25-million funding round, with Cisco Investments and American Express coming
in as new investors. It has said it will raise another $100 million in the
latter half of 2015. ET recently reported that private equity fund TA
Associates would grow its holding in payment gateway firm Billdesk with a Rs
450-crore infusion.
Globally, the entry of Apple Pay and Google
Wallet into the payment business has only added more heft to the story ,
underlining the huge potential and opportunity for Internet disruption. In
India, where most of the population doesn't have credit and debit cards, and
the mobile phone is fast becoming a tool that brings that and as e-commerce
takes off, payment could be next the big business.
“After travel, classifieds and e-tailing,
payments will be the next big boom,“ says Gupta, whose firm runs both a payment
gateway and mobile wallet, PayUMoney .His firm, PayU India, has already
acquired mobile payment app Eashmart for an undisclosed sum.
According to a report by the Internet and Mobile
Association of India (IAMAI), digital payments are expected to touch Rs 120,000
crore in 2014, growing 40% on the back of rising transactions in e-commerce,
utility bill payments and other online transactions. Statistics show that
nearly 50% of e-tailing is still cash on delivery and as that shifts towards
pay on delivery or pay on order, the numbers will only rise.“Within two years
you will see a pure payments company that's a billion dollars in valuation,“
asserts Gupta.
One97, the company that runs mobile wallet
Paytm, has already topped that with a valuation of $2 billion in February this
year when Alibaba group affiliate, Ant Financial Services, came in as an
investor. The firm has crossed the 50 million customer mark for its Paytm
wallet, making it, according to founder and CEO Vijay Shekar Sharma, one of the
largest transaction platforms in India, upstaging railway ticket booking portal
irctc.co.in, which held its own as the country's largest e-commerce platform
for a long time.
“Payment has been the biggest problem in the
country . That is why the first wave of ecommerce was solving a payment problem
using cash on delivery . So the second wave has to be payment on delivery and
that has to be through the mobile, because mobile is what is happening in the
country now,“ explains Sharma, whose firm is thus far the only mobile wallet
provider in the country to also run a mobile marketplace.
To that extent, its multi-billion dollar
valuation also takes into account the fact that it has managed to scale the
mobile payment business to a marketplace. The core business, however, is around
mobile payments and everything else, including purchases, is a used case for
it, says Sharma. “We want to be the Taobao of India,“ he adds, referring to the
marketplace that the Alibaba group runs.
Marketplaces and Payments: Joined at the Hip
It's no coincidence that One97 has attracted
investors of the likes of Ant, which runs Alipay , the largest online payment
solution in China and which powers Taobao and T-mall, marketplaces owned by
Alibaba. “They (Alipay) handle 100 million payment requests a day . So we
expect a lot of help and understanding of the market from them. Secondly , they
are a large payment service in China with relationships with many international
vendors. Many of these vendors would like to do business in India, and we will
get access to them,“ says Sharma, whose firm has raised $635 million from Ant
and other investors.
Globally , just as Alibaba has Alipay , the
largest marketplaces have their own payment systems. Amazon has Amazon
Payments, the Japanese Rakuten has Smartpay and eBay snapped up PayPal in 2002
for $1.5 billion. It's a different matter now that eBay is unlocking value by
moving PayPal out as a separate business.
The two large marketplaces in India, Flipkart
and Snapdeal, are also expected to have their own payment systems. Flipkart had
built PayZippy for which it also had customers like BabyOye, Travelyaari and
Caratlane.com. However, a year after it launched in 2013, the e-commerce firm
shut it down and media reports quoted Flipkart as saying it would continue to
power its payments internally . However, around the same time, Flipkart also
invested in mobile payment company , Ngpay. Flipkart declined to respond to
questions sent by ET on its payment strategy and on the strategy for Ngpay and
PayZippy .
Rival marketplace Snapdeal recently announced it
was buying Freecharge, a mobile recharge provider, for an estimated $400
million in one of the largest acquisitions in the Internet sector in India.
While some said the acquisition of Freecharge would provide a base from which
Snapdeal could build a payment engine Paytm started out as a mobile recharge
provider others pointed out that unlike Paytm and several other payment
providers, Freecharge did not have a payment licence to operate such a system.
Snapdeal did not respond to questions from ET.
“You can't be a serious player unless you have a
payment platform. That's a fact,“ says Sharma, “Marketplaces want to bring
trust and the only lever to do that is payments, so you can keep the money in
an escrow wallet until the goods are delivered.“
Big Problem, Big Opportunity
There are four big e-marketplaces Amazon,
Flipkart, Snapdeal and Paytm in India today with the capability to raise or
that have raised over a billion dollars in funding, points out Vishwas Patel,
founder and CEO of one of the country's earliest payments firm, Avenues India.
But not all of the big four club have a full payment system in place, and their
next round of big buys will be in this space, he predicts.This is one of the
reasons why there is such a high level of venture capital interest in payment firms.
Avenues is one of the rare firms in the payments business with no venture
funding.
The payment problem is also more acute here, and
therefore the opportunity size for a solution is that much larger. According to
the IAMAI report on digital payments, the number of credit cards in India is
only around 19 million. While the number of debit cards is higher at 350
million, most are used primarily for ATM withdrawals or often, not used at all,
says Bipin Preet Singh, founder and CEO of mobile wallet firm Mobikwik, which
also runs a payment gateway under the brand Zaakpay .
Because neither credit nor debit cards were able
to fully address the problem of payments, net banking came up as alternative.
“When we started our payment business, debit cards were not allowed for online
purchase. So we integrated with the core-banking software of banks to come up
with net banking,“ recollects Patel, who started the payment gateway business
in 2001.
Since then, CCAvenue, the payment gateway
business, has seen two inflection points one in 2004 when online travel
booking took off and the second in 2011-12, when recharges, utility payments
and online shopping took off. As a result of e-government projects that were
implemented in the last few years, Patel expects another 1,800 utilities to go
live in 2015-16 bringing a bigger boost. Additionally , of the estimated 810
prepaid mobile connections in use today , only about 3% are currently recharged
online, providing significant headroom to grow. “We don't have a B-to-C (businessto-consumer)
strategy , so we don't spend millions on acquiring customers the way wallet
companies do,“ says Patel, who has instead chosen to go to newer markets
overseas and launch local language offerings in India rather than launch a
wallet.
TechProcess Payment Services, earlier known as
Billjunction.com, has also chosen to stick to the payment gateway business even
as it has built a nifty mobile app interface that connects to its mobile-ready
gateway . “We don't want to be an end-consumer play ,“ says CEO Kumar Karpe.
Intense Competition Squeezes Profits
Incubated by ICICI Ventures during the last
dotcom boom, TechProcess now has other investors, including the likes of
Greylock Partners, Battery Ventures, Nokia Growth Partners and W Capital
Partners. But everyone, including the venture-funded ones like TechProcess, are
feeling the pinch as competition to win customers becomes more intense and
firms drop prices even below their costs.
“There is no differentiation in the payment
gateway business, so prices keep going down. It has come to a point where it
can't reduce further,“ says Mobikwik's Singh, whose firm has shifted focus to
the mobile wallet business and away from its gateway .
PayU's Gupta admits that margins in the payment
gateway business are getting squeezed and have gone from 45% to single digits
to negative for the industry . “But we are still able to maintain high
single-digit margins,“ he maintains.
The difference between the payment gateway
business and the mobile wallet business is that the mobile wallet provider owns
the customer. So if wallet has more customers, merchants are keen to partner
with the wallet provider. Over the next three years, PayU, which claims 70%
market share among e-commerce players for its payment gateway , expects mobile
wallet revenues to go up to a quarter of its total revenue and in the following
two years, to half its revenue.
“Building a consumer-facing story for the
payment business has been tricky in the past. It is high-risk, high-reward,“
says Paytm's Sharma, who has chosen to be only in the mobile wallet business
and use its payment gateway internally. “Right now, it's only the start,“ he
says about the story that is unfolding in the payments business.And for the top
3-4 four winners, there is a fortune to be made.
Shivapriya N ET25APR15
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