Then came the wallets. Mobikwik, and Paytm, and FreeCharge. Airtel Money. Amazon Pay. Phonepe. More wallets from everyone and their uncle. Then came the Unified Payments Interface, or UPI—the holy grail of instantaneous payments right from your bank account. And credit-like options where you buy now, pay later.
The past five years in India have been a rollercoaster ride for companies from card networks like Visa and Mastercard to Paytm and Mobikwik to banks to card payments firms like Pine Labs and Ingenico to payment gateways like BillDesk and PayU. (There are now 375 payments companies in India, according to a report by Medici, a fintech-focused consultancy firm.)
Business models have changed, changed and changed again. Driven by increasing internet penetration, the rise of e-commerce, and growing smartphone sales.
But most importantly—a series of policy decisions that, sometimes inadvertently, each reshaped the payments landscape. Into a market unlike any other. (China, the only comparable country, did exactly the opposite—practically unregulated, a digital payments ecosystem exploded over the years. Though that might be changing.)
For consumers, this meant that convenience became the order of the day.
Tired of dealing with cash and counting out change? Wallets—the user-friendly digital cash. Want even greater ease? Meet UPI, where you can send money straight from your bank account. Then pay later companies offered a different type of ease. And you could even ask for a payment from someone instead of waiting for them to pay you. That was the “collect” feature in UPI.
But this also opened the door for frauds. The collect feature saw people being spammed by collect requests from fraudsters. Failed payments on UPI—and the lack of quick resolution—became a problem in the early days. Payments banks opened accounts for customers without them even knowing.
Payments is not an easy business, for companies or for regulators. In the end, though, the fast-evolving nature of payments in India is changing the very way we deal with money—and even shaping consumer behaviour.
So here’s your guide to every twist and turn in India’s payments story—with all the gory details of policy and market.
The establishment of the NPCI by a consortium of banks more than a decade ago sowed the seed for large-scale changes in how payments worked in India. The non-profit entity is owned by banks, but answers to Reserve Bank of India (RBI) and the government in general—and often acts as a quasi-regulator for payments. (We wrote about the complicated position of NPCI here and here.)
NPCI’s industry-plus-government nature turned it into a one-stop shop for payments tech. Deep ties with banks and the development of IMPS for interbank transfers, for instance, laid the foundation for UPI and Aadhaar-enabled payments in the present day. (Aadhaar is the controversial 12-digit national ID launched in 2009, intended to act as a unique identification for every resident.)
But that aside, India’s current payments-heavy fintech ecosystem began to take shape with the arrival of mobile wallets—especially Paytm*.
Paytm. Oxigen. MobiKwik. ItzCash. FreeCharge. QuikWallet. The list goes on.
The most important, by far, though, is Paytm, which (like its main rivals MobiKwik and FreeCharge) pivoted from online mobile top-ups and bill payments to digital wallets. Using something called a pre-paid instrument, or PPI, licence.
A rather obscure category of payments regulated by RBI, PPI licences were mostly used for gift cards, store credit and the like. Any store of money which wasn’t cash or a bank account—which included wallets.
The freshly-pivoted wallet companies splurged on cashbacks and incentives to get users on board. And it worked. Paytm, by 2015-16, became one of the market leaders, helped in no small part by its partnership with cab aggregator Uber. (A partnership spurred by RBI’s insistence on two-factor authentication for online card payments—something US-based Uber had no experience with.) They spread from mobile phone recharges to online payment gateways to mobile payments for offline retail.
The growth of mobile wallets using PPI licences also affected how the central bank planned payment banks—the next stage in India’s payments evolution. They were specialised banks that could accept small deposits (up to Rs 1 lakh or $1447) and provide payments services, but not issue loans. Concerns over the viability of using PPI licences for large-scale payments prompted an RBI committee on financial inclusion to recommend that wallet companies be pushed to go the payments bank route instead.
At the same time, the number of payments-related startups was ballooning—with hundreds of companies springing up between 2012 and 2015, according to startup data tracker Tracxn. A golden age of payments—almost. For all their growth, wallets weren’t close to matching cards (debit and credit) in retail payments use. Not in terms of the value of transactions—the amount of money being spent by users. Not yet.
But the real kicker for digital payments was yet to come.
The tumult of demonetisation drove panicked, cashless Indians to electronic payment; and wallets, payments banks and cards saw a sharp spike in usage. As did UPI—a new interbank transfer system built on IMPS. Instead of getting a person’s bank account number and branch details—a cumbersome process—UPI allowed consumers to use virtual IDs for their accounts.
It would prove to be a game-changer—but not quite immediately. Because the only major apps offering UPI payments in the first year were PhonePe (owned by e-commerce company Flipkart) and the government’s own BHIM app. (We wrote about BHIM’s origin here.)
Nevertheless, digital payments in general built on the momentum of the post-demonetisation surge. Especially as both payments banks and wallets continued to offer cashbacks, funded by VC money and the hunger to scale quickly. But the ride’s far from over.
Scandals and yet more policy back and forth left payments banks with a rather uncertain future at the end of 2018. Likewise for wallets.
Airtel and Paytm’s banks were found to be violating KYC norms—effectively, they were adding users of their telecom and wallet businesses, respectively, as bank account holders. Without the customers quite realising it, because the payments banks were using Aadhaar-based eKYC. And another payments bank, Fino, breached the Rs 1 lakh deposit limit. RBI cracked the whip and banned them for varying lengths of time (all were given a clean chit by the end of 2018).
In late 2018, the Supreme Court put a ban on the use of Aadhaar by companies (but allowed it for government programmes). Payments companies and fintech startups of all hues, which had relied on the ease of electronic KYC to sign on customers quickly and inexpensively, were left scrambling, their business models at risk. (The government made legislative changes to make Aadhaar eKYC viable again early this year, but payments banks and others are still waiting for the RBI’s final go-ahead.)
But at the same time, UPI thrived. To the point that UPI transactions outstripped both wallets and card payments—in terms of both the number and the value of transactions.
It may be premature to declare the death of wallets, especially given the RBI’s new interoperability guidelines near the end of 2018 on allowing users to send money from one wallet (say Paytm) to another (like MobiKwik). Or even from a wallet to a bank account. (It’s still a work in progress.)
But it is safe enough to say that UPI has taken the retail payments crown. But the policy quakes and the market shifts of the past three to four years have touched almost every corner of the payments ecosystem. Where do they stand now?
What next?
“Payments are played out,” says Sajid Fazalbhoy, a principal at venture capital firm Blume Ventures. UPI has levelled the playing field—in terms of fundamental payments tech at least. “The focus now needs to be on monetisation.”
The sentiment is echoed by industry insiders and analysts. The battle now will be about who gets to sit on the UPI throne—aka the retail payments throne.
The evolution was limited to the payments systems until now, and, so far, it was about which will be the dominant payment system. With that now firmly established, we should see steady growth and the market gradually converge. Those with the appetite to keep acquiring users and merchants will be the ones that will have the staying power.
Also, digital payments is still limited mostly to the larger Indian cities. The race to capture the tier two markets and beyond will also drive the next phase of growth. Which that is likely to be aided by the spread of 4G networks and smartphones—as well as “smart” feature phones like those sold by telecom operator Reliance Jio. (Something The Ken has written about at length here.)
For now, it’s a three-cornered fight between Google Pay (formerly Tez), Paytm and PhonePe. But with Mi Pay from Xiaomi and Amazon Pay joining the fray in recent months, and WhatsApp and Jio waiting in the wings to launch public UPI services, it’s anyone’s guess.
The winners—from UPI apps to payment gateways—will also be those who can monetise the data generated from ever-growing transactions. Plus the fintech companies hooking into digital payments to drive new forms of finance (lending, insurance, investments).
Barring any policy surprises, of course.