India embraces e-payment

Your Blackberry calendar is a detailed reminder of busy - and sometimes expensive - days: confirm the air ticket to Beijing; transfer money to business partners in order to pay the contractors; alter the bank standing order for monthly rent; book a resort for the coming summer holiday in Phuket.

The ability to complete these tasks securely in a matter of hours using that same device is testament to the how online payment gateways have transformed 21st century consumption. For many in emerging markets, paying the bills isn't so easy. In India, where cash and checks still account for the bulk of wallet share, transactions must often be executed on foot and in person.

Private equity investors are trying to change this, motivated by the high cost of paper transactions and the low penetration of modern payment gateways. Capital is saturating the e-payment space, from early movers such as BillDesk and Techprocess to start-ups that want to bring mobile solutions to the unbanked.

"Retail consumer spending in India has increased at over 15% year-on-year to $900 billion in the last fiscal year, of which more than 90% being in cash," Amit Behl, Investment director, Intel Capital India, tells AVCJ. "Hence, it provides a big market opportunity for converting parts of this cash spending into electronic payments."

Leading players

BillDesk and Techprocess Solutions were established in 2000 and have grown into sizeable players by cultivating exclusive relationships with banks, major merchants and institutions. While BillDesk has been backed by TA Associates, Bank of Baroda, SBI and Clearstone Ventures, Techprocess Solutions has also received investment from Greylock Partners, Battery Ventures and ICICI Ventures.

Given the traction of these market leaders, industry participants argue that early-stage investments in similar businesses will face strong headwinds. A highly differentiated approach or cutting-edge technologies are the only means of achieving substantial market share.

"It is difficult for other emerging players to evolve to what BillDesk has become because of its early mover advantage," says Dhiraj Poddar, director at TA Associates, which invested in BillDesk in April. "Rather, the current challenge for the investment is how to help a payment processing company broaden the coverage of market segments served and continually evolve economical product offerings for the customers."

While the likes of BillDesk and Techprocess can expect further rounds of PE funding, venture capitalists are looking for opportunities among the 350 million in India that are not yet part of the mainstream financial system.

As these consumers start to appreciate the advantages of cashless transactions, pre-paid electronic accounts - travel cards, payroll cards, multi-purpose cards - have emerged. Given the scattered nature of the unbanked population, no single provider has managed to corner the market, leaving plenty of room for new entrants.

According to The Boston Consulting Group, India's pre-paid credit and debit card market is expected to reach $59 billion in 2017, a sevenfold increase on 2011. Axis Bank is currently the market leader with a more than 39% market share, while Itz Cash Card is on 22%. Other participants include ICICI Bank, ICash Card, OxiCash Card and Done Card Utility.

Although Axis Bank and ICICI Bank can leverage their established branch networks to dominate certain segments of the market, they don't necessarily have the reach into smaller towns and villages. Itz Cash Card, which has been around for seven years, is attempting to fill the gap by establishing more than 50,000 franchisees across 2,500 towns and villages.

Bejul Somaia, managing director of Lightspeed India, cites Itz Cash Card's distribution and cash acceptance network as one of the major reasons for investing in the company in 2009. "There are a lot of technology companies in India, but investors need to evaluate whether a solely technology-based approach is defensible and can capture meaningful value in the payments segment in India," he says.

Mobile ventures

Retaining a competitive edge in a fast-developing market depends on providing products and technologies that meet customers' needs with optimum efficiency. One key area is mobile payment. Companies such as Nexus Capital-backed mChek led the way in allowing consumers to make payments by connecting credit cards to mobile devices. Now ItzCash Card is trying to follow suit, securing a license from the State Bank of India in 2010 to introduce a Mobile Wallet with pre-paid facilities.
It would be naïve to think that telecom providers will allow the financial services sector a free run at this market. Just last year, Airtel announced the launch of its own mobile payment system and others will no doubt follow suit. Using the Airtel mWallet, any subscriber can upload money to his or her mobile phone and use it to make purchases from affiliated retailers.

"Probably the biggest possible fillip to this [payment] sector is going to come from mobile payments," says Intel Capital's Behl. "How mobile operators work on creating partnerships and alliances to build the mobile payments market in India is going to be critical in terms of bringing in a much larger base of customers to the ambit of electronic payments quickly."

However, not all forays into the payment space have been successful. Nokia's partnership with Obopay is an oft-cited example of what happens when you enter a market too soon and at too high a point. Since 2009, the European handset manufacturer has reportedly invested around $70 million in Obopay and oversaw the launch of Nokia Money. The idea was to provide a secure wallet for transactions without the necessity of having a bank account, but the venture closed after one year.

"So the biggest challenge lies with the number of people who are eager to make e-payments and whether they have a payment instrument that they are comfortable with," says Behl. "One should be patient enough because any investment into the young payment sector takes fairly sizable resources and time to effectively address the market."

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• Topics
• South Asia
• Financials
• Expansion
• India
• ICICI Venture Funds Management Company
• Intel Capital
• Financial Services
• Venture