* E-payments flourish after India scrapped most banknotes
* Now government backing new cashless transaction systems
* E-wallet providers offer more services to retain business
* E-wallet business model burning cash in drive to expand
* Investors see consolidation to achieve economies of scale
By Sankalp Phartiyal and Devidutta Tripathy
MUMBAI, March 10 Electronic payment firms got a
big boost when India abolished most of the country's banknotes
last year, but rival state-sponsored e-payment services are
forcing them to raise their game to hang on to their new
Until November's move, which scrapped 86 percent of all
notes to foil counterfeiting and the black market, more than 90
percent of transactions in India were in cash.
Electronic payments providers such as market leaders Paytm
and MobiKwik, and smaller players FreeCharge, Citrus, ItzCash
and Oxigen, seized the opportunity, snapping up millions of
customers and merchants caught out by the sudden shortage of
Now the government is rolling out three tools to facilitate
rival cashless transactions, including a United Payments
Interface (UPI) app that simplifies inter-bank fund transfers,
and Aadhaar pay, a bank-linked payment service that relies on
the national identity card and can be used with just a
It has also promoted Bharat QR, another bank-linked service
that uses machine-readable labels as the base for a simple
payment system, helped by Visa and MasterCard. It
requires only a smartphone and is aiming to sign up 2 million
merchants by September.
The UPI app was downloaded more than 17 million times within
two months of launch, and transaction values jumped 18 times
between November and January, albeit from a low base.
So e-wallet providers such as Alibaba-backed Paytm,
the largest, with more than 200 million clients, are adding
services to stay a step ahead.
Paytm is betting that its licence to set up a niche bank so
it can pay interest on deposits - and connect its systems with
the UPI network - will help, and it knows it will need extra
services to make the business profitable.
"The point is that e-wallets as a standalone business will
be massively risky and not viable," said Vijay Shekhar Sharma,
founder and Chief Executive of Paytm.
In the early stages of their build-up, the companies haven't
even paid lipservice to viability - giving a free service to
customers and merchants, while burning through their start-up
funding. Their only source of income has been commissions on
phone and utility bill payments.
Paytm's parent company has raised $675 million from Alibaba
and more from others, and says its current valuation is about $5
billion, but it has lost about $230 million over the last
financial year. MobiKwik, part-owned by American Express and
Sequoia Capital, has raised about $80 million and is eyeing a $1
billion valuation as it holds talks with investors for more
Both have waived fees to enable free money transfers from
wallets to bank accounts. Paytm says transfers within its
wallets and accounts will be free forever.
And they have been using cash discounts and freebies to lure
Mumbai-based management teacher Christina Sundaresan says
she started using Paytm when the government pulled the plug on
notes, and now uses it so frequently she gets a free movie
ticket each weekend.
"My laptop repairer, the vegetable vendor and the medical
store are all accepting Paytm, so it works well," she said.
But she says she would consider other payment options,
That will make it difficult for Paytm to withdraw the
freebies, but they can't keep burning cash.
"You can't have a business that says 'pay a 500 bill and
take 250 cash back'," said Aditya Puri, head of third-biggest
Indian lender HDFC Bank, which has its own payment
MobiKwik, which started as a simple digital wallet, is
looking to partner with mainstream banks to market a host of
financial services on its platform, from mutual funds to loans.
It aims to triple its wallets user base to 150 million by
end-2017, and raise the value of transactions five times to $10
It thinks its head start and extra services will keep it on
top of the competition, and that banks, latecomers to e-payment,
will struggle to match the scale of its operations and vendor
"UPI is a solution for bank transfers. UPI is not a payments
ecosystem today, as there are no merchants on UPI," said
MobiKwik Chief Executive Bipin Preet Singh.
Dhruv Chopra, managing director at the Indian unit of South
African payments solutions provider Net1, which has invested in
MobiKwik, is also betting the start-ups will be too nimble for
But with a large number of small players, many will not
survive, he said.
Avnish Bajaj of venture capital firm Matrix Partners, which
has investments in payments companies ItzCash, Mswipe, and ride
hailing firm Ola, which has its own e-wallet, agrees there will
be a clearout under competitive pressure.
"There's going to be a bit of consolidation in the e-wallets
space in the next two years," he said.
(Additional reporting by Manoj Kumar in NEW DELHI, Swati Bhat,
Suvashree Dey Choudhury and Euan Rocha in MUMBAI and Cate Cadell
in BEIJING; Editing by Will Waterman)