Mobile Money In India: Does Digitalization Follow Demonetization?

At the end of May 2017, Paytm – India’s largest mobile money company – launched Paytm Payments Bank, having received the last clearance from the Reserve Bank of India (RBI). “We wish to acquire 500 million new customers and launch a slew of financial services products such as deposits, wealth management, insurance, financial lending and many more,” Paytm founder Vijay Shekhar Sharma told business daily Mint. A few days before that, it got a fresh investment of $1.4 billion from SoftBank of Japan, taking its valuation to $8 billion. The twin developments promise to herald a coming of age for mobile wallets in India.

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Of course, mobile wallets (this term is used interchangeably with e-wallets and mobile money) have been around for some years now but, in the absence of clear rules and regulations, they were not easily categorized. In February 2015, the RBI invited applications to set up a new category called payment banks. It cleared 11 applications (three withdrew later). Airtel Payments, Paytm, India Post Payments (which launched a pilot project earlier this year), and FINO PayTech were the early starters. Other telecom players (Reliance Jio Payments, Vodafone M-Pesa) were also in the fray. And, of course, the 21 public-sector banks and their 26 private-sector counterparts can all issue e-wallets.

Mobile money is therefore not a result of demonetization, but it has taken off following the controversial move by the Indian government to remove Rs500 and Rs1,000 notes from circulation. Prevention of corruption and the spread of black money, choking terror funding, and the creation of a cashless society were the main objectives of the demonetization measure. Today, many observers say the only flourishing survivor of the trio of goals is the cashless society. But that has also been changed somewhat. “Our bid to go cashless means less cash, not no cash,” said finance minister Arun Jaitley. He was speaking at a Digi Dhan Mela, an event to educate people on digital payments.

Jaitley was particularly upbeat about mobile money because part of the supporting infrastructure is already in place. “From a time when 1% of the population had mobile phones, in 20 years it has now come to more than 90% in India,” he said. The country had 1.16 billion mobile subscribers at the end of February 2017, according to the Telecom Regulatory Authority of India. Another survey by the Hong Kong-based technology market analysis firm Counterpoint says about 300 million of those subscribers use smartphones.

“Being able to pay with a mobile device most commonly happens with a smartphone,” says David J. Reibstein, professor of marketing at Wharton. He explains why this is making waves in India. “In the U.S., credit cards and even checks are well-established systems. [But] these are simply interim systems as we transition to mobile money. In India, neither credit cards nor checks are well developed. Rather than develop a soon-to-be-outdated technology, it is logical to transition immediately to the next form of payment. This is what happened with telephones. Many developing countries transitioned to cellular faster than the U.S. The U.S. had landlines and the need for cellular was not as acute as in countries where landlines had not been fully deployed.”

Throughout human history, the primary medium of payment for goods and services “has evolved from shells, sheep, gold and silver, to paper currency, and now to mobile money whereby payments can be made through a smartphone,”notes Wharton professor of marketing Z. John Zhang. “Mobile money gains currency as the smartphone becomes more and more versatile in functions and ubiquitous in usage.”

Starting with a Clean Slate

“Mobile money offers less developed economies a great opportunity to leapfrog the developed economies,” adds Zhang. “In countries like the U.S., credit card usage is widespread and the infrastructure associated with it is mature and sophisticated. You can imagine that to move away from a well-established infrastructure and then make an expensive investment on a new one will meet with much reluctance and even resistance from all parties with vested interests in the existing infrastructure. Countries like India and China start with a clean slate and can embrace the new technology with little hesitation.”

“In India, credit card penetration is low and mobile wallets are replacing cash, which has many drawbacks,” says Kartik Hosanagar, a Wharton professor of operations, information and decisions whose research focuses on the digital economy. “Add to that, there is a big portion of the population that is unbanked. Mobile wallets are very compelling for them as well.”

The distinctions between mobile money offerings are not always clear: There are the run-of-the-mill e-wallet companies (such as Paytm, MobiKwik and FreeCharge, in the Indian context); fintech companies with their “additional” offerings; banks, which are trying to tap their own depositor base; telecom service providers, attempting to capture their many millions of subscribers; and the government’s own less-cash efforts.

“Mobile money gains currency as the smartphone becomes more and more versatile in functions and ubiquitous in usage.” –Z. John Zhang

Actually, before demonetization and its cashless aspirations, it wasn’t mobile money but the digital economy that was the focus area. “Mobile is one of the avenues to make payment in the digital ecosystem,” says Bhavik Vasa, chief growth officer of ItzCash, an “omni” digital payments platform. “Everything in the digital payments market is not a wallet. Wallets are good, but they serve only a few specific segments of society.”

The Digital India program was actually launched back in 2006. The Cashless India program (and website) is of more recent origin. It has a list of techniques and apps for going cashless. It includes credit and debit cards; AEPS (Aadhaar-enabled Payment System), which works on the holder’s fingerprint and a $100 microATM at the merchant end; USSD (Unstructured Supplementary Service Data), for which a feature phone will do; UPI (Unified Payments Interface), which needs a smartphone; Mobile Banking — “a service provided by a bank that allows its customers to conduct financial transactions remotely using a mobile device with an app”); and the mobile wallet. And, there is BHIM (Bharat Interface for Money), a mobile app developed by the National Payments Corporation of India, based on UPI. It can be used on all mobile devices.

The digital economy was going full steam ahead even before demonetization surfaced. A Boston Consulting Group (BCG) report titled “Digital Payments 2020 – The Making of a $500 billion Ecosystem in India” notes: “The global payments landscape has seen some dramatic changes. Digital payments in India are not limited to being an urban and affluent phenomenon…. India is becoming a digital country.” It is No. 2 in population, mobile phone users, Internet users and smartphone users. The study was done before demonetization. Says Alpesh Shah, BCG senior partner and managing director: “The demonetization event has further accelerated the need for digital payments and, for smaller transactions, mobile payments. In fact, some research post demonetization has shown a significantly larger acceptance of digital/mobile payments by end-consumers as well as merchants.”

According to a survey by MediaNama, a source of information and analysis on digital and telecom businesses in India, and Cambridge, Mass.–based Akamai, a leader in content delivery network services, the number of mobile banking transactions