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Podcast | Deep Dive - WhatsApp payments and its turf war with Paytm

Instant messaging giant WhatsApp is entering the payments service. Here’s how the battle between WhatsApp and Paytm is shaping up.

June 01, 2018 / 04:09 PM IST

The messaging app on your mobile phone that you use most frequently, WhatsApp, is now getting into payment services.

Sometime in early June, WhatsApp will enter the field crowded with online payment services, going up against established players lie Paytm, Google’s Tez as well as others. I do not want to say plethora but it does apply in this case.

Besides Paytm and Tez, WhatsApp is taking on the govt’s own BHIM app, AEPS, USSD, online wallets like Freecharge, PhonePe, Mobikwik, PayU Money, Oxigen, Jio Money etc. Then there are those run by the banks themselves — like State Bank Buddy, ICICI Pockets, Citi Master Pass and another by HDFC bank. That is one crowded field. Entering and making a splash in a sector that offers low margins seems a strange move, at first look.  So what is WhatsApp up to here?

Bloomberg had reported recently that WhatsApp, which has 200-240 million users in India, has tied up with three large banks – HDFC, ICICI and Axis — and is ready to implement a new payment service. SBI could also join this party, the bank said, once all "necessary systems" are in place.

Forbes India has reported that WhatsApp has been planning to launch an in-chat payment system since November 2017.


The company decided that it was going to use Unified Payments Interface, or UPI, to allow peer-to-peer transactions within its 200 million strong user base. It then approached the National Payments Corporation of India to start working on the feature.

You might have heard of this payment feature in beta stage a few months ago. While waiting for partners to implement necessary systems, WhatsApp a Beta update in February to check the payment system’s stability. This test rollout was limited to one million users and did not actually allow transactions during the test phase.

Users noticed this feature only in April, when a feature titled Request Money was spotted in some phones, which allowed users to set up a UPI profile. Many users can now see an option titled Payments in both iOS as well as Android under WhatsApp settings.

For interested users - let us face it, we will all try it at least once -, the setup process is easy.  Once a user accepts the terms and conditions of the UPI, WhatsApp generates a list of banks that it has collaborated with or plans to partner with in the future.

When selecting the bank you want to set up your UPI ID with, bear in mind that the phone number linked to your WhatsApp account needs to be the same number linked to your bank account too.

This is a prerequisite. WhatsApp will automatically add the account number linked to that phone number and will ask you to set up a UPI ID. If you already have one, you will need to enter you VPA or Virtual Payment Address and verify your debit card. That’s it. You are ready to use payments on WhatsApp.

With UPI, while the app itself is built by a developer the actual processing of transactions needs to be done by a bank. This is where the banking partners come in. In the case of Google Tez, HDFC, ICICI, Axis and SBI bank are partners who process payments. But users will be able to add any of the UPI-supported banks to their WhatsApp account to allow for payments.

Which leads us to an obvious question – in what way is WhatsApp Payments going to be different from other services like Paytm, Tez, Freecharge, PhonePe etc.? The first advantage WhatsApp has is its large user base. As mentioned earlier, it has over 200 million users. That is 20 times higher than Paytm's daily active users.

"WhatsApp has a great starting point: a monopoly in chat. High engagement makes it a credible competition," says Vivek Belgavi, head of financial technology at PwC India.

This one move could potentially introduce tens of millions of users to digital payments.

WhatsApp seems to be taking the payments service seriously. The Indian Express reported that In April WhatsApp had put out a job ad for an India head where the focus was on Payments. According to the requirements listed in the ad, WhatsApp was keen on candidates who had experience in the Payments space; presumably, in order to drive the strategy around the new feature they are hoping will be a game breaker. WhatsApp also has a separate Business app for India.

Amrish Rau, chief executive of PayU India, a payments processor, is of the opinion that WhatsApp has the influence to upend this fledgling sector.

“WhatsApp is already one of the most popular apps in India and with messaging as the key hook; they offer a compelling use case for payments, particularly P2P. They’ll be competing on the back of their UI (user interface), which is really smooth, and it will force everyone to up their game,” he said.

He then makes an interesting observation. “You need other services as the main hook and then you add payments. That’s why I think WhatsApp’s entry is a threat to the incumbents,” says Rau.

Maybe that explains the heartburn that some of the competitors are experiencing? Livemint, in its analysis, noted that digital payments is still incipient in India, and while Paytm has a huge lead, it is vulnerable. Because digital payments have fewer entry barriers than operations-heavy businesses like e-commerce or cab hailing.

Is this feature on WhatsApp secure? Forbes India reports that WhatsApp does not add an extra layer of security like Google does with its Tez payments app. However, you do need to verify each payment using your UPI pin. Once set up, you have to enter an amount and verify it using the UPI ID.  The amount is then credited to the receiver’s account.

This does not sit well with the competition. Back in February, Paytm' founder Vijay Shekhar Sharma alleged that WhatsApp was flouting rules and putting consumers at risk because it was skipping steps in the payments process. Sharma he also accused WhatsApp of restricting access to other UPI-based platforms. He took aim at WhatsApp in a series of tweets, claiming WhatsApp had bypassed security requirements and that Facebook, WhatsApp’s owner, was trying to create a walled payments garden that did not support interoperability, which is one of the key requirements of UPI.

Some time ago, the Reserve bank and the ministry for information technology had raised concerns over WhatsApp’s sharing of payments data with its parent company Facebook. Because - in layman terms - after the Cambridge Analytica mess, nobody trusts Facebook with data.

Factordaily reported that certain incumbent payment players had criticised WhatsApp payments, calling the service insecure and that it sent financial data of Indian users to servers outside of India.  The report notes that info about WhatsApp sharing data with partner ICICI Bank, as well as Facebook, came to light when it updated its privacy policy in March. The company said it uses Facebook’s infrastructure when payments are done.

“Facebook does not use WhatsApp payment information for commercial purposes; it simply helps pass the necessary payment information to the bank partner and NPCI. In some cases, we may share limited data to help provide customer support to you or keep payments safe and secure,” the WhatsApp blog said.

Moreover, the risk of these data being not entirely secure causes some consternation in the company. The Washington Post reported WhatsApp’s founders “clashed with Facebook over building a mobile payments system on WhatsApp in India.” Co-founder Jan Koum, who quit the company in April, had disagreements with Facebook over data privacy.

MEITY, or Ministry of Electronics and Information Technology, wasn’t impressed with this news. Some sources told the media that the ministry opposed the sharing of payments information under any circumstances and raised the issue with RBI.

The National Payments Corp. of India, or NPCI, seemed to be satisfied with WhatsApp’s declaration that Facebook cannot use the data for commercial purposes. “Many group companies share the infra so no issue on that. The main issue is what the data is used for,” one senior NPCI executive told the media.

The NPCI allowed WhatsApp to go ahead with beta testing because it had not crossed one million users. Data indicated that, in April, WhatsApp had a mere 1.77 lakh transactions. Further, the NPCI said it would allow WhatsApp to launch payments to all its users only after it is fully interoperable.

In response to these reports, On May9th, the National Payments Corp. of India or NPCI, which owns UPI, said all UPI apps have to allow interoperability. However, Dilip Asbe, CEO of NPCI, is reported as saying he has no concerns about data security on WhatsApp.

Looking beyond the technicalities and the accusations, what becomes clear is this is largely a turf war. Paytm has dominated digital payments in India, a strength that has catapulted the company into the big leagues. It is India’s second-most valuable internet start-up after Flipkart.

A mammoth spending spree saw Paytm beat rivals like FreeCharge and MobiKwik to become India’s largest digital payments brand. News reports have noted that Paytm raised more than $2 billion and counts the Alibaba Group and the Softbank Group as two of its key investors. From a valuation of under $200 million before the start of 2015, Paytm has ballooned to $10.2 billion in 2018.

That valuation was predicated on expectations that Paytm will continue to dominate payment services, expand its new payments bank business and introduce new services such as wealth management. And now, in waltzes WhatsApp, with its easy-to-use interface and deep pockets, throwing down the gauntlet.

What is the main threat here? User base. Which one do you think is more popular? WhatsApp or Paytm? WhatsApp is one of the most widely used internet platforms in our country. As mentioned earlier, WhatsApp has over 200 million active users. Paytm claims to have 300 million users, but the sheer number of people using WhatsApp on a regular basis is far higher.

Without even overstating, WhatsApp has a massive sway - messages on WhatsApp play a role even in election campaigns in India. Now, that platform allows you to transfer money easily.  Experts suggest that though WhatsApp’s Payments option would more or less work on the same principle of sending and receiving payments, its ability to allow users to do it while chatting makes it a natural winner. Breezy as you like. That is the clincher.

There are other apps too, of course, that can pose a challenge to WhatsApp. Google Tez has been a favourite of some users, removing the need for a wallet and transacting directly between bank accounts securely. Google Tez recorded 60 million transactions in April this year, and Paytm reported 63 million transactions during the same period. Flipkart’s PhonePe has also seen a fair bit of traction. But they’re nowhere near as ubiquitous as WhatsApp. Its entry into India’s payments space is being compared to that of WeChat, an app that redefined the payments space in China when it expanded beyond messaging.

Parent company Facebook is also eyeing a bigger market share with this move. Analysts concur that Facebook may be keen on pulling off a WeChat in India with WhatsApp. WeChat is a social networking app that allows users to do everything from messaging, calling, shopping, payment, and host of other services you can think of in just one app.

Kunal Shah, founder and former CEO of FreeCharge, says, “You have to see what happened in China—Alipay was the biggest payments company for years but the market moved towards mobile payments suddenly when WePay came in and became really big, because it was a higher-frequency app.”  He adds, “WhatsApp will lead to a digital payments revolution in India. Not just wallets, even services like NEFT could potentially become irrelevant or less used.”

Of course, that’s not to say Paytm is a spring chicken waiting to be trampled by a behemoth. It enjoys a large brand recognition and has hard cash in hand. It has become synonymous with digital payments over the last 18 months, thanks to demonetisation.

Paytm has plenty of experience, and diversified into many payments niches. It has more than $1.5 billion in cash and has the backing of investors with the ability to pump in billions more. That said, Paytm will need to stay agile and sharp. The consensus seems to be that Paytm hasn’t yet faced a competitor as formidable as WhatsApp.

“WhatsApp’s entry can bring in the next 100 million users into the digital payments fold and that will be a massive boost for the digital payments ecosystem overall,” said an industry expert and competitor.

Whatever direction this showdown takes, one thing is certain. Digital payment services are set for a big leap forward. Payments will become a highly contested market.
Moneycontrol News
first published: Jun 1, 2018 04:05 pm

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