STARTUP SPECIAL.................... Show me the (Digital) Money!

Show me the (Digital) Money!





India has all the elements in place to make a stronger shift towards digital payments. But, can cash be unseated as king?

Between April and August last year a small group of people toured some 80 remote villages in Odisha, Bihar and Uttar Pradesh in an effort to try and give residents of the hinterland access to some basic banking services. There are around 1,25,000 bank branches in India, for a country of over 1.2 billion people. For many living in the hinter land, accessing them remains an arduous journey to a nearby town or city; and then too, their low-value transactions aren't welcome with open arms.

In 2014, the Reserve Bank of India (RBI) mandated Oxigen Services, a digital payments company, to run a pilot project to see if India's unique ID card project called Aadhaar could be used as a means of authenticating unbanked villagers across India's hinterland. The pilot, which called for the tour of the 80 villages, was also meant to de termine whether Aadhaar could be used to provide the unbanked villagers a means to receive cash in their hamlet itself.

By November, the RBI announced its guidelines for licensing for payment banks, the objectives of which are to provide, in addition to small-saving accounts, payments remittance services to migrant labour, low-income households and small, unorganised businesses. A revolution in payments seemed around the corner. After all, India has so far been a country of cash, with 95% of all payments made through it. Now, a raft of factors including rising smartphone sales, rapidly growing mobile internet use, and the proliferation of authentication means such as Aadhaar could catalyse a digital shift.

Everyone seems to want a piece of the action. While over a dozen startups are chasing the digital payments opportunity, mobile services providers such as Vodafone and Airtel too think there's a massive market to be tapped; conventional banks themselves are working overtime to keep in step with this change. And they are chasing this opportunity not just for typical payments purposes; some of them see the shift to digital payments as a more efficient means of reaching government doles to their intended recipient or reaching remittances to family in the hinterland.

This opportunity has been in the works for a while. In Mumbai, Citrus Pay's cofounder Jitendra Gupta recounts the time when online payments had a failure rate as high as 40% and it took 60-80 seconds to process a transaction. As technology evolved, companies such as Citrus, best known for its online payment gateway, have thrived. Success rates have doubled to 80% and transaction times are down to 15-20 seconds.

Besides building more robust gateways, Gupta has also seen a shift in the source of traffic -from barely 2% from mobile phones, to over 50% today. Even as Citrus has been able to ride this changing market dynamic, its rivals faded. “As of April 2015, the GMV [gross merchandise volume] at Citrus was $1.5 billion...we have been able to grow because we haven't just built a strong solution, but added layers of analytics to our products,“ says Gupta. Citrus today works with 17 million customers, processing 10 million transactions a month. Finding its Digital Payment Feet Company executives argue that despite the proliferation of the mobile phone, India is just finding its digital payments feet. “The use of digital and electronics payments in India is very low...barely 10-15% of smartphone owners use digital payments,“ contends Bipin Preet Singh, founder and chief executive of MobiKwik, a mobile wallet.“India has over 800 million adults, but barely 35-40 million of them make payments online.“

That hasn't stopped entrepreneurs from trying new and innovative ways to do business. For example, Mohit Lalvani, cofounder of QuikWallet, a mobile payment service in Mumbai, is trying to use his service to empower hundreds of small businesses to use a simple text message solution to propagate non-cash payments.

In the 24 months he has been in operation, some 1,000 merchants have signed up with the wallet and today users can avail of an assortment of payment options including cards and even loyalty points. Lalvani wants to take a wrecking ball to the existing payment structure, which he says is extremely inefficient. “Our wallet integrates with the restaurant backend and customers can track their orders on their phones and even track what they eat and drink on the fly,“ he says. By the end of the year, he expects his wallet to be used at 3,000-5,000 merchants and have at least 1,00,000-1,20,000 users running the wallet on their phones.

Lalvani isn't the only one looking to take a crack at reinventing the cash-centric payments ecosystem. For the past six years, Manish Patel, founder of Mswipe, a provider of mobile card readers, has been looking to find a way to relook at the way card payments are accepted and made in India. While nearly 90% of terminals are from HDFC Bank, ICICI Bank, State Bank of India and Axis Bank, almost 85% of these machines work on landlines -an opportunity rich for disruption.

“There is little incentive for the providers to devise a breakthrough solution,“ he contends. “In this setup, cash offers the least friction for people...the hardest thing to change is consumer mindset.“ To try to convince obdurate consumers and merchants, Mswipe is working on a series of technologies that aims to merge the mobile phone and mobile point of sale (PoS). “India has barely a million PoS machines, China has over 15 million installed...we have a massive opportunity to disrupt this market,“ adds Patel. In this push to replace and overhaul existing PoS infrastructure, Mswipe competes with Ezetap, which is looking to push ahead with its products built around the mobile phone. “A clear target for us is the field-force of companies who need to collect payments,“ says Abhijit Bose, cofounder and chief executive of Ezetap.“Unlike traditional PoS machines, we don't need to take up batch payments of each device and report them to a bank.“ Instead, at a prespecified time, payments are automatically tallied and fed back to the system.

Cash, What's That?

Ezetap also collaborated with India's largest public sector bank, State Bank of India, to develop a mini-ATM to dispense a maximum of ` 1,000 and take up a limited set of banking transactions remotely. Already 3,000 of these machines have been rolled out, with hundreds more on the way to being installed. “We can also be a major player in the digital collection and disbursal of social sector schemes such as [Pradhan Mantri] JanDhan Yojana,“ he says.

Soma Sundaram, founder of iKaaz, a digital payment platform based in Bengaluru, thinks that cards in their current physical form may be headed the way of dinosaurs. “We want to enable consumers to make and receive payments without the hassle of having to physically carry cards and cash,“ he says. Having worked with early pioneers in mobile payments (Nokia and Obopay), the founders are taking a fresh look at things.With barely any marketing spend we have recorded 6,50,000 transactions on our Mowa platform,“ says Sundaram.

Around 15 km to the southwest of iKaaz's office, at the headquarters of Momoe, another Bengaluru-based venture, Karthik Vaidyanathan grins sheepishly when asked how much cash he carries about. Usually, it's under `100. As a cofounder of Momoe, a provider of mobile payments, he is used to living an (almost) cash-free life. “India is a beautiful place to start anything around the mobile,“ says Vaidyanathan. “The phone has become ubiquitous, payments on it are today a reality and we expect to have 10,000 merchants accepting this as a payment option by April 2016.“ Not only can users make payments, they can split bills too. While restaurants in Bengaluru were an immediate target, Vaidyanathan says Momoe is targeting a broader set of merchants to boost its growth.

MobiKwik, funded by the likes of Tree Line Asia and Cisco Investments, is on a cash-conversion drive -it even offers to pick up cash and deposit it into a digital wallet. The firm today claims to have some 20 million users for its digital payments services and Singh, its founder, says this will increase to 80-100 million in the next 18-24 months. In this push, the mobile phone (and platforms based on mobile internet like near field communication or NFC and mobile internet) will become key to MobiKwik's fortunes. “We want to build on our significant lead with offline retail [Big Bazaar, PVR and Dominos are a few retailers that use their technology] to become the point of sale replacement for thousands of small enterprises,“ he adds.

Company executives say that the ubiquity of mobile phones has allowed them to challenge existing giants in this space and devise smaller and nimbler alternatives, or do away with them entirely. Rather than have to deal with cash (and the headache of managing the backend of physical money sloshing around the system), companies are promoting improved payment networks, PoS alternatives and wallets to make this digital push.

Banks, too, limited by the size of their branch network, are leaning on digital solutions for some answers. “There are barely a million PoS terminals in India [with duplication at large outlets, there are barely 3,00,000 in reality], but for a country of this size and breadth, there should be 19-20 million of them,“ says Ritesh Pai, senior president and country head -digital banking at YES Bank.“Using technology is the only way to extend this reach...with the use of biometrics, a physical card and PIN may no longer be needed.“

A Long Way to Go

That thinking may be farfetched. According to Nitin Gupta, chief executive of PayU India, a digital payments provider, the central problem to moving towards digital payments is that barely 1,00,000-1,10,000 merchants, or under 1%, accept online payments. “Online bill collection is a huge opportunity as just 75-80 large enterprises accept these payments, while this number should be north of 1,000...similarly only 3,000-4,000 smaller merchants do [think housing societies], while this can be as high as 3,00,0004,00,000,“ adds Gupta.

PayU's rapid growth across both its businesses provides an idea of the potential in India. The company's payment gateway PayUbiz, for example, works with 75 of the top ecommerce players, processing some 20 million transactions a month. The other business, a consumer-facing initiative called PayUmoney, allows online payments to over 80,000 merchants -with over 5,500 added every month.

When Uber, the taxi aggregator, wanted to launch its services in India, it ran into a regulatory hurdle. Unlike elsewhere, Indian authorities insisted on a two-factor authentication for cards payments, adding a layer of complexity to an otherwise simple process.

While Uber and other companies who lean heavily on card payments are lobbying for single-factor authentication with the regula tors, they turned to Paytm's wallet to find a way around it. According to data from Uber, it has registered over 1,50,000 drivers and according to one estimate over 2,00,000 trips happen daily. Paytm is also growing beyond its staple of small value transactions to higher value online payments. In the next five years, Paytm should have 500 million users, says founder Vijay Shekhar Sharma, by which time he boldly predicts cash payments in India will decline by 20%.

“We launched our prepaid wallet in January 2014 and have 100 million wallets and we undertake some 75 million transactions a month...the likes of MasterCard and Visa process some 150 million,“ he says. “Both merchants and consumers have mobile phones today...the PoS may be redundant... wallets can redefine digital payments in India.“

Despite the inroads made by the likes of Paytm, banks aren't ready to play second fiddle in this ever-changing payments landscape. Says Deepak Sharma, executive vice-president and head -digital initiatives, Kotak Mahindra Bank: “We want to use digital technology to create a seamless offline and online payment mechanism for our customers.“

Kotak Mahindra is looking at new ways to enable -and hasten -person-to-person payments, which account for 70% of the banking transactions. For example, the bank has built a mobile number-based platform KayPay and is working on one-click solutions for increasingly tech-savvy customers. Chasing after these customers seems to make business sense for Kotak Mahindra -transactions are 39% higher in these accounts, balances are 20-25% higher and a month ago a special recharge app launched on Android saw volumes shoot up 40%.

Can Others be Far Behind

Other banks too are queuing up to pursue these digital-savvy consumers. Rajiv Anand, group executive and head, retail banking, Axis Bank, says that as consumers spend up to 150 minutes per day on their phones on average, banks are being compelled to rethink the way they do business with them.“We have to tweak our products to fit the world in which they spend time,“ he adds. For example, Axis Bank has launched what it terms a multi-social payment platform called Ping Pay, has already racked up 1,00,000 users and expects to double this number in the next 12 months.

“Today, the retail bank is also a technology compa ny...it is both digital and local [digical, for some marketers] in nature and customers will continue to bank with us for comfort, convenience and trust that we provide,“ adds Anand.

The first time Pramod Saxena, founder of Oxigen Services, tried to launch digital payments, back in 2008, he found the going tough.Mobile networks were rudimentary, smartphones costly and legislation vague. Oxigen was the first non-bank to be connected with the National Payments Corporation of India's (NPCI's) gateway and it was four years later in 2012 that his initiative actually took off.

As the ecosystem has stabilised and flourished, Saxena has set an ambitious target for Oxigen -he wants to as much as double transaction value from `9,000 crore in 2014-15 by the end of the current financial year. “We want to position ourselves as the total provider across remittances, wallets and other emerging forms of digital payment,“ he says. “We were the first non-bank to be connected to Aad haar and that provides us the opportu nity to target millions of merchants and consumers.“

Nandan Nilekani, former chair man of Unique Identity Development Authority of India, is working with NPCI as an honorary advisor, on how to make mobile phones inter-operable in all payments. “Right now, with payment banks, we run the risk of having a lot of pay ment islands coming up which don't talk to each oth er. It is a policy issue -how to get all the systems to talk to each other and the technolo gy for that. For instance, how gy for that. For instance, how to make a Paytm wallet work at a store with an HDFC PoS,“ Nilekani had told ET Magazine recently.

Nilekani says NPCI is aiming at making the mobile phone the default digital payment wallet, for which it is working with banks and the RBI to design, build and roll out the technology, which he estimates should happen in six months. In February this year, NPCI had inaugurated a unified payment interface to connect payments across smartphones.

As mobile phones become the centre of this digital payments universe, mobile services companies such as Vodafone, with m-pesa, are building their own strong platforms. “We have an advantage of physical distribution over conventional banks,“ argues Suresh Sethi who runs Vodafone's m-pesa in India. “Banks have a limited reach with around 1.25 lakh branches and around 1,50,000 ATMs...we can access 1.8 million multi brand stores.“ In the past 18 months, Vodafone has set up 90,000 outlets (with ICICI as a banking partner) and almost 60% of them are in rural India. The mobile operator has tied up with five states to distribute a variety of subsidies. “This infrastructure creation is critical to making banking and finance more pervasive in India,“ says Sethi. “There is no intermediary involved and benefits go from the government agency directly to the beneficiary.“

In an office above a supermarket and a pizza store, Sridhar Rao is looking to replicate the sharp growth he saw in his previous jobs at Vodafone (chief executive of the Bengal Circle and then m-pesa) with Novopay -a Khosla Labs-incubated mobile payments venture -of which he is a cofounder.

The company uses Aadhaar as means of authentication (the former technology chief of the unique ID initiative Srikanth Nadhamuni chairs Novopay) and adds a layer of mobile payment and cloud technology to let consumers in the hinterland access a range of banking and payment services. “As an ID that is foolproof, Aadhaar is a game-changer,“ says Rao. “Backed by this authentication, we can more effectively and securely offer banking and payment services from a small retail store to consumers.“

Novopay has signed up with some 10,000 such outlets and its pace of transactions is growing at over 30% per month -just one data point on a bank of screens at the company's network operating centre in Bengaluru. “The consequences of being unbanked are dire...we estimate that at the bottom of the pyramid, people lose as much as 28-30% of their wages from struggling to withdraw them from a distant bank or government office.“ Saddled with this kind of inefficiency, technology-led payments such as Novopay seem a much safer bet.

Rahul Sachitanand

Additional reporting by Indulekha Aravind

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