Where WhatsApp Pay fits into India’s growing digital payments space

Two and a half years.

That’s how long Facebook-owned WhtasApp has waited to get a nod for its UPI-based payments system from the operator, NPCI. After an initial pilot in February 2018 with a maximum of million users, the regulatory approval was thwarted by data localization measures pushed by the RBI and NPCI. Yesterday, the NPCI finally allowed WhatsApp payments to go live with an initial cap of 20 million users. Facebook joins a market dominated by competitors it knows well from its country of birth: Google through Google Pay, Walmart through its acquisition of Flipkart and PhonePe, and Amazon that launched Amazon Pay only recently but is gaining volumes significantly. On top of these are the individual banks that offer their own UPI payment services. This growth in the fintech sector comes with a spate of innovations over the last decade. Digital payments were the first disruption, and digital lending followed. Today, China is a leader in digital payments, and India has been an able follower. India registers about one-eighth the transactions that China does, but it matches China on growth.

The Unified Payments Interface (UPI) currently services a total customer base of approximately 400 million. It is one of the biggest stories of fintech innovation to have come out of India. Piloted in April 2016, the platform enables users to transfer money instantly between two bank accounts over a mobile phone. It gained relevance that November, when India demonetised high-value currency notes.

In its first full financial year, 2017-18, UPI accounted for 9% of all retail digital transactions in volume terms and 1% in value terms. These include transactions through debit and credit cards, IMPS bank transfers, UPI and National Automated Clearing House (NACH). By February 2020, UPI’s share had crossed 50% in volume terms and 16% in value terms.

The pandemic and physical distancing have provided further tailwinds to UPI. In September, the payment method made up nearly a quarter of the value of all retail digital transactions. In October, overall UPI transactions touched an all-time high of 2 billion.

The UPI infrastructure is characterized by peer-to-peer transactions and real-time inter-bank settlements. Its progress has had a knock-on effect on Indian companies. Further, greater smartphone ownership, lower transaction costs, and improved user experience are also spurring new business models in fintech.

Start-ups in the sector are now turning their attention to innovations in retail, real estate, insurance, and wealth management. Even legacy banks are investing in various segments: wallets, digital lending, payment services, savings and wealth management, remittances, point of sale products and services, and insurance and real estate.

This March, CB Insights, a market intelligence firm focused on the internet economy, published a list of the top 250 promising companies in fintech. Companies from the US dominated the list (136), but India came in a worthy third, with 20 companies. These include PolicyBazaar in insurance; Pine Labs, Razorpay and BharatPe in payments processing; Cred and INDWealth in personal finance; and Khatabook, ClearTax and Fyle in accounting and taxation.

More than where India is right now, start-ups are looking at where it can potentially go. In 2018, the Bank for International Settlements (BIS) ranked India seventh among the 24 countries where it tracks digital payments. Around 67 million payments were processed per day in India that year—about one-eighth of China and one-seventh of the US. This marked an eight-fold growth in just six years: only China had a better growth rate.

But India still has much distance to cover in financial inclusion. In 2018, the latest year for which BIS data was available, it was ranked last in per capita penetration and frequency of use, with just 18 digital transactions per person per year. This was less than half of Saudi Arabia (38) and Mexico (40). Though digital payments have shot up since 2018, India is far from the likes of China (142), the US (495), and Singapore (831).

New innovations mean India is leapfrogging the debit and credit card generation of digital payments systems. Only about 33% of India’s population above 15 years owns a debit card, against 92% in Singapore, 87% in Japan, and 67% in China, according to the World Bank.

On this path, China has shown the way, relying on new payments infrastructure to increase penetration. One measure of China’s progress in this space is the upcoming initial public offering (IPO) of Ant Financial, the fintech arm of retail giant Alibaba. It is expected to be the world’s largest IPO, at $35 billion, and comes from a behemoth offering digital wallets, lending, wealth management, and banking services.

Of the 24 countries the BIS tracks, only nine have infrastructure to settle transactions in real time. In 2018, around 95% of China’s digital transactions were classified as real-time settlements. For India, that figure was 29% in volume terms and 7% in value terms.

Payments are now possible even without a smartphone using USSD 2.0, the UPI and digital payments story in India can only go further upwards. Facebook has long been eager to ride the gravy train of marrying its phenomenal distribution of WhatsApp to local retail and payments. It’s investments in Jio at the start of the year were one step towards the goal. With WhatsApp payments going live, it is one step closer. The UPI is a success story of Indian innovation aided by foreign capital. However, not without the regulator and the NPCI having its say. In an announcement that preceded the nod to WhatsApp payments, the NPCI declared that it will be enforcing a 30% cap of total volumes of payments for all Third Party App Providers (TPAPs). The two players dominating the UPI transaction volumes are both TPAPs: Google Pay and PhonePe, and the move will affect both of them. Unscathed however, will be the banks that have their own UPI infrastructure including Paytm and Jio, both of which have secured payments bank licenses. While WhatsApp is currently limited to 20 million users, it will be interesting how it scales, and how its parent’s partnership with Jio will shape up.

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