India was largely a traditional cash economy before the advent of the COVID, and the main mode of payment system was cash. However, the liberalization by the government and demonetization has brought many technological innovations in this space outpacing the western counterparts due to huge volumes of transactions and growth economy coupled with high GDP and penetration of smartphones supported by huge mobile telecom network. The shift in economy and consumer behavior due to COVID-19 triggered innovative trends in digital payments and the growth of mobile payment companies.
New mobile payments solutions are greatly benefitting businesses and consumers by helping them with cutting the traditional payment costs like interchange fees, service charges, processing fees, etc. Let us delve deeper into how mobile payments work and how mobile payment companies make money.
How does the mobile payment technology actually work? Mobile payment refers to any transaction effected with your mobile device. This convenient and secure mode of transaction is more in sync with today’s cashless and contactless world. The most common mobile payment methods are Mobile Wallets and NFC payments. A mobile wallet is simply the electronic version of your traditional wallet that stores your credit or debit card details for making your payments. NFC (Near-Field Communication) payments are done by keeping an NFC card reader and your smartphone near each other and the NFC chips communicate without contact to complete a payment.
The demonetization move by the Government of India in November 2016 created a severe cash crunch. The payments infrastructure was reframed to facilitate direct transactions between the bank accounts of two users. NPCI introduced a real-time payment interface called the Unified Payment Interface (UPI) that integrates all the bank accounts of a customer into a single application. Mobile payment companies like MobiKwik, PhonePe and PayTM were quick to gain millions of users during the next few months by integrating their UPI services.
“What do you think of the commercial model for digital mobile payments? How do we make money?” Vijay Shekar Sharma, Founder and Chief Executive of PayTM, once asked Nandan Nilekani, one of the key architects of the Unified Payments Interface. This is the million-dollar question that the above mobile payment companies in India and the Silicon Valley started to resolve.
Digital Payments
Digital payments are basically transactions that occur digitally, or through online modes. It provides an end-to-end experience with payment integration. With the onset of technology, financial system and banking reforms, the usage of digital payments has seen a remarkable growth. Digital payments are now omnipresent our everyday lives, be it for buying food from a street vendor, grocery or for paying EMIs for laptops, TV, etc. Various modes of payments like credit and debit cards, cash cards, gift cards, NEFT, RTGS, IMPS, USSD, UPI, QR Codes and Digital Wallets have evolved over a period of time.
Looking at the mobile payment companies revenues, the payment app PhonePe showed the highest growth with 857.22% in the year 2019 followed by Paytm, whose growth is 827.68% and Google Pay, that made a growth of 337.73% in 2019. This means all the three apps have grown 3 to 8 times in the year 2019.
According to Statista, around 44 billion digital payments were recorded across India in the financial year 2021. The digital payments market is set to grow globally at 19.4% CAGR during 2021-2028.
Penetration of Cards
The penetration of credit and debit cards was less in India due to low credit history of the people as well as the high risk of defaults. The main reason for this is the lower enforcement of laws and legal actions. The usage of credit cards shrunk following the 2008 financial crisis, but rebounded after 2011. Things took a turn when most banks started to restructure their credit card strategy. With more and more customers becoming smart users, there has been an increase in usage of newer modes of payments like ecommerce and POS transactions, .
According to ceicdata, credit card usage at POS data was reported at Rs.239,770.000 million in Jun 2021. Debit card usage data was reported at Rs.515,940.000 million in Jun 2021.
Sources of revenue
Having looked into the various sources of payments, now let us look at the sources of revenue for mobile payment companies in detail. Accelerated change started happening when even non-banking market entrants were gaining inroads into the underserved segments. That is when the mobile payment companies started offering a full-suite of value-added services extending beyond their basic mobile payment services.
Here is a chart from ceicdata that shows the value of mobile banking transactions in India (in millions) from 2011-2021:
Their important revenue streams can be classified into:
1) Floating on money in the system
Float refers to the money within the banking system that gets counted twice briefly due to the time gaps in registering a deposit or withdrawal. Mobile payment companies earn money by floating.
2) Commission charges from Banks and Merchants
A Merchant Account is an account issued by an acquiring bank which allows a business to accept debit and credit cards. Merchants pay credit card processing fees that are anywhere between 2.87 percent and 4.35 percent per transaction.
3) Acquiring merchants
Mobile payment companies are also investing in millions of small merchant establishments in the country. These activities include digitizing ledger books of small shops, creating digital fronts for customers to discover them online, and using small shops as ATMs to facilitate cash withdrawals for customers.
4) Affiliate contacts with vendors
There are affiliates that help merchants to increase their sales on the mobile channels. A few examples of popular digital content that affiliates help to sell are music, movies, books, audiobooks.
5) Marketable profiles/data for cross-promotion
The mobile payment companies create a marketplace where merchants would pay a commission to the wallet company for sale of its product to customers.
6) Subsidy income on remittances
A remittance is money sent to another party, who is usually in another country. Remittances are mostly made via an electronic payment system and a fee is applicable. Direct Benefit Transfers (DBT) is a scheme introduced by the Government of India for transferring the subsidies of various social welfare schemes like LPG gas subsidy, old age pension, etc. These also add up the transactions and revenue of mobile payment companies. According to the World Bank, India is among the top remittance recipients in 2018 with $79 billion.
7) Ad revenues
By just putting up an advertisement banner on their platform, the mobile payment companies will draw a huge amount of money. For example, PhonePe had around 16 million transactions on a daily basis as of February 2020, and at least 16 million times a user will be opening its app and see its advertisement banner. Its UPI app currently controls 47.43% of the market share of India.
8) Interest Earning
These companies earn interest from the customer funds stored at the wallet company’s bank account.
9) Subscriptions
These companies charge a subscription fee to make their customers visit their platform on a regular basis. This helps with retaining their customer base at the same time.
Mobile Wallets
A Mobile Wallet is a smart device app that stores the users’ card details, so they can pay for their transactions using that device. Mobile wallets use tokenization (randomly generated alphanumeric ID) to provide increased security for both the merchant and the consumer. Nowadays, the mobiles wallets have evolved and provide a host of service offerings like E-commerce store, travel, hotel bookings, purchase of digital gold, etc.
The use of these apps for making online payments has made a huge growth in few years. The number of users using these apps is increasing significantly day by day. The wallet facility of these apps attracts a lot of users. The growth in retail electronic payment systems including National Electronic Fund Transfer (NEFT), mobile banking, and development of payment acceptance infrastructure is likely to boost digital payment transactions from Rs. 2,153 lakh crore in FY20 to Rs. 7,092 lakh crore in FY25, according to the India Trend Book Report 2021 by the Indian Private Equity and Venture Capital Association (IVCA) and Ernst & Young.
Mobile payment providers are working on transforming their operating model to embrace the growing imperatives for efficiency, scale and global interoperability. An article by TechCrunch states that India and Singapore are working to link their digital payments systems to enable “instant, low-cost fund transfers,” in a major push to disrupt the cross-border transactions between the two nations that amounts to over $1 billion each year. Milestones in financial activities like these are sure to accelerate the incomes of mobile payment companies in India.