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Digital wallets and cashless transactions are on the rise in India but is the sector safe?

digital wallets and cashless transactions
Currently, the top 3 players capture ~50% of the overall market, with 10+ players splitting the remaining between themselves.

Demonetisation

Digital wallets and cashless transactions are on the rise in India but is the sector safe?

The existing $ 6Bn (GTV) is expected to grow at 50%+ CAGR (by volume), supported by favorable regulatory measures, presents a huge untapped opportunity for multiple players.

Indian wallets got a golden opportunity last year when the surprise demonetisation move was announced. While the idea was to undo the flourishing of black money, the narrative also included digitisation of financial transactions – making them more transparent thus traceable. While a large number of Indians are yet to turn to the use of digital wallets and cashless transactions, the sector is pegged at about $6 billion.

While the government has also launched its own version – BHIM – several players have seen multi-fold growth over the course of a year and there is still a largely untapped market left. The future of Indian wallets seems promising and with inputs from RedSeer Consulting, we evaluate the segment’s potential.



Future Potential of digital wallets and cashless transactions in India

The existing $ 6Bn (GTV) is expected to grow at 50%+ CAGR (by volume), supported by favorable regulatory measures, presents a huge untapped opportunity for multiple players.

The success of a wallet is driven by strong network effort – merchants and customers incentivizing the other’s adoption. New players will need ready access to a customer base to succeed. Therefore, it is difficult for a new player to enter the market to ensure long-term business sustainability.

In a large and diverse marketplace like India, wallets have created a differentiated positioning for themselves – Paytm as a general use wallet; Oxigen as a predominantly Tier 2 player. Thus, there is enough space for at least 4-5 major players and a number of smaller players.

Currently, the top 3 players capture ~50% of the overall market, with 10+ players splitting the remaining between themselves.



Impact of Amazon wallet

The wallets market in India is already quite crowded. Compared with established players with a large user base like Paytm, the Amazon wallet will have limited impact on the overall market landscape in the short-term.

From a business perspective, the intent of the Amazon wallet launch is twofold:

  1. Provide existing Amazon Pay customers with a convenient payment experience, and
  2. Maintain a level playing field with PPI wallets provided by competing for etailers Flipkart (PhonePe), Snapdeal (Freecharge) and Paytm (Paytm)

“Amazon wallet will provide more of an incremental impact on Amazon in the near term and will not swing its market share or increase customer stickiness in a big way. However, in the long term, it will provide Amazon with a strategic advantage as loyal customers will move towards smoother transactions on the platform for added ease and convenience.”- Anil Kumar, CEO, RedSeer Consulting.



Threats to the Industry

  1. Low stickiness – merchants and customers are easily swayed by incentives and maintain 2-4 wallet accounts at any point
  2. Substitution by cash and digital products – the government is actively promoting alternative digital payments such as UPI which could upend the entire use case of digital wallets
  3. Business sustainability – currently, wallets have to incentivize both customers and merchants through discounts and cash backs, which directly impacts the bottom line and long-term sustainability

Customer Preferences

  1. Customers choose wallets based on best available offers and are largely satisfied with the service offered to them with an overall NPS of 27%
  2. Merchants, on the other hand, are more picky about the wallet’s features with a lower NPS of 3%, being most dissatisfied with the commission structure.


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