After a long wait, it’s finally here — the National Payments Cooperation of India (NPCI) has opened the gates for up to 20 million users to ‘WhatsApp’ money to their contacts. This allows Facebook-owned WhatsApp to participate in the UPI market, which, at about 2 billion transactions a month accounts for about 50 percent of the retail digital payments market in India, with a monthly throughput of ~$50 billion, or ~12 percent of the market by value).
We expect retail digital payments to cross a monthly throughput of $1 trillion by FY2024, so the size of the pie is expanding rapidly. This market is currently dominated by Google Pay and PhonePe, each with a ~40 percent market share. The recent NPCI circular to cap the market share of a third-party payment app to 30 percent is very relevant and will pave the way for WhatsApp to gain share from both Google Pay and PhonePe.
But even otherwise, WhatsApp had a great starting position with a highly engaged base of about 400 million users, many of whom keep checking WhatsApp frequently throughout the day. In rural India, WhatsApp is often the only app that people use for messaging and calling. While Google Pay, PhonePe, and PayTM have a comparable user base, the fact is that users of payment apps do not keep checking their apps unless needed.
Another tailwind for WhatsApp is that the modalities of capping the market share of Google Pay and PhonePe are likely to be complex, and adversely impact the user experience. This should enable WhatsApp to make rapid strides at least in the P2P market.
However, roughly half the UPI transactions are payments for commerce; and this is where WhatsApp will have to go to the drawing board. Business use cases of WhatsApp are still in a nascent stage, and WhatsApp will need to push hard to create a seamless user experience to drive person-to-merchant (P2M) transactions. For example, if a merchant can link their billing system with their enterprise, WhatsApp can send a ‘Collect Money’ notification to the customer, then the transaction could be seamlessly executed as a UPI P2M transaction on WhatsApp Pay itself.
The elephant in the room, of course, is: what are the global giants such as Google, Amazon, Facebook, and Walmart (PhonePe) seeing in this market even when the interchange is nil, i.e. absolutely no revenue is to be made by acquiring and processing UPI transactions?
The first hypothesis is that they are banking on a re-introduction of interchange; the industry has been pushing for a reasonable interchange so that at least costs are covered. Remember that while marginal costs of a digital transaction are minuscule, the cost of setting up and managing the platform is substantial. If that were to happen, then of course there would be a revenue pool created overnight, and the business case would start looking a lot better. However, it may also induce large banks or other large players to enter the fray.
The second hypothesis is that there are substantial opportunities to monetise the user base by cross-selling other financial services. PhonePe and PayTM already offer savings and investment products such as digital gold and mutual funds on their apps, while Google Pay has just launched a credit card in partnership with Axis Bank and Visa.
There is also a belief that in the digital world, the ‘winner takes all’, so, if players with deep pockets remain invested, and since marginal costs are very low, at some point operating leverage will kick in. This can be contested, of course, there aren’t too many shining examples in financial services, and regulators also try and ensure that no player dominates the market. The NPCI’s recent circular of capping the market shares to 30 percent is a clear indication of the thought process in India at least.
Finally, there is the hypothesis that the key monetisation driver is not financial services at all, it is search or advertising for Google, and ecommerce for Amazon and Walmart. So far WhatsApp has stayed away from advertising and has been a notable exception to the rule that ‘If you're not paying for it, you become the product!’, so it’s tough to say what they have up their sleeve…
A fascinating battle lies ahead among the global giants and it’s tough to call who will win. One thing is certain — consumers can feast some more on cash backs, discounts, and offers.Shishir Mankad is Head, Financial Services, Praxis Global Alliance. Views are personal.