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PhonePe’s bet on helping users access physical cash is fraught with risks

Leveraging offline retail.
By Sangeeta Tanwar
Published Last updated This article is more than 2 years old.

It may seem counterintuitive, but Indian digital payments major PhonePe is chasing growth by facilitating cash withdrawals. For this, it’s even hitch-hiking on offline retailers.

The Walmart-backed platform launched PhonePe ATM service on its app on Feb. 5. The feature allows users to collect physical cash—up to Rs1,000 ($14) a day—from a kirana (mom-and-pop) store and transfer an equivalent amount to the merchant from their PhonePe app.

Customers in 300 cities across Delhi, Mumbai, and Bengaluru can now locate nearby stores offering this facility on the PhonePe app and use the service for free. PhonePe says it aims to cover more Indian cities in the coming months.

PhonePe ATM will benefit those who don’t have ATMs in their vicinity or those in areas where ATMs frequently run dry of cash. “PhonePe ATM service will help users withdraw money within a radius of 15-20 metres, doing away with the need to travel long distances in search of a (bank) ATM,” Vivek Lohcheb, the company’s head of offline business development, told Quartz.

He adds that there is no irony in a digital wallet encouraging the use of cash. “We don’t want to increase cash circulation in the market. The fact is, 97% of commerce already happens through cash. So, with our new service, we only want to facilitate that requirement,” said Lohcheb.

The goal is to create more use-cases for existing consumers and encourage them to carry out transactions on our platform, he added.

Some experts, though, doubt if the service will be useful for existing users. “The ATM idea is purely a gimmick. Most customers using digital payments apps are digitally savvy and don’t have much requirement for physical cash,” said Ashneer Grover, CEO and co-founder of BharatPe, a Delhi-based fintech company.

More users

While kirana store owners can benefit from higher footfalls from the service, experts say the real benefit for PhonePe lies in expanding its user base, which currently stands at 185 million.

“What PhonePe is doing is, it is familiarising more people with its digital payments platform—albeit in the garb of cash transactions. Consumers will start using the app to withdraw cash, and with time use it directly for digital transactions,” said Bala Parthasarathy, CEO and co-founder of MoneyTap, a Bengaluru-based firm offering credit.

Digital transactions in India have witnessed a tenfold increase between 2013 and 2019, but remain less common than in other BRICS countries, according to a May 2019 Reserve Bank of India report (pdf).

With slow growth in the uptake of digital transactions, digital payments platforms are left with little choice but to piggy-back on the predominant kirana stores. “Kirana stores have survived the supermarkets, big retail chains, and even e-commerce. Ironically, the bigger players including digital payment platforms and large retailers are now striving to work with the same kirana stores that they are competing with,” said Parthasarathy of MoneyTap.

Challenges remain

PhonePe’s inorganic growth strategy may give it access to more users, but this approach comes with pitfalls, according to experts.

“By tying up with kirana stores for withdrawal of cash, PhonePe is letting consumer experience go out of hand,” said Raj N Phani, founder of the Hyderabad-based fintech company, Zaggle. “The company will no longer have the advantage of overseeing and managing end-user experience. This could hurt brand PhonePe as it could face disgruntled customers.”

Scaling up the service would also pose challenges. PhonePe will have to invest heavily in educating merchants about using PhonePe ATM facility, more so in smaller cities, where digital literacy is low. “This reliance on local shop owners for facilitating cash withdrawal will put more pressure and increase PhonePe’s costs for training merchants and maintaining record-keeping systems,” said Parthasarathy.

With the new service, PhonePe has also made itself vulnerable to fraud. There could be cases where merchants and customers carry out withdrawals and dishonestly contest transactions. There is also the possibility of frivolous cases of customers collecting money and denying doing so.  

Making cash available all the time at the kirana stores is also going to be a big task. For example, users not finding cash at a kirana store will end up being unhappy and waste no time in switching over to a competitor, suggested Phani.

The team at PhonePe is aware of some of these pitfalls. “To override this uncertainty and ensure a user does not return disappointed from a kirana store, we have created a tab on our app, which merchants can toggle off to show whether they have enough cash to disburse or not,” said Lohcheb.

Even if PhonePe plugs all the loopholes, the company still does not have a revenue model to monetise the service. Without revealing details, Lochebe said, “We are going to launch more value-added services for our customers and merchants in the coming months. We are experimenting and evaluating multiple revenue models to see how best we can monetise our new offerings.”

In the absence of a revenue model, it is to be seen how PhonePe makes its bet on offline retail pay off.

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