You could call him a magician. Or you could call him a banker (of sorts). A music lover (“I love U2”). A startup whiz. Or just a successful entrepreneur who knows how to make people spend, and spend smart. Or, as most people do, call him Vijay Shekhar Sharma, founder of arguably the best-known digital wallet in the country, Paytm. We call him the face of the move of the year.
THE HIGH POINT of his year, Vijay Shekhar Sharma tells me with a grin, was meeting U2’s Bono and Coldplay’s Chris Martin.
We are at Sharma’s office in Noida, not too far from Fortune India’s digs, and among other things over a marathon meeting, he is talking about a year when he received a licence to set up a payments bank, and his company made profits—“for two weeks”—after five years. You need to be a real U2 fan to put Bono above that. It makes me think that Sharma has his priorities right. But then, what do I know about the priorities of someone who runs a company that is said to be valued at $4 billion (Rs 25,268 crore).
There are other things about Sharma that are more important than the valuation. He, in many ways, started the conversation about mobile payments and digital wallets in India, a trend which has since turned into a deluge. There were digital payment systems before Paytm, which Sharma founded in 2010, and several since, but nothing that became as ubiquitous in as little time.
Sharma started small. One97, the company that owns Paytm, was a seller of mobile ringtones and other value-added services. He says he would borrow a friend’s credit card to pay for games and apps for his smartphone. “My addiction to the App Store and iTunes led me to think of an easier payment option for Indians.”
Nobody else was trying that. Flipkart, which most Indian tech ventures look upon as a pioneer, was building its cash-on-delivery model, based on the theory that Indians don’t like committing card details online.
Sharma’s strategy with Paytm was simple: Sign up a few partners, like HomeShop18, MakeMyTrip, and BookMyShow, who would project Paytm as a convenient ‘pay-through’ option. Then there were deals, like the one Paytm struck with Uber, which made it inconvenient for users to function without it: You couldn’t get a cab if you didn’t have money in your Paytm wallet. Once people got used to the ease of use, they stayed. Parallelly, Sharma was growing Paytm into a full-fledged online marketplace, with the convenience of the wallet built in.
Today, Sharma claims Paytm has 119 million accounts, a number we could not independently verify. Rival wallets such as PayU, MobiKwik, and Oxigen claim similar user bases, largely because there’s no limit to the number of wallets a single person can have. It’s not just those companies. These days you’d be hard pressed to find an e-commerce vendor that does not offer a wallet as a payment option. Snapdeal is betting big on its FreeCharge Wallet, developed after the Rs 2,400 crore buyout of FreeCharge last year. Flipkart too acquired prepaid wallet company FX Mart. (There are already a dozen videos on YouTube on how the Flipkart wallet can be hacked, but online security is an issue for another day.)
What does the frenzy around digital wallets mean for India? The answer to that is still evolving, but here’s one certainty: It isn’t another nerdy fad. In fact, in a world that’s adopting technology at warp speed, with the idea of money changing as fast—and with banks morphing into tech players—Sharma and his peers could well be taking the next step in India’s move towards a cash-free economy. And suddenly, it’s clear why nothing comes close to this as the most important move of recent times.
Talk so far has been about a “less cash” economy, since few could imagine a functional world without paper money. And then, the New York Times carried a report on how Sweden could completely get rid of cash in a few years. “Few places are tilting toward a cashless future as quickly as Sweden, which has become hooked on the convenience of paying by app and plastic,” the report said. Many banks in Sweden no longer accept or dispense cash.
Can such a thing happen here? Sharma says there are signs already. At a recent wedding, he says, the shagun (a ritual gift or blessing of cash) was done with a Paytm wallet instead of cash. Of course, it will be a long time before India gets to where Sweden is, where street vendors carry mobile credit-card readers. But cashless transactions, such as for retail purchases, are growing here too. Between April 2011 and April 2015, the transaction value of credit cards rose by 153%.
Wallets are piggybacking on this growing comfort with cash alternatives. For instance, MobiKwik has struck deals with Big Bazaar and other retailers, which let some 10,000 brick-and-mortar stores accept payment via its wallet. Bipin Preet Singh, founder and CEO of MobiKwik, is among those who believe the end of cash is inevitable. “Cash doesn’t have any intelligence,” he says. “It doesn’t give you anything extra.”
If you still think the rise of non-cash means is fiction, turn to the facts. Bank of America Merrill Lynch estimates India’s payment market at $15.5 trillion in FY15, growing at 12% annually. Mobile payments account for 0.1% of the market right now (the rest is cash, credit card, cheque, and remittances), but BofAML says this could go up to 10% by 2022. According to The Economic Times, the Reserve Bank of India (RBI) disclosed a threefold rise in the number of transactions on digital wallets between February and April 2015, in response to a Right to Information request.
Here’s another epochal shift: With peer-to-peer transactions, digital wallets such as Paytm are challenging the belief that you need a bank’s seal to assure you of a secure financial transaction. Bankers and credit card companies have been stirred into action to counter the trend. If they don’t adapt to this new normal, banks will find their role as financial intermediaries shrinking. “Maybe payments is the first thing to get out of the banks,” Sharma says.
Aashish Chandorkar, director at Capgemini Consulting, doesn’t think that’s idle talk. “The pure payments part of the bank’s business is under stress,” he says. If a user estimates that 30% to 40% of his banking usage is simply to pay bills, he may find it easier to put money into a digital wallet and pay bills directly from there, “like a one-stop shop”.
Banks on their part acknowledge the challenge. “We have to not just defend our customer base, we have to be able to grow it,” says Rajiv Anand, head of retail banking at Axis Bank. Others like Chanda Kochhar, managing director and CEO of the country’s largest private sector lender ICICI Bank, agree that banks that do not adapt to technology will not survive. “We will have to ride on the trends which our consumers are riding ... digitisation, mobility, and social media,” Kochhar says.
Ultimately, that technology will be the great disruptor in finance, as with every other business, is a truism. But what few could predict is that digital wallets would creep up and unsettle business-as-usual so effectively. Things could get scary for the laggards here on. Sharma tells me Paytm is moving at war pace to start its payments bank business within the next six months (the RBI has given licence-holders up to 18 months to start). “If someone places a five-year bet with me, [I am willing to bet] we will have more than 60 million accounts at Paytm bank,” he says.
He then makes a claim that would sound absurd if he wasn’t earnest: If the zero-balance Jan-Dhan accounts, set up in bulk by public sector banks to meet their financial inclusion goals, are kept out of the reckoning, Paytm will overtake leviathan State Bank of India’s retail accounts by 2018.
To push home the bravado, Sharma likens the implications of the payments bank experiment to the impact of nuclear power. His team calls the project ‘Pokhran’, a code name inspired by the site of India’s two successful nuclear tests.
Judging by the chatter on the ground, while maintaining their nonchalance in public, the dirty tricks departments at the big banks are working overtime to cut Paytm and its peers down to size. A recent news report says Sharma and Ankur Saxena, CEO of Oxigen Wallet, had complained that banks, including SBI, were not allowing customers to refill non-bank digital wallets from their accounts. Asked about this on Reddit, Sharma replied: “We are talking to them and hopefully getting some way or the other to solve it.”
The conflict between the agents of cash and non-cash transactions isn’t limited to the urban pockets that you would associate with technological jumps. Consider this. One of the key programmes of the National Health Mission, under the Ministry of Health & Family Welfare, is a cash transfer to expectant women and new mothers to pay for health care, including immunisation. But in places like rural Jharkhand, few women have access to bank accounts. Many have access to mobile phones though, so the mission has tied up with telecom operator Vodafone’s M-pesa, a mobile-based service for transferring money. The beneficiary receives the funds on her phone. If she wants cash instead, she only needs to find the nearest M-pesa outlet.
It’s a sad comment on financial inclusion that more Indians have mobile phones than bank accounts. The Brookings Institution says India accounts for 21% of the world’s unbanked population, while the country now has a billion mobile subscriptions according to the Telecom Regulatory Authority of India. The mobile Internet user base grew a staggering 99% in rural areas, per a 2015 study by the Internet and Mobile Association of India and IMRB International. (The figure is 65% for urban areas.) But digital payment companies aren’t merely after the warm, fuzzy feeling that comes with supporting social uplift. A subsidy beneficiary can use their digital wallet to buy goods and services—like urban, upper-class folk do for their Flipkart purchases and Uber rides. Once awareness spreads, it’s a matter of time before subsidy holders begin using wallets for such transactions, opening up a vast new consumer market.
Who will miss banks and cash then?
One spoiler that the folks at Paytm and MobiKwik won’t mention: India’s abysmal Internet quality. A recent ‘state of the Internet’ report from network and cloud services provider Akamai shows that in the first quarter of 2015, India ranked 14 out of 15 Asia-Pacific countries in Internet speed, with an average speed of 2.3 Mbps, compared with leader South Korea’s 23.6 Mbps. The telecom and broadband infrastructure is creaky even in the metros. What would be the picture in villages?
Also, a cashless utopia fuelled by digital wallets assumes that every citizen will have access to the Internet as a basic service. India is far away from that. We won’t comment on Mark Zuckerberg’s high-decibel campaign for Free Basics, a platform that he says will make some parts of the Internet free and accessible for all, in partnership with like-minded telcos. But it merits mention that days before we went to press, Sharma emerged as something of a hero of the anti-Free Basics camp, saying it violates Net neutrality. A possible motivation for that is Paytm’s looming rivalry with telcos, which too have digital payment ambitions.
I ask some of the country’s top bankers about the threat from Paytm’s tribe. The responses are predictable. “We see them less as disruptors and more as enablers,” says Shikha Sharma, managing director of Axis Bank. “We too are constantly looking at technologies that could make a difference to the way we offer our services to our customers.” Kochhar of ICICI Bank echoes that any innovation will only help expand the market for financial services.
Shyamal Saxena, head, retail banking, India, Standard Chartered Bank, says the convergence between banking and mobile wallets will happen when there is seamless transfer to and fro. But, he reminds the customer, put too much money into your digital wallet at the expense of your bank account, and you’ll lose out on interest.
This isn’t a battle that can be won by dangling interest though. So banks are pulling out their big gun: trust. “Customers will make their choices. They will pick up [a digital wallet] and they will experience it, but ultimately they will go with the brands they trust,” says Shikha Sharma. “Will a rural person trust a message on a phone when it comes to his money? Right now, he puts the cash under his pillow,” he adds.
That’s an image meant to drive home the intimacy afforded by cash in a world undisturbed by disruption—except it glosses over one nuance. Mobile phone users in rural areas are among the largest users of prepaid connections. They already keep track of the money left in their account via messages that flash on the screen after every use or every recharge. Navigating digital wallets may not be such a big leap.
I ask Sharma what he’s doing about trust. “Indians take time to trust anybody when it comes to money,” he tells me philosophically. But then, he adds, what Paytm is selling is “convenience, and you can experience convenience only when you use the service. The change of behaviour takes time.”
Shubhashis Gangopadhyay, director, School of Humanities and Social Sciences, Shiv Nadar University, agrees. “A matter of trust is always solved by demonstration. So the moment something starts working, other people see that, and those who were sceptical in the beginning [catch up].”
Banks understand the power of the network effect, which explains the rush among them to build their own wallets. ICICI was among the earliest movers with a wallet called Pockets. Today, almost every bank, private or public, has one. “Banks are jittery, that’s why they are investing in technology,” says Vinay Dev Jhari, vice president of Sapient Global Markets, India, an advisory firm that works with financial services companies. Jhari says that in the long term, it’s likely that financial institutions will get increasingly specialised, meaning that customers will need to start looking elsewhere for general (read, retail banking) solutions.
Capgemini’s Chandorkar says Paytm is in a sweet spot. With the payments bank licence, it can simply add a layer of CASA (current and savings accounts) services and convert its existing wallet users into banking customers. “It will become super difficult for the banks to fight that,” he says.
Then there’s the RBI’s idea of last-mile financial coverage, which underlies the Jan-Dhan Yojana, among others. The scheme aims to give all citizens access to basic savings bank accounts, need-based credit, remittances, insurance, and pension. As its website says: “This deep penetration at affordable cost is possible only with effective use of technology.” In its recent report, the RBI’s Deepak Mohanty Committee, set up to recommend ways to improve financial inclusion in the medium term, says meaningful inclusion will not happen without cash transfers from the government to individuals. Again, cue e-wallets and payments banks.
Essentially, all that a payments bank needs is a wide network of representatives (or banking correspondents), who can visit even the most far-flung hamlets and accept deposits of up to Rs 1 lakh per customer or hand out cash. “Banks in India are not able to go beyond a certain [demography], but that’s exactly the section that is in dire need of banking services. Increasingly, there was a feeling that through the formal route the benefits of banking will not reach that section,” says Sunil Kumar Sinha, principal economist and director, public finance, Fitch Ratings, India.
“Having a payments bank licence allows [digital wallet companies] a wonderful piece of vertical integration. The customer doesn’t even have to move their money to the wallet if they have an integrated wallet and bank account. At the point of payment, this facility becomes much more attractive and lucrative,” argues Chandorkar of Capgemini.
Players from other industries have also sensed the opportunity. Prime among them are telcos, who say they are naturals in this business because of their distribution reach. “In India, no financial company has the gift of distribution like a telecom company or an FMCG company,” says Upanga Dutta, chief marketing officer of network operator Telenor India. The multinational plans to set up its own payments bank in association with pharma billionaire Dilip Shanghvi, having experimented with financial services in various parts of the world like Bangladesh, Pakistan, Thailand, and Serbia. India’s largest telecom operators, Airtel and Vodafone, also have payments bank licences.
Cashless transactions aren't just convenient for the customer. They also ease the burden of regulators and financial watchdogs. Because all transactions are electronic, there’s a clear and transparent trail. To curb black money, the government has even proposed tax rebates for merchants and consumers using electronic payment options. Friendly policies will help build sentiment in favour of innovations like digital wallets.
However, under existing regulations, a user can fill a digital wallet with only up to Rs 10,000. To store more (up to Rs 1 lakh), the same KYC (know your customer) norms that banks have to follow kick in. The same norms have to be followed for payments bank accounts as well.
Won’t all this due diligence make operations much more expensive? Sharma shrugs off the question. It costs $0.5 per customer, he says, because Paytm’s business is entirely digital. A traditional bank has to cover the cost of physical touchpoints and paperwork. “We can acquire a customer anywhere that has a working Internet connection. That is why we have a much lower customer acquisition cost,” he says.
That seems a little disingenuous and skirts around my original question on KYC costs, which are pretty hefty and wouldn’t be any different for a digital entity vs. a physical bank. A banker who asks not to be named says it costs SBI over Rs 1,200 to complete a single KYC process; this includes verifying the paperwork, digitally saving it, and taking back-ups. Can Paytm afford that kind of spend? As things stand, no, although in a recent interaction on Reddit, Sharma did gloat about Paytm’s two-week-long profit spree.
Don’t get him wrong. Profits aren’t even on the agenda for digital upstarts where the mandate from investors has been to focus aggressively on market share to the exclusion of everything else. (In Paytm’s case, backing comes from Alibaba and SAIF Partners, among others.) But don’t let that obfuscate a critical point: 2015 was also the year when the conversation started turning towards making money, as tech companies grappled with severe criticism of inflated valuations and unsustainable, loss-inducing growth.
So how exactly does an e-wallet company make money? There’s no single answer. M-pesa, for instance, charges a transaction fee when money is transferred between two people, of 1% to 1.5% of the value of the transaction. Paytm does not charge for transactions between wallets; it gets a transaction fee or commission from the merchants who use it. Telecom service providers pay a commission of 2% to 5% to payment services that have a SIM recharge service. Paytm also charges 4% of the transaction value when a customer transfers money from the digital wallet to a bank account.
Sharma says it also earns a commission “when a merchant uses us for marketing or showcasing a product on the Paytm app”. Known as the gross contribution margin, this works out to 5% of the total transaction value.
Capgemini’s Chandorkar is sceptical about this claim and says even 2% from merchants is a bit of a reach. “Our guess is it can make 2% from maybe 5% to 10% of the merchants, but beyond that I don’t think anyone is paying that much,” he says. Does that mean some merchants pay nothing, I ask. “It won’t be zero,” he says, “but it definitely won’t be more than 2%.” Merchants negotiate hard and have multiple apps and wallets to choose from, Chandorkar adds.
Digital wallets have to pay a fee to various payment networks—credit card companies and banks—that customers use when filling the wallet. “We make better margins when you [customers] fund it [the wallet] through a debit card or net banking, and we make less margin when you do it using a credit card,” says Sharma. For a wallet to make good business sense, the amount that merchants pay it should be more than its outgo. “Very simply,” explains Sharma, “1% is the cost of funding the wallet, and 2.5% is the cost to the merchant.”
His claims of paying next to nothing to acquire customers notwithstanding, wallets do have to spend money in getting and retaining customers, generally in the form of cashbacks. “In some cases there will be some loss leaders because they are important to get customers,” says Suresh Sethi, business head, M-pesa, justifying the spend.
Operating costs in this business are high, so break-even itself will take a few years, and real profits a few more. Sharma says to speed things along, Paytm may stop spending on marketing. “In November, we decided to see what happens when we do not spend on marketing. We found that we were able to make money that month. Our estimate is that we should be profitable by 2017-end,” he says.
Investors and e-commerce observers will also keenly watch the progress of Paytm’s marketplace, which had a daily gross merchandise value (GMV) of Rs 38 crore as of November. That’s anaemic compared with the other Alibaba-funded unicorn Snapdeal (reports say its GMV touched nearly Rs 26,000 crore in August), although Paytm hasn’t really invested in acquiring customers for this part of the business—it has only engaged its existing wallet customers. With each marketplace offering its own wallet to its merchants and customers, the largest marketplace could also become the largest wallet provider. This makes Paytm’s foray into payments banking all the more vital; it is a hedge against the winner-takes-all fight in wallets.
The excitement cuts no ice with a few sceptics, who believe India is woefully underprepared. Rohit (he goes by just that name), assistant professor of economics at Delhi’s Jawaharlal Nehru University, says marrying financial inclusion with technology is fundamentally flawed. “You will have to buy an Internet connection, because that’s not going to be universally available,” he says. “Yes, mobile phones are getting cheaper, but not everyone in the country will own a phone.”
The other issue Sharma and his ilk will have to address is that of stickiness. “There has to be a true value proposition on an ongoing basis. Only then can a huge shift happen,” says Soma Sundaram, CEO of Bengaluru-based mobile payment startup iKaaz Software. Sharma seems to think convenience is all that’s needed to guarantee stickiness, but he admits that the idea of digital wallets needs to be evangelised a lot more. “We believe that by 2020 we should have 500 million users, [but our] biggest hurdle will be consumer education,” he says.
Meanwhile, he has been on an acquisition spree. Paytm’s most recent acquisition was of services marketplace Near.in. Earlier, the company had invested in hyperlocal delivery app Jugnoo, and helped fund another hyperlocal marketplace, Little. All this building up has resulted in predictable comparisons with Sharma’s biggest investor, Alibaba. Is he trying to build an Alibaba out of India, is the question raised in almost every story on Paytm. “No. We don’t want to be the Alibaba of India,” the man who loves rockstars tells me when I nudge him, this time without a grin. “We want to be Paytm from India, who gave a new business model to the world.”
Additional reporting by Ashish Gupta & Kunal N. Talgeri.