* India's cash crisis seen as opportunity for mobile apps
* Companies recruit sales agents, suspend fee charges
* Poor internet connection, illiteracy among growth barriers
* Experts question business model in loss-making sector
By Devidutta Tripathy and Manoj Kumar
MUMBAI/NEW DELHI, Nov 29 Digital payment
providers in India have mobilised hundreds of extra workers to
enrol small merchants and offered their services for free,
betting that severe cash shortages will prove to be the
opportunity of a lifetime.
Signing people up, however, may be the easy part.
Getting shops and customers to change their reliance on cash
permanently will involve convincing people like Mohammad Javed,
a 36-year-old meat shop owner in New Delhi.
Working out of a bustling market in the capital, he is
surrounded by banks and ATM machines, but says he does not know
how to use a credit card machine, let alone a mobile wallet.
He says business has dropped since Prime Minister Narendra
Modi's shock move on Nov. 8 to ditch higher value banknotes, but
Javed does not believe mobile app providers offer a solution to
his problem - or to his customers.
"We don't have knowledge or resources to open a mobile
wallet or card-swipe machine, and our customers who pay 100-200
rupees ($1.46-$2.92) are not interested either," he said.
Javed's reluctance is a reality check for the likes of Paytm
and smaller rival MobiKwik, which have gone into promotional
overdrive since Modi's announcement.
The prime minister, whose government supports digital
payments, brought in demonetisation to crack down on the shadow
economy and improve tax collection.
"Why should India not make a beginning in creating a
'less-cash society?'," he said on Sunday, "Once we embark on our
journey to create a 'less-cash society', the goal of 'cashless
society' will not remain very far."
The companies say results have been promising so far.
Paytm, backed by Chinese Internet giant Alibaba Group
Holding Ltd, has added 700 sales representatives since
Nov. 8, taking its number of agents to 5,000.
The company, which has 4,500 full-time employees, plans to
double the number of agents to more than 10,000, as it
aggressively expands its network.
It says it has nearly doubled the number of small merchants
signed up to its services to 1.5 million in the last few weeks
and added eight million clients to the 150 million it had before
the banknote ban.
MobiKwik, whose backers include U.S. venture capital firm
Sequoia Capital and American Express, said it had
increased its agent base to more than 10,000 from about 1,000
before the Modi move.
Merchants on its platform have risen to 250,000 from 150,000
previously, and chief executive Bipin Preet Singh said they were
aiming for a million in up to two months. It has added 5 million
accounts since Nov. 8, bringing the total to 40 million.
But challenges loom.
Credit Suisse estimates more than 90 percent of consumer
purchases are made in cash, as millions still do not have bank
accounts. Those who do have bank cards mainly use them to
withdraw from cash machines.
Sales of cheap smartphones have boomed in recent years, but
internet networks remain patchy, especially in rural India.
Financial literacy and technology usage also remain low.
Dillip Kumar Agrahari, a vegetable seller in a Mumbai
suburb, recently signed up to Paytm but does not know how to
operate a smartphone.
He hopes switching to digital payments will improve his
business as the cash crunch drags on, but says he will have to
depend on a cousin to help with accounts.
Many businesses have traditionally opted for cash
transactions because they are hard for the tax man to trace,
given sales taxes are typically at least 10 percent.
Mangal Singh, a furniture store owner, said nearly 80
percent of his business was transacted in cash, even though he
accepts credit card payments.
"We are working on wafer-thin margins," he said. "If we are
asked to pay 12.5 percent tax and other charges, we will have to
close down our shops."
Concerns also remain about the infrastructure for mobile
payments, as customers or merchants from one platform cannot
transfer payments to another.
MobiKwik said it had started offering wallet-to-wallet
transfers, though not all rivals were on board.
WHEN WILL PROFITS COME?
The challenges raise questions about whether the business
models of mobile payments providers are sustainable.
Paytm recently slashed fees until Dec. 31, from a system of
fees that ranged from 1 to 4 percent, with the most lucrative
coming from telephone and utility bill payments.
MobiKwik is not charging fees until March 2017.
The closely-held companies are loss-making.
Paytm Chief Executive Vijay Shekhar Sharma said the company
expected to reach profitability in two years, without giving
details. MobiKwik's co-founder Upasana Taku said they hoped to
become profitable in mid-2018.
Fitch Ratings believes that once the cash crunch subsides,
some merchants and customers will go back to business as usual,
using notes to pay for transactions.
"I would expect some amount of behavioural changes," said
Fitch analyst Saswata Guha. "We're still not sure if this shock
per se is incentive enough for them to completely change the way
they do things."
($1 = 68.1384 Indian rupees)
(Additional reporting by Sudarshan Varadhan; Editing by Rafael
Nam and Mike Collett-White)