Keep an eye on the fintech space

Investors cannot afford to ignore the disruption that will impact a wide range of sectors Investors cannot afford to ignore the disruption that will impact a wide range of sectors

Ola Money, Airtel Money, Idea Money, Paytm, Unified Payments Interface (UPI) — any Indian with a smartphone is inundated with multiple offers of mobile wallets (m-wallets) and ‘cashbacks’. M-wallet penetration is over 125 million, far exceeding credit card penetration (25 million). The new payment banks are also about to take off, with their cashless options. 

Many service providers (including, I think, most telecom services) are offering mobile wallets. Some wallets are closed (only allowing transactions with one specific vendor/service provider), semi-closed (allows transactions with many parties but doesn’t allow direct cash withdrawal) and open (allow direct cash withdrawal). Below a limit of Rs 10,000, wallets require no paperwork or KYC, which is a big convenience. 

 

UPI will probably supersede mobile wallets. Indeed, UPI could supersede bank transfer systems like National Electronic Funds Transfer (NEFT) and Immediate Payment Service (IMPS), since it works for anybody with a bank account and a smartphone. The UPI allows for instantaneous 24x7 transfer of up to Rs 1 lakh between two bank accounts, without any exchange of sensitive information. Each UPI account has a handle (which is like an email id) and a couple of SMS texts are enough to make and validate a transfer. 

All these systems are designed to reduce the need for cash. By offering convenience, service providers hope to capture some information, create a float of deposits and build brand loyalty. As of now, India is a cash economy with over 90 per cent of transactions (by number) cash-settled. As these systems catch on, the number of cash-settled transactions could reduce sharply. 

Some transactions are cash-settled because everybody concerned wishes to evade paying tax (and doing the paperwork for tax compliance). Those evasive transactions tend to be large and lumpy. But many cash transactions, in fact, the vast majority, are legitimate. Both parties would be quite happy if the transaction was cashless and convenient. 

Consider, for example, the payment of road toll or a payment of Rs 50 to a mechanic by a car owner for changing a tyre. The car owner is paying tax anyhow (and may be able to write off toll payments, or the mechanic’s fee as tax-deductible expenses).

The road toll is recorded in the system anyway. The mechanic’s earnings are below the tax threshold. He has a mobile phone and a bank account. The mechanic’s fee can be transferred by UPI, or Paytm. As more such cashless transactions are captured, data about consumption patterns builds up. The need to print banknotes drops. The need to carry large sums drops. Analytics around that data could, and should start to throw up deep insights about consumer tastes and consumption patterns. 

Wallets are being offered by telcos as a convenience and it might reduce their transaction costs. But, it’s hard to see how wallet-providers can make money sustainably in a crowded space with limited revenue streams. The business model may be unviable — especially since UPI undermines the reason for separate m-wallets, and the cost of UPI is almost negligible. Even the new payment banks can only invest in government securities and charge very small fees for remittances, due to the competition. So, the business model for payment banks is also dubious. 

However, cashless transaction systems alter the commercial space for other businesses. For example, these would reduce costs for e-commerce players as these payments replace cash on delivery. CoD is expensive and cumbersome — collection personnel must be vetted and physical security is required. 

Such cashless systems should eventually lead to greater tax compliance as well, assuming tax authorities are smart about mining data. Of course, who controls data generated by such transactions and how secure that data is, is a matter of concern. Given the lack of a privacy law; the unwillingness of the government to enact such a law; the existence of Aadhaar which can link disparate databases; hackers are bound to have a field day. It is a question of when, not if, there will be large database breaches with private details scattered all over the internet. Datamining and cyber-security would therefore, become two areas of great demand.

Obviously these advances in fintech are not directly available as vehicles for investment (except to private equities and venture capitalists). But, these new cashless systems will directly, and indirectly, affect a wide range of sectors and listed entities. Investors cannot afford to ignore the disruption and fallout.