A payment system is to an economy what plumbing is to houses: The only time people talk about it is when it's not working.
That's been the case in India since the government's demonetization decision on Nov. 8. While that shock gutted commerce, it also upended the payment method of choice: cash. A simmering tension between two systems is now coming to the boil.
On one side is a bank-dominated, card-based infrastructure that can't handle peer-to-peer payments and works at just one-tenth of the country's estimated 13 million retailers. On the other is a mobile-based architecture hobbled by inadequate smartphone penetration (300 million, in a population of 1.2 billion), patchy data quality in towns and villages, and a strange dominance of players that boast neither strong online communities of their own nor a compelling e-commerce presence. In short, they're nothing like Alibaba Group Holding Ltd., Tencent Holdings Ltd. and Baidu Inc.
What's powering these companies instead is a stroke of good luck. The biggest is Paytm, a mobile wallet with 165 million users. Founder Vijay Shekhar Sharma couldn't hide his glee when customers topped up their balances by almost 1,000 percent right after Prime Minister Narendra Modi's cash ban.
Still, if payments are no different from plumbing, are they really lucrative enough to get this unicorn any closer to its goal of becoming India's first $100 billion company, which, by the way, is twice the market value of PayPal Holdings Inc.?
HDFC Bank, which does as much credit card business in India as three of its nearest rivals put together, doesn't appear to think so. "Wallets have no future," the bank's managing director, Aditya Puri, declared recently. "You can't have a business that says pay a 500-rupee bill and take 250 as cashback."
Puri would be right to be dismissive if Alibaba-backed Paytm was only about unsustainable discounts. But a Sanford C. Bernstein survey of Indian banking customers, conducted before the currency ban, showed a very different picture:
- Almost half of bank account holders also use Paytm wallets;
- The biggest reason they do so is "convenience";
- More than half of Paytm users are in the 25-35 age group.
"Young bank customers could easily ditch plastic for Paytm," says Bernstein analyst Gautam Chhugani. So could small retailers, once Paytm becomes a deposit-taking financial institution next month. Merchants, who can't afford to pay transaction costs as high as 1.8 percent on credit cards, could avoid them altogether as long as their funds remain parked in Paytm Bank current accounts.
The profit on this float could allow the startup to compete for individual deposits by slashing the numerous fees that traditional lenders in India get away with. Adding third-party products like wealth-management services and insurance would be straightforward, too.
HDFC Bank won't keel over. The lender has crunched its cost-to-income ratio even as it made significant investments in digital technologies. That's not the only competition Paytm faces. The government is promoting a shared mobile-payment interface. Banks are conspiring to kill it. Even if they succeed, that still leaves India's richest man in the fray: Mukesh Ambani's Reliance Jio, a new telco, this week signed up a payment partnership with Uber Technologies Inc. Coming soon: the Jio Payments Bank.
Just because Indian fintech startups lack the scale and sophistication of their Chinese peers doesn't mean banks can take them lightly. If HDFC Bank manages to displace Paytm with its own PayZapp, Puri will remain the king of Indian payments and can diss standalone wallets all he wants. Until then, he should show his new rival some respect for snapping at his heels.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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