E-wallets: Money on the move

Several companies, especially those in the e-commerce and telecommunication services sector, have come out with digital wallets to help consumers.

IN A rush to board a train in time, Shivani Bhargava, a 19-year-old Delhi University student from Mumbai, ends up in a tight spot after she forgets her wallet at home. After getting down at the station in Delhi, she has to book a cab and reach her hostel at the earliest, but doesn’t have the cash or cards to do so. Enter Meru Cabs’ ‘cab wallet’. All she does is tap her mobile app and, voila, the payment is made. “Not only did I reach my hostel safely, but I also got a 30% discount,” says Bhargava.

Meanwhile, a couple of hundred kilometres away, 33-year-old Pappu, a plumber from Jaipur, has stopped queuing up at the post office to send money back home in Bihar. These days, he transfers it straight to his wife’s account through his smartphone. Back home, his wife Beena, too, doesn’t have to travel for miles any more to withdraw the money; a trip to the neighbourhood kirana (grocery) store suffices.

Several companies, especially those in the e-commerce and telecommunication services sector, have come out with digital wallets to help consumers. All you need to do is preload money and you can use it to pay for services or transfer it to other accounts. If a recent Reserve Bank of India (RBI) directive is anything to go by, these digital wallets can soon apply to become ‘payment banks’, financial institutions aimed at “furthering financial inclusion”.

As per the directive, telecom operators, supermarket chains, electronic wallets and prepaid instrument players can open these payment banks to accept deposits, offer basic saving facilities and provide remittance services for millions of people who are currently out of the digital financial system.

E-wallets have been around for quite some time and their popularity has been rising at an exponential rate. So, it was just a matter of time that the RBI issued guidelines for licensing of companies that can venture into the space. Several major players are now applying for licences to set up payment banks.

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What are payment banks?
As per World Bank estimates, only 35% of the Indian population has accounts with financial institutions. To service the remaining population, the RBI came out with two new banking categories called small finance banks and payment banks.

Payment banks are meant for simple banking transactions. These institutions are neither allowed to lend or accept term deposits nor can customers keep more than R1 lakh in such accounts. Such payment banks can issue debit cards and offer services like remittances and utility bill payments. They can also distribute simple financial products like mutual funds and insurance. Individuals can use the payment bank account to make daily or monthly cash transactions either through debit cards or through mobiles. This can also help guard against debit card fraud since one can keep a smaller balance in accounts.

But before payment banks become a reality, let us try to understand e-wallets. In general, as per the RBI, there are three kinds of e-wallets—closed, semi-closed and open. A closed wallet is one that a company issues to its consumers for in-house goods and services only. These instruments do not carry the advantage of cash withdrawal or redemption. Several portals such as Flipkart, Jabong and MakeMyTrip offer such closed wallets. It is basically an account where money gets credited in case of a refund due to cancellation or return.

“The money sits as a liability on the books of the company and there is no interest earned on it. When a customer makes a purchase, the money moves to revenue in the books,” says Supam Maheshwari, chief executive officer, FirstCry, an online babycare product portal. FirstCry has a closed wallet where the refunded money is parked in case of a cancellation.

In the payments space, firms such as MobiKwik, PayU and Paytm offer semi-closed wallets. As per the RBI, a semi-closed wallet can be used for goods and services, including financial services, at select merchant locations or establishments that have a contract with the issuing company to accept these payment instruments. Semi-closed wallets do not permit cash withdrawal or redemption by the holder as well. For example, customers can use Airtel Money, a digital wallet initiative by the telecom major, for an extensive range of services across merchants to pay for remote transactions like instant money transfers from an Airtel Money wallet to any bank account or another Airtel Money wallet across the country, booking railway and movie tickets and paying for utility bills, among others.

Finally, open wallets can be used for purchase of goods and services, including financial services such as funds transfer at merchant locations or point of sale terminals that accept cards, and also cash withdrawals at automated teller machines or business correspondents. These kind of wallets can only be issued by banks.

An example of an open wallet is M-Pesa by Vodafone in partnership with ICICI Bank. Vodafone also offers M-Pesa as a semi-closed wallet.

How far will they reach?
To understand the e-wallet revolution, let us take you to Kenya, a country in eastern Africa, where M-Pesa was developed. Considered the most mature mobile payment system in the world at present, M-Pesa has spread quickly and has become the most successful mobile phone-based financial service in the developing world since its launch in March 2007.

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In Kenya, over 25% of its $78-billion gross national product flows through M-Pesa transactions. Around one-third of Kenya’s population uses the service to transfer small amounts of money to other people and merchants via their mobiles. In India, Vodafone has been piloting M-Pesa along with ICICI Bank. M-Pesa provides branchless banking services and allows Vodafone subscribers to deposit and withdraw cash from their accounts by exchanging real cash for electronic cash at the Vodafone network of retail stores (at brick-and-mortar money transfer agencies).

In India, debit and ATM cards are primarily used to withdraw money. RBI data for the year 2013 indicated that the use of debit cards at merchant outlets was less than 5% in terms of value transacted. Even to pay utility bills, the majority still withdraws cash rather than paying through net banking. People still want to hold and pay cash.

In contrast, in Kenya, mobile-based digital payment has become the de facto mode of payment. The user exchanges his/her cash for electronic value at retail stores run by an agent, just like they do for recharging their phone’s airtime. M-Pesa has over 60,000 agents in its network, where its users can deposit and withdraw cash easily. In India, on the other hand, mobile money providers can’t offer cash-out transactions. Even with the new ‘payment bank’ directive of the RBI, it’s not clear if a user can withdraw cash anywhere or if it is limited to only the platforms that gave them their cards.

Another thing that is not clear is how payment banks will be integrated or work alongside Jan Dhan Yojana, a financial inclusion scheme that the central government launched in mid-2014.

Some companies earn a small interest on the money lying in closed wallets. “There are two ways in which customers can get a refund: they can either get the money back or it can be put in the portal’s credit,” explains Praveen Sinha, founder-MD of Jabong. If money comes into the wallet due to a refund, it earns a minuscule interest, but the interest will be triggered only after a minimum amount is reached.

With closed wallets, companies don’t need RBI approval to launch such accounts. In case of semi-closed wallets, the money is managed by payment companies. “These wallets are handled by non-banking entities. As per regulations, we need to keep the money in an escrow account,” says Upasana Taku, co-founder, MobiKwik Systems, a mobile wallet service provider.

Does this money earn interest? Yes, but how much depends on the agreement between the bank and the payment company. “We have to maintain the escrow account with a bank. The RBI has made an exemption for us on earning interest on the funds lying in the account. A formula is used to arrive at the average balance on which one can earn interest, say, on the average balance of 52 weeks. This interest is in the range of 4-6%. None of the wallets pay interest to customers,” says Jitendra Gupta, founder-MD of Citrus Payment Solutions, which offers payment gateway services.

Some payment service providers, however, say the interest earned on money in semi-closed wallets can be higher. “It can earn more than 6% on the average balance and in the range of fixed deposit rates,” says Taku of MobiKwik. Merchants don’t get any benefit from the money lying in wallets. “We don’t get any monetary benefit from the payment companies when a consumer uses her wallet at our outlet,” says a Delhi-based vendor who facilitates the use of Airtel Money.

However, companies such as Paytm give offers such as R50 cashback on transactions to consumers,” says Vinamra Pandiya, chief operating officer, TastyKhana, an online food ordering portal. In case of open wallets, the banks manage the money. “The bank is the legal entity, while the infrastructure is taken care of by the payment service provider,” says Sunil Kulkarni, deputy managing director, Oxigen Services, which is planning to launch an open wallet soon.

Shashwat Sharma, partner, KPMG India, says: “With the release of final guidelines for licensing of small finance banks and payments banks, the RBI has reinforced its commitment to financial inclusion. This is a step in the right direction to bring India’s unbanked and underserved segments into the formal finance structure, with banking penetration expected to expand substantially beyond the traditional segments.”

Do you actually need it?

If you use Internet banking or online payment through a credit or debit card, you need not switch to mobile money transfer services like Airtel Money or Vodafone M-Pesa. As mobile money transfers are costlier than, let’s say, National Electronic Funds Transfer (NEFT) or Immediate Payment Service (IMPS). This facility will be useful for those who don’t have a bank account, net banking or credit card and those who don’t use online card payments.

These payment formats are gaining popularity, as they work on Unstructured Supplementary Service Data (USSD) technology. In this technology, you can communicate with the service provider’s computer similar to online chatting. You need to choose the options step by step and this can be without the Internet service being activated.

However, if you have data services then you can simply download the apps and transact easily.

Finally…

In 2013, RBI governor Raghuram Rajan had said, “The key to cheap and universal payments and remittances will be if we can find a safe way to allow funds to be freely transferred between bank accounts and mobile wallets, as well as cashed out of mobile wallets through a much larger and ubiquitous network of business correspondents.”

The transactions volume via mobile wallets has had more than a three-fold growth in the past two years, which has clocked over R2,700 crore so far, as per Crisil.

Taku of MobiKwik, which is in the process of putting together an application for getting a payment bank licence with over 12 million customers already, says: “Our payment bank strategy will be focused on leveraging our core strengths: disruptive technology, business model innovation, and a stable, secure mobile-based platform with the capability of scaling up rapidly at a fraction of the cost offered by older technologies.”

A company, which recognises that and carves out its operations accordingly, will manage to give this new-age payment system a boost. The current set of payment bank licences are part of a pilot initiative and will lead to significant learning, both for financial regulators and industry players. These learnings will only become clearer over time.

TYPES OF E-WALLETS
In general, as per the RBI, there are three kinds of e-wallets—closed, semi-closed and open

* Closed wallet: A closed wallet is one that a company issues to its consumers for in-house goods and services only. These instruments do not carry the advantage of cash withdrawal or redemption. Several online shopping portals such as Flipkart, Jabong and MakeMyTrip offer such closed wallets. It is basically an account where money gets credited in case of a refund due to cancellation or return.

* Semi-closed wallet: In the payments space, companies such as MobiKwik, PayU and Paytm offer semi-closed wallets. As per the RBI, a semi-closed wallet can be used for goods and services, including financial services, at select merchant locations or establishments that have a contract with the issuing company to accept these payment instruments. Semi-closed wallets do not permit cash withdrawal or redemption by the holder as well.

* Open wallet: Such wallets can be used for purchase of goods and services, including financial services such as funds transfer at merchant locations or point-of-sale terminals that accept cards, and also cash withdrawals at automated teller machines
or business correspondents. These kind of wallets can only be issued by banks.

WHO CAN USE THIS MONEY
* If you use net banking or make online payments through credit or debit cards, you need not switch to mobile money transfer services like Airtel Money or Vodafone M-Pesa since mobile money transfers are costlier than, let’s say, National Electronic Funds Transfer (NEFT) or Immediate Payment Service (IMPS).

* This facility may be useful only for those who either don’t have a bank account, don’t use net banking, don’t possess a credit card or don’t prefer making online card payments.

CHARGE SHEET
* There are several charges involved in mobile money and these charges are generally higher than in banking transactions. For example, the registration fee for Airtel Money is R50. The cash-loading charges are nil (up to R3,000), R40 (R3,001 to R4,000) and R50 (above R4,000).

* Similarly, the charges for money transfer between Airtel Money and a bank account are nil (R10-50), R15 (R51-R1,000), R35 (R1,001–R3,000) and R50 (R3,001–R5,000).

* These services are not designed to handle big amounts. Airtel Money’s ‘super’ and ‘express’ accounts, for instance, have the limit of a transaction of R10,000 per day.

* However, while shopping online, you stand to get several offers through these platforms. For instance, you can get 37% off on shopping for R1,500 from Myntra using Airtel Money. A mobile recharge on Airtel through Airtel Money can give you more talktime.

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