India’s largest mobile payment company is sitting on a ticking time bomb

Old school.
Old school.
Image: Reuters/Dinuka Liyanawatte
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In 2009, Paytm was incubated by Noida-headquartered One97 as a mobile wallet to help consumers conveniently pay for cellphone bills and movie tickets. Today, it is India’s largest mobile payment company, doing business with the likes of Uber, among the world’s most valuable startups.

At the core of Paytm’s offering—perhaps the most important factor that has enabled its meteoric rise—is a solution to the Reserve Bank of India’s (RBI) cumbersome regulatory requirement for online transactions.

India’s central bank currently requires that every card-based transaction go through a two-step verification process. That system takes both speed and convenience out of the online experience.

Paytm streamlines this process by providing a mobile wallet, which can be filled up (using two-step authentication) and then used without the need for repeated verification. And it works: From seven million users in 2013, it now has over 25 million users.

But here’s the ticking time bomb: The RBI’s mulling a single-step process for transactions up to Rs3,000 ($48).

And that’s way above the Paytm app’s average transaction amount of Rs150.

So, why would anyone still use the platform?

Paytm CEO and founder Vijay Shekhar Sharma is undeterred.

“Typically one extra click…it doesn’t make wallets, it doesn’t break wallets,” he told Quartz. ”Incidentally, I would say that if you were to add money to the wallet and there is no (second- or) third-factor authentication, it will be better for us.” This is because Paytm users, too, would benefit from loading cash on their prepaid wallets faster.

Besides, Sharma factors in the Indian mentality to save money and spend under control. “Consumers transact using Paytm because they are in control,” he said.

And there are some, like angel investor Sanjay Swamy, who believe that consumers might stick to two-factor authentication even if other options exist.

“I don’t know what the psyche will be. Some would say, ‘Great. Now I don’t have to go through two-step,'” explained Swamy, “But other consumers may not be comfortable.” And might not trust companies with their card details.

Diversify and grow

A month after rolling out its mobile wallet service in January 2014, Paytm launched its e-commerce platform.

The company claims that it registers 25 million transactions every month. For every transaction made, Paytm takes a cut of 2.5% from the merchant. On its e-commerce platform, the mobile payment company is looking at 100,000 sellers in the next one year, growing it substantially from its current base of some 15,000 sellers.

In February this year, Paytm got a huge boost when Chinese e-commerce giant Alibaba chose the Indian company as its first investment in the country. Ant Financial Services Group, an affiliate of Alibaba that runs China’s largest mobile payment service Alipay, picked up a 25% stake in One97 Communications, the parent company of Paytm.

In March, Ratan Tata picked up a stake in the company for an undisclosed amount.

And within the next two weeks, it is going to launch its new peer-to-peer mobile wallet service where two individuals can transfer money. The app is already being tested in its beta version.

In the e-commerce space, where the app is fighting it out with Flipkart, Snapdeal and Amazon, the company is banking on the convenience of its payment process to bolster sales.

While the online marketplaces have made peace with cash on delivery being the most preferred payment mode for Indians, Paytm is placing its bet on shoppers paying through their virtual wallets.

Sharma’s reasoning is that consumers are shopping 80-90% cash on delivery—and that is not scalable. ”You don’t want to move $50 billion in cash everyday,” he argued. “Even banks discovered that it is not a viable model for them. That is why they continue to de-incentivise cash.”

With the number of mobile wallet users in India bulging as the online retailing boom continues, Sharma is optimistic. ”We will definitely be the biggest marketplace in this country,” he said.

His timeline: “1,000 days.”