At the end of May 2017, Paytm – India’s largest mobile money company – launched Paytm Payments Bank, having received the last clearance from the Reserve Bank of India (RBI). “We wish to acquire 500 million new customers and launch a slew of financial services products such as deposits, wealth management, insurance, financial lending and many more,” Paytm founder Vijay Shekhar Sharma told business daily Mint. A few days before that, it got a fresh investment of $1.4 billion from SoftBank of Japan, taking its valuation to $8 billion. The twin developments promise to herald a coming of age for mobile wallets in India.

Of course, mobile wallets (this term is used interchangeably with e-wallets and mobile money) have been around for some years now but, in the absence of clear rules and regulations, they were not easily categorized. In February 2015, the RBI invited applications to set up a new category called payment banks. It cleared 11 applications (three withdrew later). Airtel Payments, Paytm, India Post Payments (which launched a pilot project earlier this year), and FINO PayTech were the early starters. Other telecom players (Reliance Jio Payments, Vodafone M-Pesa) were also in the fray. And, of course, the 21 public-sector banks and their 26 private-sector counterparts can all issue e-wallets.

Mobile money is therefore not a result of demonetization, but it has taken off following the controversial move by the Indian government to remove Rs500 and Rs1,000 notes from circulation. Prevention of corruption and the spread of black money, choking terror funding, and the creation of a cashless society were the main objectives of the demonetization measure. Today, many observers say the only flourishing survivor of the trio of goals is the cashless society. But that has also been changed somewhat. “Our bid to go cashless means less cash, not no cash,” said finance minister Arun Jaitley. He was speaking at a Digi Dhan Mela, an event to educate people on digital payments.

Jaitley was particularly upbeat about mobile money because part of the supporting infrastructure is already in place. “From a time when 1% of the population had mobile phones, in 20 years it has now come to more than 90% in India,” he said. The country had 1.16 billion mobile subscribers at the end of February 2017, according to the Telecom Regulatory Authority of India. Another survey by the Hong Kong-based technology market analysis firm Counterpoint says about 300 million of those subscribers use smartphones.

“Being able to pay with a mobile device most commonly happens with a smartphone,” says David J. Reibstein, professor of marketing at Wharton. He explains why this is making waves in India. “In the U.S., credit cards and even checks are well-established systems. [But] these are simply interim systems as we transition to mobile money. In India, neither credit cards nor checks are well developed. Rather than develop a soon-to-be-outdated technology, it is logical to transition immediately to the next form of payment. This is what happened with telephones. Many developing countries transitioned to cellular faster than the U.S. The U.S. had landlines and the need for cellular was not as acute as in countries where landlines had not been fully deployed.”

Throughout human history, the primary medium of payment for goods and services “has evolved from shells, sheep, gold and silver, to paper currency, and now to mobile money whereby payments can be made through a smartphone,”notes Wharton professor of marketing Z. John Zhang. “Mobile money gains currency as the smartphone becomes more and more versatile in functions and ubiquitous in usage.”

Starting with a Clean Slate

“Mobile money offers less developed economies a great opportunity to leapfrog the developed economies,” adds Zhang. “In countries like the U.S., credit card usage is widespread and the infrastructure associated with it is mature and sophisticated. You can imagine that to move away from a well-established infrastructure and then make an expensive investment on a new one will meet with much reluctance and even resistance from all parties with vested interests in the existing infrastructure. Countries like India and China start with a clean slate and can embrace the new technology with little hesitation.”

“In India, credit card penetration is low and mobile wallets are replacing cash, which has many drawbacks,” says Kartik Hosanagar, a Wharton professor of operations, information and decisions whose research focuses on the digital economy. “Add to that, there is a big portion of the population that is unbanked. Mobile wallets are very compelling for them as well.”

The distinctions between mobile money offerings are not always clear: There are the run-of-the-mill e-wallet companies (such as Paytm, MobiKwik and FreeCharge, in the Indian context); fintech companies with their “additional” offerings; banks, which are trying to tap their own depositor base; telecom service providers, attempting to capture their many millions of subscribers; and the government’s own less-cash efforts.

“Mobile money gains currency as the smartphone becomes more and more versatile in functions and ubiquitous in usage.” –Z. John Zhang

Actually, before demonetization and its cashless aspirations, it wasn’t mobile money but the digital economy that was the focus area. “Mobile is one of the avenues to make payment in the digital ecosystem,” says Bhavik Vasa, chief growth officer of ItzCash, an “omni” digital payments platform. “Everything in the digital payments market is not a wallet. Wallets are good, but they serve only a few specific segments of society.”

The Digital India program was actually launched back in 2006. The Cashless India program (and website) is of more recent origin. It has a list of techniques and apps for going cashless. It includes credit and debit cards; AEPS (Aadhaar-enabled Payment System), which works on the holder’s fingerprint and a $100 microATM at the merchant end; USSD (Unstructured Supplementary Service Data), for which a feature phone will do; UPI (Unified Payments Interface), which needs a smartphone; Mobile Banking — “a service provided by a bank that allows its customers to conduct financial transactions remotely using a mobile device with an app”); and the mobile wallet. And, there is BHIM (Bharat Interface for Money), a mobile app developed by the National Payments Corporation of India, based on UPI. It can be used on all mobile devices.

The digital economy was going full steam ahead even before demonetization surfaced. A Boston Consulting Group (BCG) report titled “Digital Payments 2020 – The Making of a $500 billion Ecosystem in India” notes: “The global payments landscape has seen some dramatic changes. Digital payments in India are not limited to being an urban and affluent phenomenon…. India is becoming a digital country.” It is No. 2 in population, mobile phone users, Internet users and smartphone users. The study was done before demonetization. Says Alpesh Shah, BCG senior partner and managing director: “The demonetization event has further accelerated the need for digital payments and, for smaller transactions, mobile payments. In fact, some research post demonetization has shown a significantly larger acceptance of digital/mobile payments by end-consumers as well as merchants.”

According to a survey by MediaNama, a source of information and analysis on digital and telecom businesses in India, and Cambridge, Mass.–based Akamai, a leader in content delivery network services, the number of mobile banking transactions in India grew 150% year on year. It stood at 49.5 million for March 2016. The amount transacted was up 239% to Rs.57,280 crore ($8.9 billion). The total customer base went up to 175.6 million from 135 million the previous year (data is available up to May 2016). On specific companies, it notes that as of September 2016, Paytm had 140 million wallet users with 75 million to 90 million monthly transactions. ItzCash had 110 million registered users. MobiKwik had 35 million wallet users, and Vodafone M-Pesa’s number of active customers jumped to 1.3 million by March 2016, up 35% quarter-on-quarter.

The next year (after demonetization), according to a more recent MediaNama report, the number of mobile wallet transactions increased 475% and the amount transacted grew 207%. In March 2017, Paytm wallet users increased to 218 million, with 700,000 added per day. During the month of demonetization (November 2016), 70,000 merchants were being signed up daily.

ItzCash has recently invested in fintech startup, which works in the corporate expense management space. “The seeds of the Digital India movement have been sown,” says Naveen Surya, ItzCash managing director. He explains that the company is looking at more investments and partnerships.

Riding the M&A Wave

M&A and consolidation is the order of the day. The Gurgaon-based online marketplace ShopClues has taken over Bangalore-based mobile payments platform Momoe. The Napster-run PayU has acquired Citrus Pay. Amazon India has bought payment firm Emvantage, Flipkart has bagged PhonePe, and taxi-hailing service Ola has picked up mobile payments firm Qarth. Infibeam, India first listed e-commerce company, is integrating itself with online payments platform CC Avenue. However, a plan to merge FreeCharge and MobiKwik made no progress. “We don’t see any value in this,” said MobiKwik cofounder Upasana Taku. FreeCharge was earlier sold to Snapdeal in 2014 at a valuation of around $400 million. Today, the asking price is much less.

“I fully anticipate continued consolidation,” says Reibstein. “It serves everyone better with only one or two players. In the ideal situation, there will be a strong international player that ends up dominating the market.”

Meanwhile, the larger players in the sector are attracting big ticket dollars. The SoftBank Group investment in Paytm has created India’s first payments unicorn. The Alibaba (China)-backed Paytm has also signed a non-exclusive term sheet to acquire rival FreeCharge, the Snapdeal digital payments platform. The SoftBank-funded Snapdeal is, in turn, being sold to Flipkart. Paytm is also eyeing events platform

MobiKwik is also attracting investments. It has got three rounds of funding — $5 million, $25 million and $50 million – and is in the process of raising series D funding at a valuation of $1 billion. That will make it the second payments unicorn in India.

Venture Intelligence, which tracks private company financials, transactions (private equity, venture capital and M&A) and their valuations in India, says that its data shows that between 2013 and 2017, One97 Communications (Paytm’s parent company) got $360 million in funding. FreeCharge received $113 million, and MobiKwik $75 million. There were six deals in 2013; 11 in 2014; 24 in 2015; and six in 2016. The deal amounts — $14 million, $127 million, $251 million and $369 million for the four years respectively – show that the individual ticket sizes are getting larger.

“Mobile payment was a key area of interest to PE-VC investors in India even before demonetization. By making adoption of digital payments much more widely accepted, demonetization has only made the sector more attractive,” says Arun Natarajan, founder of Venture Intelligence. “However, given the rapid growth and hyper-funding of companies like Paytm, newer entrants have to demonstrate clearly differentiated offerings to convince investors.” (Prior to the payment bank licenses, mobile wallets came in categories which offered less operational flexibility and, thus, scope for differentiation.)

“In India, credit card penetration is low and mobile wallets are replacing cash which has many drawbacks.” –Kartik Hosanagar

Some deals do not fit into the Venture Intelligence categories. Fino Paytech is a payments technology company. It will soon evolve into a payments bank; it got final RBI approval in March. Says Rishi Gupta, managing director & CEO of Fino Paytech: “We launched BPay (a mobile wallet) a few months ago as a part of our strategic plan to increase our digital footprint along with our physical presence across urban and rural areas.”

MobiKwik has taken a different route. “The independent mobile wallet with a network of 55 million users and 1.5 million merchants is transforming into a financial distribution platform and will be offering all banking services without being a bank,” says MobiKwik cofounder Upasana Taku. It has not applied for a payments bank license.

But, unlike e-commerce in India, where the quest is to burn money to gain market leadership, the same logic does not work here. Discounts, cash-offs and coupons are prime attractions, but convenience of use ranks high, not the small amount of money a user can save. Additionally, some players don’t have to go shark tanks to raise finances (and valuations). “The telcos and the government both have ample resources,” says Reibstein. “This is not an industry for small businesses for sure,” Zhang adds. “The infrastructure investment requirements and the minimum scale required for efficiency will all encourage the emergence of some big companies. There will be majors, but it is not clear how major they can be and where they will come from.”

Filling Different Needs

“In my opinion, mobile wallet companies will fill different needs over time,” says Hosanagar. “Some will dominate the consumer space by consumer-to-consumer and consumer-to-store transactions. Others will become corporate wallets and be used by corporations for employee expense management, meal vouchers and such. Yet others will be used by the government to handle disbursement of subsidies.

“There are too many players in the market right now,” he continues. “While the mobile wallet space is attractive and it solves some important pain points in India, I can see two players making it in each of the different verticals — consumers and corporate wallets. The government also will need one to two solutions at most to handle payments. I anticipate consolidation in the mobile wallet space much like in e-commerce.”

Payment companies are also facing new competition from the old guard. Leading banks have all come out with mobile wallets. Telecom companies are tying up with them. Reliance has signed a 70:30 joint venture agreement with India’s largest bank – the State Bank of India (SBI). Alongside, the latter’s mobile e-wallet SBI Buddy is winning new users. Also in the fray are Punjab National Bank’s (PNB’s) Kitty, Axis Bank’s LIME, Kotak’s Kaypay and ICICI’s Pockets. In March 2017, the amount of PNB’s mobile banking transactions were 10.6 times higher than in March 2016, according to MediaNama.

Side-skirmishes have broken out here too. SBI has disallowed its net banking users to top up third party wallets. ICICI has blocked transactions on PhonePe.

Who will win the wars? “Like many other online and mobile platform based businesses, mobile money is also a network-based business impacted by network effects,” says Keyoor Purani, professor of marketing at the Indian Institute of Management Kozhikode. “Hence, whichever category of services builds faster and bigger networks is likely to benefit from positive network effects.”

For transfers and the payments services involved, each of the mobile money service players needs to build a two-sided network resulting in both same-side network effects and cross-side network effects, Purani notes. “For example, larger adoption and app downloads among the mobile users may lead to positive same-side user network effects leading to money transfers. But for payment transactions, the success would depend on positive cross-side merchant network effects in the sense how widely the mobile money service is accepted by the retailers.”

The success of the mobile money category or a service provider “will depend on how fast and big such networks are created to leverage the positive network effects,” adds Purani. “Broadly, there are two factors that may lead to building networks. First is the user experience, which may include speed, convenience and perceived security. The second is aggressive promotion to drive platform adoption on both sides – mobile users as well as merchants — with discounts, loyalty rewards and advertising.”

BHIM Flexes Muscles

On some yardsticks, the government’s efforts are already a success. A survey by KPMG, a professional services company, cites “ever-increasing mobile phone penetration” as one of the key catalysts for the spread of digital payments. The BHIM app, it notes, was downloaded more than 17 million times in the two months after demonetization was announced. A poll showed that nearly 88% respondents prefer cashless payments over cash payments, with 48% using digital payment for more than 75% of their transactions. But there is another side. Some 90% are unaware that the government runs a 24X7 ‘Digishala’ — a TV channel to guide people on digital payments.

“I would consider that the government’s BHIM-UPI-based mobile money platform fares better compared to e-wallets with regard to user experience and has great potential to be successful in this market,” says Purani. “However, BHIM being a government platform seems to be lagging far behind with regard to aggressive promotion to rapidly build networks. The telcos’ mobile money services such as M-Pesa have the inherent advantage of positive network effects with regard to mobile users, but to leverage cross-side network effects, they need to rapidly promote it among merchants for transaction payments. Further, being a part of a large telco group, focused attention on payment services could be an issue compared to the Paytm and MobiKwik sort of independents. Paytm and the others have been spending massive amounts of money in building user network through advertising and discounts.”

“It serves everyone better with only one or two players. In the ideal situation, there will be a strong international player that ends up dominating the market.” –David J. Reibstein

“The amount of transactions in any economy tends to be enormous, and it is hard to imagine that any payment mechanism by any entity can emerge as the sole winner,” says Zhang. “There will be many winners in the end.”

Security and Other Concerns

Hosanagar, who has studied the subject extensively, feels there are three contenders with the potential to win the mobile wallet wars in the U.S. — Apple, Google (Android Pay), and PayPal. “The first two are favored by consumers” he says. “PayPal is the oldest in digital payments (it was founded in 1998) and has a considerable franchise among large merchants. But it is too early to annoint winners. The early battle in the search engine market was among Lycos, Yahoo, Altavista, Webcrawler and Excite. But Google, which was nowhere on the horizon, was the eventual victor.”

But before the winners are decided, there is a mindset issue in India that has to be overcome — online security. “There have always been some risks in managing your virtual money,” says Vasa. “The challenge here is not the technology or infrastructure, but educating the customers on the lurking threats. What we need to understand is that sometimes, people in general believe that if you move from physical to digital, the digital front will solve all the problems. The reality is that while it solves your problems and eases your pain compared to physical transactions, it also expects the customer to be smart on the internet and be aware of basic security measures.”

Also to be overcome are the naysayers. HDFC Bank managing director Aditya Puri recently told the Nasscom India Leadership Forum that e-wallets have no future in India. He mentioned that Paytm had chalked up a loss of over Rs.1,600 crore (about $250 million). He feels brick-and-mortar banks will beef up their digital offerings. Where are the customers? “[Firms are] making chicken curry without the chicken,” he said. “Get the chicken, and I’ll tell you how much competition there will be.”

Meanwhile, overseas competition is in the air. Amazon has got RBI permission to launch its own digital wallet in India under the Prepaid Payment Instrument (PPI) route. (This is the regime under which other payment players have operated.) PayPal is understood to have applied for a PPI license, too. WhatsApp is likely to launch a payments application in India, its largest market. And Apple has just started the trial manufacturing of its iPhones in Bangalore. Samsung Pay launched in India a few months ago; can Apple be far behind?