India’s crippling regulations should have killed e-wallets, but the opposite is happening

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Payment received.
Image: AP Photo/Dar Yasin
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India’s e-wallet companies have outdone themselves in the face of regulatory hurdles.

In October 2017, when India’s central bank issued a fresh set of regulations for the industry, business was expected to plummet by about 80%. The fear was that customers would be put off by the unnecessary and irrelevant extra layer of documentation—users were asked to complete the know-your-customer (KYC) process by Feb. 28 this year, failing which they wouldn’t be able to upload money into their e-wallets.

But the companies were in for a surprise.

Transactions recorded by prepaid payment instruments (PPI)—mobile wallets, prepaid cards, and paper vouchers—rose around 4% from Rs14,959 crore in February to Rs15,521 crore ($2.26 billion) in May, Reserve Bank of India (RBI) data show. This was a result of merchants pushing aggressively with better offers and keeping the process simple.

However, some industry officials don’t see any reason to cheer. By this time, they say, the industry could have grown more robustly if not for the KYC norms. “We are just celebrating the fact that we have managed to survive, but is that something worth feeling happy about?” asked the CEO of a mobile payments firm, seeking anonymity.

In any case, the industry faces several challenges even as it is expected to grow to $1 trillion by 2023 and draw more players.

Making money

Primarily, there is the balance-sheet hurdle.

Most e-wallet firms are still not profitable in India. With 60 non-banking e-wallet players already in the fray and more expected, the competition will only intensify.

Adding to the pressure are the various discounts and deals offered to customers. Discounts and cash-back offers may have helped somewhat improve customer stickiness, according to industry experts, but that’s not helping the cash registers.

Then there are the expenses of setting up biometric devices. “Right after the new regulations, the number (of transactions) had come down because we were still building the infrastructure to complete the KYC process,” said Praveen Dhabhai, COO of Payworld, an assisted wallet player. “Training the retailers was a challenge and even though the process doesn’t take more than a couple of minutes it took time to get people on board.”

Meanwhile, the currency-shortage crisis in April boosted digital transactions even though hard cash remains king.

At the moment, growth is mainly coming from the more digitally experienced customers, according to Abhishek Sinha, co-chair of the PPI committee at Payments Council of India (PCI), an apex body of the payments and settlements industry. “Customers who were early adopters of digital transactions are willing to take the extra step as they have seen value in these. But those who came in later are dropping off, and that’s a worrying trend,” Sinha said.

The next test will come in March 2019 when the deadline for physical verification under the new KYC norms ends.

KYC 2.0

The first stage of the KYC norms involved linking e-wallets to a government-approved identity proof.

Now customers must visit company-approved centres to get their documents physically verified. “It is still easy to complete the process on the computer or mobile and it takes away the pain for 12 months,” said Naveen Surya, chairman emeritus, PCI. “But when a user is asked to complete the paperwork once again by visiting a centre, that can turn out to be a huge roadblock.”

Industry officials also argue that firms had worked hard to tide over the KYC hurdle because the RBI had promised interoperability. This would allow users of one wallet to transfer money to customers of another, opening up the market considerably. The norms were expected in April but the wait continues.