WhatsApp is a step closer to disrupting India’s fintech space

Fully mobile.
Fully mobile.
Image: REUTERS/Phil Noble
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Facebook-owned social messaging service WhatsApp is all set to take India’s fintech space by storm.

Last week, the decks were cleared for the world’s largest social messenger app to start providing payment services in India. The Indian central bank-backed National Payment Corporation of India (NPCI) said that Whatsapp has complied with all data localisation norms and can soon go live, according to an affidavit filed by the Reserve Bank of India (RBI) in the country’s apex court.

While it still awaits the supreme court’s nod, this development comes as a big relief to WhatsApp as the company’s long-time dream of monetising its massive user-base of over 400 million in India is inching closer to reality. “The combination of payments and the stickiness of a chat messaging service gives WhatsApp immense power to disrupt the fintech space,” said Aparajita Srivastava, partner at New Delhi-based Ikigai Law.

The NPCI’s nod comes at a time when the adoption of digital payment has received a fresh impetus. Since the spread of Covid-19 in India, digital payment platforms like Amazon Pay, Phone Pe, and Paytm have witnessed a sharp surge in transactions.

United Payment Interface (UPI)—an Indian central bank regulated digital platform used for instantly transferring funds—clocked its highest-ever volumes in July, according to the NPCI.

WhatsApp’s foray into this space will lead to a further increase in usage of digital banking, said Chamundeshwari Gandham, project manager, financial services at GlobalData, a data analytics and consulting company. “Usage of mobile payment solutions is high among Indian consumers, showing consumers’ willingness to quickly adapt to digital solutions,” he added.

Ripe for disruption

Along with entering into the digital payment space, WhatsApp is partnering with banks to offer banking services and products through its platforma service known as “neo-banking.”

WhatsApp has already tied-up with two of India’s largest private banks, ICICI and HDFC. Customers of these banks can use WhatsApp to avail of services such as checking account balance, mini statement, and credit card limit, among others. Adding to this, WhatsApp will now help domestic lenders to offer micro-lending, pension, and insurance services through its platform.

This is bad news for India’s existing neo-banks.

The term “neo-bank” is used loosely and isn’t defined by regulators in India. A neo-bank in India is defined as a platform that improves the digital experience of a bank’s customers. Neo-banks don’t avail licence as they only act as a connecting platform, and all transactions and assets are held on the bank’s balance sheet. A bank usually ties up with such companies as it helps them in reducing the cost and cater to niche segments.

Some of the leading neo-banks in India right are Niyo Solutions, Open, PayZello, InstaDApp, Neo-Bank, and 0.5Bn Finhealth. These neo-banks provide a range of services including loans, insurance, prepaid cards, saving, and investment products.

But why would WhatsApp enter into the neo-banking space?

For traditional banks, reaching out to the rural parts of India for lending and selling financial products is a high cost and time-consuming process. But there is a huge demand, which is waiting to be tapped into.

In this scenario, a tie-up with WhatsApp could turn out to be a win-win proposition for banks as well as the instant messaging app. While banks can reach out to this large unbanked population, WhatsApp can quickly monetise its user base, something it has been trying to achieve for a long time.

Analysts believe that WhatsApp can fill this microfinance demand vacuum in a cost-efficient manner. “One has to think about WhatsApp as a distributor of these products and services. A vehicle for banks to reach to the customers without any sharp rise in transaction cost,” said Ankur Bisen, senior vice-president of the retail & consumer products division at Technopak.

Besides the rural parts of India, WhatsApp is also looking to tap into small businesses’ needs. According to GlobalData, the social messaging platform’s business app has made strong inroads into micro, small and medium enterprise (MSME) space during the recent lockdown and currently has 15 million users. “This aligns well with its plan to digitise businesses and offer working capital loans, helping it to gain clients over its competition,” said Gandham.

He added that WhatsApp “could potentially leverage its parent Facebook’s partnership with Reliance Industries to get access to a large number of small businesses.” In April, Facebook bought a 9.99% stake in Jio Platforms, the umbrella entity for all the digital and internet businesses of India’s richest man, Mukesh Ambani.

But still, there are hurdles that WhatsApp will need to cross to succeed in India’s digital payments and neo-banking space.

What’s next

WhatsApp’s bid to venture into India’s fintech has been laced with regulatory challenges so far, and experts believe that’s not going to end change time soon.

What WhatsApp is doing falls in a grey area and “since it’s already under regulatory scrutiny, it may not like the usage of the term (neo-banking) against its name,” said a Mumbai-based analyst, requesting anonymity.

Also, given WhatsApp’s massive userbase, it’s movement in the payment and fintech space will be monitored closely. ”The RBI may insist on full compliance of data protection rules and any other applicable regulations (as it was the case with the WhatsApp payment service),” said Gandham.

A lot will also depend on execution and how the entire model plays out. Besides, the competition might heat up in this space as other homegrown messaging apps would take a cue from WhatsApp, states Bisen.