Digital Payments: Pursuit of the Holy Grail

The brief lull in e-commerce interest since the start of 2012 seems to have driven people to focus on ways to expand the market as opposed to merely spending more marketing dollars to gain wallet share of the existing base of users transacting online. An area garnering considerable interest from e-commerce companies and investors alike is the development of key enablers like supply chain management and logistics, digital advertising and payments.

The digital payments segment, in particular, has drawn significant interest given the imperative of e-commerce companies to transition consumers away from cash on delivery (COD) over a period of time. We had covered the payments ecosystem in our report "India Goes Digital" published in November 2011. This note is an update on where the market has moved since then and where our thoughts on where this segment could be headed going forward.

Why has India scored low on the payments innovation index?

One of the key complaints of Indian e-commerce players is failure rates of online payment transactions, which gets attributed to deficiencies in the payment gateway technology. However, in our view, there are a multitude of factors that contribute to failed transactions with the primary one being a lack of compatibility of systems and processes across different levels of the payment process i.e. across client, third-party payment gateway, acquiring bank, interchange and issuing bank servers.

The solution to that problem may lie in taking smaller steps (such as figuring out systems to ensure consistent user identity tracking across all parties involved) rather than aiming for a complete overhaul of the core payment gateway technology.

Besides innovation on the card payment technology front, significant product innovation in other countries has led to the development of digital payment solutions that have in turn aided the development of the digital commerce industry in those markets. Some of these include PayPal, Square, Authorize.net and Amazon One Click in the US, Qiwi in Russia and Alipay in China.

In China, which also has a large COD market, third party payment solutions have been gaining significant traction over the last few years. Alipay, Tenpay and 99Bill together account for more than 900 million registered users (almost 9 times India's estimated internet population).

The Indian payments market differs from most other markets largely because our regulatory framework is singularly focused on fraud protection (for banks and consumers) as opposed to being commerce centric and market driven. Also, developing payment solutions like Paypal and Alipay requires significant risk capital that has a fairly long term horizon.

The Indian digital payments segment has so far not had access to that form of capital. The digital payments segment has witnessed heightened activity in recent months. In the last six months, five players (Citrus Payments, Zakpay, Gharpay, Billdesk and Money on Mobile) have raised funds for growth.

In addition, Airtel launched an aggressive television and online marketing campaign to promote its mobile wallet service "Airtel Money". Currently, it is operating under a prepaid payment instrument license, which limits capability of the platform to cash withdrawals and remittances between subscribers of the service.

However, given Airtel's aggressive push towards tying up with various public and private sector banks, the service has the potential to enable payments across physical and digital storefronts for a significantly larger consumer base. The critical success factor for the service will be its ability to develop a ubiquitous network of merchants and consumers, which in turn will depend on the fees it charges for the service.

If Airtel were to take a longer term view and offer the service at nil or very low fees (a strategy Alipay and Tenpay have adopted very successfully to develop very large consumer franchises), it could potentially expand the digital payments market in India significantly and garner a disproportionate share of the same.

The other interesting development has been the launch of Rupay Debit Card by National Payments Corporation of India (NPCI) in March. Rupay was launched to replicate the success of China UnionPay (CUP), which is today accepted in 28 countries and through which a bulk of digital payments are made in China.

Given the materially lower fees charged by Rupay (as compared to Visa and Mastercard), it holds the promise of driving down fees associated with debit card payments, which can help expand the merchant base and drive card usage and penetration.

NPCI has also continued to expand its Interbank Mobile Payment Service (IMPS) network, which today boasts of 41 partner banks. While IMPS holds out the promise of making digital payments ubiquitous and has already registered 35 million users, the platform has not been able to gain traction in terms of transaction volumes.

Banks have not invested seriously in promoting the service because of the potential cannibalization of their fee income from traditional payment channels. NCPI has recently given a push to inter-connect IMPS with m-wallet services offered by banks, Telcos and other players including the Airtel Money service. This could very well provide IMPS a shot in the arm it requires.

COD versus online payments: Improving user experience may hold the key

COD as a payment option has been leveraged by e-commerce companies in India to address two critical issues. One of them is a consumer's inherent lack of trust in the online shopping medium. The other is the relative hassle of paying in advance using one of the digital payments options. While COD has been critical in helping address the trust factor, weaning consumers away (from COD) even after they gain the trust and comfort of transacting online will not be an easy task.

Improving the experience of making online payments (combined with monetary disincentives for opting for COD) could help reduce the reliance on COD. ClearTrip launched its one-click booking facility called Expressway with much fanfare recently. Expressway allows customers to store their card details in their Cleartrip accounts enabling a more seamless checkout process. Ngpay, India's largest m-commerce player, has developed technology that allows users to store their card and account details on their handset in an encrypted form.

This again helps in delivering a seamless experience where payments can be made without having to remove your card from the wallet.

Where do we go from here?

Several initiatives are underway to unlock and capitalise on the potential digital payments opportunity in India. While no single channel has established clear supremacy yet, mobile appears to be gaining traction as a medium to not only deliver mobile-payment services offered by players like Airtel Money, Movida (JV between Visa and Monetise) and MMP, but also as an economical Point-of-Sale (POS) device for merchants and cash collection agents.

PAYPOS, a mobile payments app from Paymate allows merchants to utilise an online payment gateway to transact through mobile phones.

Another Bangalore based start-up, ezetap has developed India's equivalent of "Square," which converts a mobile phone into a POS device by installing an additional piece of hardware and software.

The digital payments segment in India has the potential to spawn a few successful billion dollar enterprises. The question is whether the segment will attract the risk capital required or will it become an arena, where the big boys battle for glory.

(Aashish Bhinde is the Executive Director and Karan Sharma is Associate Vice President of Avendus Capital)