India is fast turning out to be the battleground of choice for global giants. First, it was all about garnering eyeballs on social media, with short videos being an offshoot; next, it was e-commerce; then it was battle royale for retail (which is still on); and now, it is an all-out battle for a share of the customer’s wallet in the digital payments sector, or specifically the UPI or Unified Payment Interface space.

Let’s look at the players involved. One of the oldest players in the space is PhonePe, which now Walmart owns; another big player is Alphabet’s Google Pay; then there’s Amazon Pay. And this week, Facebook’s WhatsApp Pay was added to the list when the National Payments Corporation of India (NPCI) allowed the popular messaging app to roll out its payments service. And, of course, there's Alibaba-backed Paytm, which also allows UPI payments.

“It is the battle of the tech behemoths and payments is actually the frontier of the battle between Alphabet, Walmart, Amazon, and Alibaba in the only market where all these players can operate freely. Alphabet comes from search, Amazon from retail, Alibaba from payments and Facebook from social media. Payments is the one arena where all these battlefields collide. Owning the transaction is critical to the success of each of these behemoths’ core business and also enables each of them to expand share of customer mindshare and wallet,” says Barnik Chitran Maitra, managing partner & CEO, Arthur D. Little, India & South Asia.

One of the USPs of UPI is ease of use. In fact, commenting on the arrival of payments services on Facebook-owned WhatsApp, UPI’s inherent ease might be what the social media behemoth’s co-founder, Mark Zuckerberg, was hinting at on Friday. “All you need is a debit card with a bank that supports UPI and you can set it up straight away,” he said in a video message.

“With UPI, India has created something truly special and is opening up a world of opportunities for micro and small businesses that are the backbone of the Indian economy,” he further added. WhatsApp Pay, which has been in beta mode since 2018, has been restricted to a million users.

Experts reason UPI was a logical step for Facebook to take, given the exponential growth in digital payments in India. “Looks like we might reach the milestone of 1 billion UPI transactions per day sooner than we earlier anticipated,” says Vijay Mani, partner at Deloitte India, adding that non-bank payment service providers (PSPs) were driving customer adoption and resultant growth. “This trend will continue with the arrival of WhatsApp on the scene.” Numbers too back Mani’s optimism. Data released by the NPCI, for instance, recently showed that more than 2 billion UPI transactions were processed in the month of October alone. And during a pandemic, where people want contact-less payments, this figure can only go up.

Why WhatsApp?

WhatsApp—which last year claimed it had 400 million monthly active users in India—entering the payments space is significant, because of the ubiquitous nature of the messaging service. “WhatsApp brings two very important things to the table—a large base of customers that are used to interacting conversationally and an increasing base of businesses that are using WhatsApp as a channel for business communication. This provides a ready-made platform for both consumers and businesses alike to undertake commerce conversationally,” says Murali Nair, president-banking at the fintech firm Zeta.

Nair also argues that WhatsApp’s formal entry into the e-wallet space could be a potential game changer. Besides, it is available in 10 Indian regional languages—as Zuckerberg pointed out—and is working with leading banks such as ICICI Bank, HDFC Bank, Axis Bank, the State Bank of India, and Jio Payments Bank.

Moreover, this is where Facebook’s strategic $5.7-billion investment into Mukesh Ambani-led Jio Platforms Limited—a deal which was signed this year—enters the picture.

“The recent big strategic investment of Facebook into Jio is predicated on the expected strategic benefits of having a successful WhatsApp Pay (and vice-versa). Reliance Jio’s strong network of small mom-and-pop kirana stores means the possibilities for payments using WhatsApp are endless,” says Maitra. “WhatsApp Pay could become the preferred choice of making and accepting payments by small businesses in Reliance’s network, further reinforcing Facebook’s position and also, in turn, making Reliance Jio a deeper player in the digital ecosystem.”

Getting crowded?

A crucial question to ask at this juncture is whether with these big players competing against each other, is India’s digital payments space getting crowded?

To begin with, WhatsApp Pay’s main selling point now, as described by Zuckerberg himself, is convenience. While this convenience of using WhatsApp Pay could lead to some users migrating from existing players, there might be space for all. According to Mihir Gandhi, partner and leader-payments transformation at PwC, there is scope to expand 10X of the current volumes of UPI in the next few years. “There is enough potential for growth. In fact, the current players themselves will have to really rapidly scale up their capacity and capabilities to solve that kind of volume.”

Maitra adds that the kind of user experience and cashback incentives provided by WhatsApp will go a long way in determining whether WhatsApp can corner this market. “It will largely depend on the quantum of cashbacks that WhatsApp can provide for payments. Given that service levels are generally similar across these payment apps, the only way for a player to differentiate itself is to invest in customer acquisition and retention through monetary rewards such as cashbacks.”

However, it comes with a caveat: The NPCI has allowed WhatsApp to expand its base in a “graded manner starting with a maximum registered user base of 20 million in UPI”, it said in the press release announcing its nod for WhatsApp’s payments service.

While this could keep the other players artificially protected, the bigger issue, according to Maitra, is that the 20 million reflects “just 5% of its total subscriber base. Even when it is allowed to increase its offering of UPI services to more than 20 million subscribers, the question remains: by how much will WhatsApp be allowed to scale up?”

For Maitra, this fact becomes crucial when when one considers that Google Pay has more than 75 million transacting users on its UPI platform. Similarly, PhonePe believes its user base is 250 million, with active users touching 100 million.

WhatsApp, in response to an email from Fortune India, said: “We are excited about working together with NPCI and all of our partners to provide payments to people across India and we’ll continue to work with them to make it available to everyone over time.” Fortune India also reached out to various firms in the payments space, but they refused to comment.

The 30% cap conundrum

The NPCI, in a separate release, also set a cap of 30% of the total volume of transactions to be processed in UPI through a single third-party payments app. “This will be with effect from January 1, 2021,” it said. “The cap of 30% will be calculated basis the total volume of transactions processed in UPI during the preceding three months (on a rolling basis),” the release said. It gave existing apps, which exceeded the limit a period of two years, from January 2021, to comply.

Players in the space say that this could cause problems for users. “This announcement has come as a surprise and has implications for hundreds of millions of users who use UPI for their daily payments and could impact the further adoption of UPI and the end goal of financial inclusion,” says Sajith Sivanandan, MD and business head, Google Pay and Next Billion Users initiatives, India. “Digital payments in India is still in its infancy and any interventions at this point should be made with a view to accelerate consumer choice and innovation. A choice-based and open model is key to drive this momentum,” he adds.

A cautious sentiment is similarly echoed by Sameer Nigam, founder and CEO of Flipkart-backed PhonePe. “We have reviewed the recent NPCI circular and want to assure all our customers and merchants that there is absolutely no risk of any UPI transactions on PhonePe failing. In fact NPCI's circular categorically says that the 30% market share cap does not apply to existing TPAPs [third party app providers] like PhonePe until January 2023. PhonePe remains fully committed to ensuring that there is no customer disruption caused by this circular,” he says.

But some experts also argue that NPCI’s decision might be in the right direction. For Zeta’s Nair, the intention behind NPCI’s move was to guard against monopolies that may arise if the market is left uncapped.

Similarly, PwC’s Gandhi says that capping is a step in the correct direction “because you want to de-risk the overall ecosystem and the infrastructure... So I think it’s a step in the right direction, that’s giving a good opportunity for other players to come in the market. And also it is expanding the market.”

Another looming question is whether with so many tech giants in the fray, will these morph into superapps? Deloitte’s Mani points out that the PSPs are already offering a number of services in a single app. “The core payments service does not generate enough revenue or customer stickiness, and therefore, additional services become necessary,” he says.

PwC’s Gandhi concurs. “Payments as a business typically doesn’t make a lot of money. It is used more as a hook to get customers in. And customer stickiness is generated because the customers enjoy the experience. And once the customer becomes the key, then you start offering other value-added services like lending products, or insurance, or a ticket booking, or ability to make your bill payment on the same app. And that’s how it slowly morphs itself from a very focussed payment app to a superapp,” he says.

Maitra argues that despite incurring losses, digital payments businesses command huge valuations. “All these apps are backed by cash-rich parent companies and the final winner really boils down to who is going to be the player with the deepest pockets and is willing to play the long game by investing a significant amount in the Indian payments space. So it’s going to be bonanza for the Indian consumer with more cashbacks as this battle heats up,” he sums up.

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