Raju Prasad started taking donations through a mobile-payment app a few months back. The 42-year-old said his salary had nearly doubled to about Rs 300 a day—about $4, and more than the average daily wage for an agricultural laborer in Bihar, India’s poorest state. Many travelers now chant more than Rs 5 or Rs 10 with a few taps on their smartphones instead of digging out their wallets.
Mr. Prasad, who earns most of his money from commuters coming to Bettiah station from big cities like New Delhi and Mumbai, said, “People used to drive me away saying they didn’t have cash.” “Now, they scan my QR code. And they’ll happily give whatever little amount they want.”
The fact that beggars and their beggars are part of India’s digital finance revolution helps explain the explosive growth in mobile payments—along with the challenges faced by companies such as Alphabet Inc.’s Google LLC, Walmart Inc.’s Flipkart and local rival Paytm. with. Make business profitable.
Indians have been migrating to digital financial services for some time now. This is in part because of rising wealth, better internet and more affordable technology – and because Prime Minister Narendra Modi has placed digital transformation at the center of government policy.
Launched in 2015, “Digital India” aims to drive faster and more inclusive economic growth by moving government and banking services online and bringing the country’s poor, especially rural areas, into the formal economy through investment in technology .
But it was the pandemic that triggered the change. The lockdown forced lakhs of people to buy groceries and medicine through mobile apps as they could not leave their homes. ATMs ran out of cash – which, in any case, put many people off for fear that they would catch the virus from handling physical money.
According to S&P Global Market Intelligence, by the second quarter of 2020, mobile payments accounted for 30% of Indian private consumption with ATM withdrawals. Mobile payments more than doubled to nearly $1 trillion in 2021 compared to a year ago.
Kartik Raghupati, head of strategy and investor relations for Flipkart’s payments arm PhonePe, said, “The only silver lining of the pandemic is that everyone has started using digital payments more. Registered users jumped 50%, he said.
S&P Global says that Bangalore-based PhonePe now has about 165 million monthly active users and accounts for 48% of India’s mobile payments by value. Google’s share is 40%, and Paytm’s is around 9%.
India’s 48.6 billion digital payments last year was more than double that of next-ranked China, according to an April report by payments-systems company ACI Worldwide, which said volumes could top 200 billion by 2026. But paying $80 with the average Indian user. Compared to a government cap on transaction fees of $2,300 in China and around $8,000 in the US, as well as a government cap on transaction fees, India’s attractiveness is greater ability to secure a slice of its market of about 1.4 billion people than near-term gains. .
For now, digital payment providers in India are likely to lose money—and more, say analysts.
This is partly due to the way India’s payment system has developed.
Countries such as China and the US – the two largest digital payments markets by value – relied on private companies to develop the technical backbone to support phone transactions. In India, this task was given to the National Payments Corporation of India, a non-profit organization that regulates the country’s retail payments. It was mandated to “facilitate an affordable payment mechanism to benefit the common man across the country and promote financial inclusion”.
Dilip Asbe, Managing Director and CEO, NPCI said that the Government of India sees the digital payment system as a public good, similar to Power Grid.
“Efficiency in the payment system is core to the economy,” he said, as it improves transparency, tax collection and the circulation of money in the formal economy.
NPCI launched its Unified Payments Interface in 2016. The companies were then invited to develop apps on top of the platform, known as UPI.
There were three ingredients needed for UPI to be successful in India too, Mr. Asbe said: ID cards, bank accounts and smartphones. Mr Modi’s government has encouraged people to get biometric ID cards and to have at least one bank account in every household.
Nearly 80% of adults had bank accounts as of 2017, up from 35% six years ago, recently published central bank data showed. Meanwhile, the number of smartphone users has grown to 750 million, Deloitte said in a February report.
The platform of UPI is also interoperable. Transactions are done by scanning a QR code associated with an individual or business, or by looking at someone’s phone number or virtual address. All QR codes work on any app hosted by UPI. This is in contrast to the US, where someone shopping at Walmart, for example, cannot scan a checkout QR code using PayPal’s Venmo app.
Due to the pandemic, users of UPI grew 85% to 250 million in the two years to March, with over 300 banks and two dozen payment apps now on the platform.
The interoperability that helped the adoption of mobile payments, however, also makes it easier to switch between apps, forcing companies to offer cash discounts and other incentives to keep customers. They have also spent heavily on marketing and educating merchants and consumers about how mobile payments work.
“It is a chicken and egg problem,” said Madhur Deora, chief financial officer of Paytm. If not enough merchants sign up, customers will have no reason to do so.
About 90% of India’s $900 billion annual retail market is controlled by small, family-owned stores that rarely accept credit cards due to 3% to 4% charges. The 2020 government ban on transaction fees for UPI-based payments prompted many small merchants to sign up with their customers.
This restriction is one of the biggest impediments to the profits of payment companies. In January, a group of them urged the government to end the rule, which they estimated had caused industry losses of more than $700 million.
Analysts say it will take at least a few years for any mobile payments company to make a profit in India. Meanwhile, local startups competing against giants like Google and Walmart can afford to burn through cash to build market share.
In the long run, digital-payments companies are looking to sell financial services and other products, said S&P Global Market Intelligence Analyst Sampath Sharma Narianuri.
PhonePe is advertising insurance products on television. Google Pay recently allowed merchants to open digital storefronts within its app. Meanwhile, Paytm is planning to seek regulatory approval to sell insurance.
In the village of Bakharia in Bihar state, with a population of about 1,500, all but two dozen or so stores and stalls display placards or stickers with QR codes on the main road.
Ranjan Patel, who runs a small betel nut shop, said he signed up for several apps after customers demanded to pay from their smartphones. Now, about 80% of them do.
“They prefer to scan their smartphones and QR codes to make payments,” he said.