India’s Cash Ban Is the Best Thing to Happen to Digital Payments

EghtesadOnline: Vijay Shekhar Sharma’s Twitter feed has come alive these past two weeks. From a roadside egg-seller in Bhopal to a soda hawker in Bangalore, the founder of Paytm has posted snapshots of the unusual array of merchants who ply the teeming streets of India -- and are now turning to his digital payments startup for help.

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26 November 2016

Those fishmongers, vegetable vendors and rickshaw drivers count among the thousands who’ve signed onto India’s largest digital payments service since Prime Minister Narendra Modi triggered a nationwide cash crunch when he scrapped the country’s two largest note denominations. While the aim was to vanquish “black money,” it could end up being the best thing to happen to its nascent online finance industry and haul its antiquated economy into the 21st century by making digital payments mainstream, according to Bloomberg.

Sharma sensed the opportunity in a country where over 90 percent of the transactions are cash-based. Within hours, Paytm designed full-page ads to run in the biggest newspapers, proclaiming “Ab ATM Nahi, Paytm Karo” -- no ATMs now, use Paytm. On Wednesday, the startup -- which counts Alibaba Group Holding Ltd. as a backer -- outlined plans for what it called India’s first mobile checkout service, updating its app to accept credit and debit card payments.

“It is as if the black fog has lifted. The fintech opportunity in India is now looking huge,” said Sanjay Swamy, managing partner at Bangalore-based venture fund Prime Venture Partners, which has invested in seven financial technology startups. “The market size question has gone away and lead incumbents will become very big very fast, and their valuations will jump in a big way.”

Known as demonetization, the scrapping of 500 and 1,000-rupee notes sent businesses into firefighting mode and drove panic-stricken citizens to banks to exchange old cash for new. It also sent millions scurrying to digital cash, as daily growth numbers of online payments startups illustrate.

In a country where there’re fewer than 25 million credit cards for a population of over a billion, One97 Communications’ Paytm and rivals such as FreeCharge notched up astounding growth within days. MobiKwik, which has 40 million users and 250,000 enrolled merchants, said it’s seen a 75-time surge in transactions in just the past week.

Airtel Payments Bank went live on Wednesday in the western state of Rajasthan. The unit of the country’s biggest phone company, Bharti Airtel Ltd., said its 10,000 retail outlets in towns and villages will function as banking points and offer services such as 7.25 percent interest rates on savings accounts.

“This time will never come again,” said Upasana Taku, co-founder of Delhi-based MobiKwik, whose backers include Sequoia Capital, Cisco Investments and American Express. “All the reluctance and friction in adoption of digital payments has vanished overnight. We are updating our numbers every day as usage is going through the roof.”

Even before demonetization, Indian digital payments had been expected to shoot up. The market could be worth $500 billion by 2020, or 10 times current estimates, Google and Boston Consulting Group said in July.

While the situation’s still developing, India could end up a rare bright spot for financial technology investors. Funding and deals for fintech fell globally for a second straight quarter in the July to September period, according to KPMG and CB Insights. In contrast, Taku said investors are now asking her: “How much money do you want?”

Paytm -- last valued at $5 billion by investors including Alibaba’s payments affiliate Ant Financial and MediaTek Inc. -- says it’s just getting started. It’s rolled out its app in 10 Indian languages and continues to sign up merchants by the thousands. It announced a zero-transaction fee for merchants on mobile payments and no-fee money transfers from Paytm to bank accounts we well as a DIY kit for novice neighborhood merchants and hawkers.

Its user base has now hit 150 million and daily transactions have averaged 7 million since Modi’s move, more than the “combined average of all credit and debit cards in India,” the company said. Its gross merchandise value has reached $5 billion so far this year, already outpacing 2015’s $3 billion.

On Tuesday night, the central bank gave the industry another boost, temporarily increasing limits on pre-payments and introducing measures to encourage smaller merchants and consumers to adopt e-payments.

“Customers can do day-to-day transactions using prepaid wallets. Small merchants will be able to receive digital currency without deploying physical POS terminals or other infrastructure,” said Naveen Surya, chairman of the Payment Council of India and Managing Director of ItzCash.