An Insight into the Indian Digital Payments Industry

November 10, 2019

A surging digital payments industry in India is leading the transition into a cashless society, opening up a plethora of investment opportunities in the world’s largest democracy. Convenience for consumers, operational efficiency for businesses and formalization of the economy have all meant that an increasing number of transactions are taking place through digital payments systems, driving rapid growth in this sector.

 

Non-cash transactions are growing at a compound annual rate of 12.7%, and according to a report by Credit Suisse, the market is projected to be worth $1 trillion by 2023. Of the 600 million people in India that have access to the internet, close to 450 million own a smartphone, leaving a staggering 800 million people who are yet to go online for the first time. This represents a largely untapped market with immense growth potential in terms of consumers switching to smartphones and integrating into digital payments.

 

 

The Indian digital payments industry can be classified into pre demonetization and post demonetization. In November 2016, the Indian Government banned the Rs. 500 and Rs. 1000 notes as legal tender overnight, in an attempted crackdown against corruption and tax evasion. This outlawed the use of India’s two largest currency denominations at the time, accounting for nearly 86% of cash in circulation. In an economy where over 95% of transactions take place via cash, demonetization forced consumers to transition towards digital alternatives such as Paytm, a payment system app which attracted more than 10 million new users within a month.

 

Paytm, an Indian startup, is currently valued at $15 billion within a decade of its inception. Chinese tech goliath Alibaba, SoftBank and Warren Buffet’s Berkshire Hathaway all have investments in the company which has now become the region’s biggest digital payments platform in terms of both transactions and user base. However, unlike the digital payments service in China which is completely dominated by Chinese companies Alipay and Tencent Pay, the burgeoning industry in India has attracted significant foreign direct investment leading to intensive competition in the industry. Although Paytm and Walmart subsidiary PhonePe currently share just over 70% of the market combined in terms of app installations, there are a growing number of international companies rolling out their own payments services in the region. Google Pay and Amazon Pay have already established themselves as services in the crowded industry, whilst Facebook is currently awaiting government approval to begin offering payments in India through WhatsApp, which already has 400 million users in India.

 

 

 

As these companies rapidly expand in the battle for market share, competing to gain more users comes at a massive cost. Collective loses for the year ending March 2019 amounted to over $1.03 billion between Paytm, PhonePe and Amazon Pay. This translates to a 167% increase in loses from the previous year, with most of the cost increases coming from promotional incentives such as cashback offers to attract new customers. Challenges also arise from the fact that India is still largely a cash driven economy, with growth in the value of currency in circulation being nearly ten times more than the value of digital payments in the past year. 

 

As more consumers and companies adopt these digital payments services, there will be a transformation in the competitive dynamics within a lucrative industry. With companies beginning to offer a wider range of financial services such as small loans, insurance and pensions, increasing competition could give rise to a number of high valuation acquisitions as firms aim to penetrate a market that demonstrates vast amounts of long term potential. 

 

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