Can PhonePe ride the UPI wave to move users away from Paytm and MobiKwik?

Apart from being built on the UPI infrastructure, PhonePe also has the advantage of being backed by Flipkart.
Can PhonePe ride the UPI wave to move users away from Paytm and MobiKwik?
Can PhonePe ride the UPI wave to move users away from Paytm and MobiKwik?

Paytm, an incumbent in the space of mobile wallets became the direct beneficiary of India’s cashless dream the night after the government's demonitisaiton drive. While the government also launched the Unified Payments Interface (UPI) and the BHIM app to boost digital payments, it is yet to see adoption.

With over 57% market share and over 200 million users, Paytm is a clear market leader. But there are many others that have been striving for a share of the pie. While some like Mobikwik are managing to survive, others like Freecharge lost out and eventually sold out to Axis Bank.

But with UPI, there is now a new opportunity for offering a simple payment interface to users. One player that has been riding on the government's UPI wave to garner a significant customer base is Flipkart’s payments platform PhonePe.

To survive in a market where Paytm is a clear market leader, there had to be a major differentiator and for PhonePe UPI was it.

The UPI dream

For PhonePe, the original plan was to build a payments system riding on the IMPS service that banks offered and be a strong player in the peer to peer transfer space. While integrating the APIs of different banks and integrating it onto one platform would have been an extremely tough job for PhonePe, it has been lucky.

It got acquired by India’s largest e-commerce player Flipkart in April 2016 and around the same time, the National Payments Corporation of India (NPCI) launched UPI, a payments infrastructure that lets you send and receive money without needing a person’s bank account details.

PhonePe was the first to grab this opportunity and built a completely consumer-facing app on the UPI infrastructure.

The launch of UPI got many market observers wondering if this meant the end of mobile wallets. While it may still be too early to say so, UPI definitely makes transactions a lot simpler and for apps like PhonePe riding on UPI, they already have an upper hand compared to mobile wallets.

Why is UPI better than a mobile wallet?

For starters, a mobile wallet is just a digital version of your wallet. It requires you to take money out of your bank account the put it in there. When it comes to UPI, the interface is such that no bank account details, no transfer to the UPI app are required. It syncs with your bank account and with just one UPI pin or a Virtual Payments Address, a transfer can be done without ever revealing your bank account details.

“UPI has been our differentiator from day one and we have been fairly big on UPI. Even our early campaign was your bank is your wallet. Be it money transfers or merchant payments, UPI is a convenient model for users and we have been able to garner a fairly loyal customer base for UPI,” says Rahul Chari, co-founder and CTO, PhonePe.

Rahul Chari and Sameer Nigam, co-founders of PhonePe

Being a payments container

While riding on the UPI platform as against mobile wallets is anyway a differentiator, what works best for PhonePe, according to Rahul, is that the digital payments firm has been innovating on top of the UPI interface and has created what it calls a payments container.

Apart from UPI, PhonePe supports different kinds of payment instruments be it a wallet, a credit/debit card, bank accounts, gift cards and more. Rahul says that you can plug different instruments with PhonePe and use them.

This makes PhonePe convenient across payment options like a wallet or a card. It has also integrated a buy now pay later option.

“Creating value added services out of a payments container allows you to choose the instrument you want based on the need of the transaction,” says Rahul.

From being a pure peer-to-peer transfer player, PhonePe has evolved into allowing interbank transfers not just to others but also to yourself. A number of value-added services like payment reminders have also worked in its favour.

The PhonePe App has around 40Mn downloads. From 1.1 million transactions in December, as on June, PhonePe saw 6.5 million transactions happening over the app.

The Flipkart advantage

While digital payment firms, like any other B2C players, end up spending a lot on customer and merchant acquisition, a huge advantage PhonePe has is the backing of Flipkart. Being the default wallet for Flipkart customers automatically gives it a captive customer base and several hundreds of transactions.

It also gives PhonePe a captive merchant base, given Flipkart’s large seller base.

Flipkart is to PhonePe what eBay is to Paypal. With Flipkart also comes its sister companies Myntra, Jabong and eBay India.

“If you see payment companies that have succeeded like Paypal or Alipay, they have been associated with a group that has an active use case. Similarly, with Flipkart, we have a customer and merchant base readily available and the regular feedback we receive from them helps us make our solution a lot more robust for when we branch out of the Flipkart network,” says Rahul.

In fact, while PhonePe’s focus has been more on P2P transactions, it is currently a market leader in UPI peer-to-merchant (P2M) transactions with about 80% contribution. PhonePe claims that merchant transactions grew by 400% in May making it the largest player for merchant UPI transactions.  

In the P2P payments market too, PhonePe holds around 38.5% market share as compared to the govt’s UPI app BHIM, which is at about 28.5% as on April 2017.

The way forward

From being a consumer-facing UPI app to a payments container, PhonePe wants to continue to innovate and add more use cases to the app.

It started with a foray into offline payments. This is also something Paytm has been going big on.

Rahul says PhonePe is designed to be a collection platform for merchants and where users can pay.

“QR code is what’s largely adopted at the moment. We also have a solution where it’s integrated with merchants and the cashier can just raise the request from his system, the consumer then gets the invoice on his PhonePe app and pays the merchant,” Rahul says.

Currently, PhonePe is live in all Apollo Pharmacy, Cafe Coffee Day, Barista and Spencer's outlets and has partnered with payment aggregators like PineLabs and Commdel and a lot of merchants are being on-boarded through them. PhonePe will be going live with 15 pan-India chains in the next quarter. 

The big step for PhonePe will be offering financial products.

“We started with allowing customers to use money in the easiest way possible. The journey we now want to take is not just using your money on PhonePe but also managing your money effectively and grow it,” Rahul says.

While this plan is still in its early stages, the idea is to create a good value proposition that is tech driven. It will be partnering with banks and financial companies that can bring a good value add for customers.

Financial products could include investment instruments like mutual funds, insurance. Products like credit and lending are also in the works.

There is still a long way for PhonePe to become the Paytm of digital transactions. Paytm, being an early mover in this space has been widely adopted not just by the millennials but also by a huge number of shopkeepers, tea-sellers and street vendors.

With an added convenience of UPI and the strong backing of India’s largest e-commerce player, it is now left to PhonePe to expand aggressively while treading carefully and make its mark in the yet nascent digital payments market in India.

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