Nowadays, cell phones have become the primary devices around which our daily lives revolve, and are shaping how consumers search, purchase and pay for goods and services.
Clearly, commerce is moving to mobile phones and so is the payments ecosystem. Digital/mobile wallets have emerged as the key engine to mobile commerce, particularly in emerging markets where formal banking reach is limited to just about 40 per cent of the population, compared with 90 per cent penetration for mobile phones.
The adoption of the digital wallet is also driven by other emerging market commonalities such as the increasing penetration of smartphones and internet on mobile services, a favourable regulatory environment and a demanding and tech-savvy customer that expects instantaneous and one-touch payment solutions.
Most importantly, the entry of non-banking institutions offering innovative payment solutions played a critical role in the success of digital wallets. These non-banking institutions range from device manufacturers (Apple and Samsung), tech firms (Google and Alibaba), telecom companies (Vodafone and Airtel), online retailers (Flipkart and Amazon) and e-commerce start-ups (Uber, Ola and MakeMyTrip).
Among emerging markets, China and India are leading the digital wallet revolution. China’s mobile payment market is the largest in the world and was valued at 12.2 trillion yen ($1.83 trillion; Dh7.07 trillion) in 2016, up from 200 billion yen in 2012. E-wallets account for 58 per cent of the mobile payment market in China, which is the highest percentage globally, compared to just 15 per cent in the US and 23 per cent in the UK.
Furthermore, the market is dominated by two players Alipay (owned by Alibaba) and Tenpay (owned by Tencent), accounting for a combined 90 per cent share of third-party mobile payments, although the recent entry of international giants such as Apple Pay and Google Pay is expected to further intensify the competition in the coming years.
Indian market
On the other hand, Indian mobile wallet market is still at a nascent stage (compared to China) but offers significant growth potential in years ahead. Between 2013-17, the transaction volume and value of the mobile wallet industry saw a phenomenal combined annual growth rate (CAGR) of 120 per cent, both having more than doubled between the 2016-2017 fiscal year.
Going forward, the Indian mobile wallet industry is expected to maintain a similar growth trajectory, with transaction volumes expected to grow at a CAGR of 94 per cent between 2017-21 to reach 32 billion transactions and the value of the transactions to rise at a rate of CAGR of 126 per cent to reach Rs32 trillion (Dh1.76 trillion) by 2021. Consequently, India’s digital wallet space has also attracted several global players, with China’s Alibaba investing in leading mobile wallet company Paytm, and tech giants such as Facebook and Google trying to integrate payment services into the WhatsApp messenger and various Google applications.
Moreover, leading Indian banks such as ICICI (Pockets), Axis Bank (Lime), HDFC (PayZapp), SBI (SBI Buddy) and IDFC Bank (Ziggit) have also started offering mobile wallet services in addition to the mobile banking apps. Consequently, the Indian mobile wallet market is highly fragmented and competitive, with market participants using heavy discounting to attract users to their respective platforms.
Historically, banks have been the natural owners of the payments space. However, the emergence of new payment channels such as mobile wallets and the subsequent entry of non-banking players (which account for the lion’s share of the global mobile wallet market) has challenged the traditional banking system, especially when non-banking players are increasingly offering financial services portfolio in addition to the standard P2P transfer and bill payment services).
For instance, Alibaba and Tencent, are offering loans, insurance and wealth management services as part of their future growth strategy in China. Moreover, mobile wallets also have a strong backing from regional governments and central banks as they are perceived as cost-effective medium of financial inclusion for the unbanked population, particularly in emerging markets. For instance, Indian regulators have introduced differentiated a banking licence for both banks and non-banking players that allows the latter to execute basic banking and remittance services.
Seamless and quick
Most importantly, customer experiences with mobile wallets have proved to be far more seamless and quick, compared to traditional payment channels. Therefore, it is imperative that the banks realise the importance of a comprehensive digital banking strategy. Mobile/digital wallets assist the banks in improving customer relationship and retention, position their payment cards as top of wallet, and protect their customers and the institution from fraud. Moreover, since banks already have an existing customer base, they are better positioned to monetise this opportunity as compared to non-financial firms that will need to spend on customer acquisition.
Today, most of the banks are at cross-roads and are trying to work-out a pertinent digital wallet strategy. Major banks such as ICICI (Pockets), HDFC (PayZapp), and SBI (SBI Buddy) have launched their own e-wallets that offers value for their customers and provide additional marketing opportunities to position themselves as technological leader in this space.
However, more often than not, bank-led digital wallets fall short (in terms of user interface, merchants’ participation, ease of use, loyalty/discount programmes, etc) of their non-banking counterparts as they are fundamentally designed for continuous innovation and value-added offerings, which allows them to offer cross-functional solutions including media content, product merchandising, bill payments, etc.
As an alternative approach, some of the leading banks are collaborating with digital wallet companies to formulate a ‘win-win’ proposition wherein the bank gains access to the mobile wallet’s customer base, while the wallet gets a wider reach for merchant payments, both online and offline, by associating with the bank’s card network.
For instance, IndusInd Bank chose to partner with Mobikwik to launch a co-branded wallet while IDFC Bank, which had earlier launched its own wallet ‘Ziggit’, recently partnered with MobiKwik for e-wallet services in India. Clearly, both approaches have their own merits and demerits and only time will reveal the most successful and apt digital wallet strategy for the banking sector.
In conclusion, digital wallets present a significant opportunity for banks to go beyond their traditional core banking role and offer value-added commerce experience to its customers while expanding their reach to ‘unbanked or ‘underbanked’ population. While banks have a natural advantage in terms of customer relationships, structural security, multichannel capabilities, and stability, they will have to match the innovative solutions, operational efficiency, and client-service skills of non-banking wallet companies.
Shailesh Dash, Founder and CEO, Al Masah Capital.
