A shop owner collects payment with Paytm, an electronic payment backed by China’s Alibaba, in New Delhi, India. (Xinhua/Bi Xiaoyang via Getty Images)
In 2016, the Indian government force-fed the idea of a cashless society to its citizens, pushing them into the arms of the digital payments industry through its demonetization programme that abruptly scrapped 85% of its currency.
It led to the rapid digitization of India’s monetary system, slated to grow $500 billion by 2020, contributing to 15% of GDP, with a slew of public and private players, from the government and multiple fintech companies to messaging apps vying for customers’ wallets.
While digital wallet companies such as Paytm, MobiKwik, FreeCharge, Ola Money, and Amazon Pay gained massive ground, Alibaba-backed Paytm, India’s top digital payment firm, hit 100 million downloads on Google Play Store in December.
Two years later, the scene has changed. Strict regulation of Indian central bank, the Reserve Bank of India (RBI), has dealt a blow to the growing digital wallet business. It all started last October, when the RBI directed digital payments companies to ensure that the payment instruments issued by them adhere to know-your-customer (KYC) norms — a process through which financial institutions verify information about customers, including their identification details and biometrics — by February 28 to pave the way for interoperability between prepaid payment instruments (PPIs), bank accounts and cards in a phased manner.
Ironically, this regulation comes at a time when mobile wallets reported a 14% growth in January transactions at 113.6 million compared to 99 million in December 2017.
Motorists refuel their vehicles as a sign for digital payment service MobiKwik is displayed at a Bharat Petroleum fuel station in Bengaluru, India. (Photo credit Dhiraj Singh/Bloomberg)
Now, since many e-wallet users — it is estimated at least eight out of every 10 — failed to fulfill the KYC formalities, several digital wallet companies were forced to bar them from adding or receiving money in their wallets from March 1. This irked many customers, according to The Economic Times, who have threatened to stop using the digital platforms. “There is major chaos in the field,” said Bipin Preet Singh, chief executive officer of Mobikwik.
While the mobile wallet companies grapple to get their customers to comply with KYC norms, losing a huge chunk of user base could lead to some firms scale down operations and cut jobs. Potentially exacerbating the squeeze is the cost to execute the RBI guidelines which could be well over $100 million for the firms.
Worse, mobile wallet companies could face a loss over $2 billion, which is over 90% of all digital wallet transactions, due to the new RBI directive. Amazon Pay has already shown a 30% drop-off in the wallet’s customer base.
An attendant stands beside a display board during a Digi Dhan Mela, held to promote digital payment, in Hyderabad on January 18, 2017. (Photo credit AFP/Getty Images)
In the last two years, since e-wallet providers simplified transactions, combined with multiple promotional offers to gain traction, major e-commerce platforms have partnered with them. But now, while the KYC crunch dwindles profitability of mobile wallets, it is feared that not only will these e-commerce businesses go back to cash transactions, but perhaps even the domestic remittance business, which is around 50% of the total PPI transactions, might revert back to banks.
In a traditionally cash-based economy, with the value of physical currency in circulation estimated to be over 9% of GDP, India has more recently seen 50% year-on-year growth in digital transactions, according to a study by Google and the Boston Consulting Group.
Even some of the last hold-outs of the cash economy, small pockets of activity such as street markets, vegetable vendors and grocery shops that dealt in notes and coins have eased into digital payment systems. Now, they will go back to cash, negating significant efforts made to build a digital payment behavior.
Without a doubt, the current regulations will take long time to be imbibed fully, and shrink the space for walletproviders, which have been a major contributor in achieving the Digital India dream.