Winning with digital wallets

Why e-commerce players are falling over each other to add that digital wallet

With the launch of PhonePe, Flipkart has become the third home-grown marketplace to own a digital payment platform. On the face of it, the launch is expected to help Flipkart close a crucial gap on the payments front against competitors Snapdeal and Paytm both of which already own digital wallets. The real question is, how big a help is a payment platform in locking existing customers and netting in new ones? As technological parity is a given, what are the factors that can help create differentiation in a crowded marketplace?

Globally, the most successful models in this space are from China. The big three internet companies, Alibaba, Tencent and Baidu, have their own payment platforms - namely, Alipay, Tenpay, and Baidu Wallet. Their large, diversified businesses and customised payment solutions have helped them corner a large chunk of the digital payment market in China and made their e-commerce businesses stronger.

The key advantage a digital payment platform offers is an integrated customer experience and shortening the idea to cash loop from the customer's perspective.

Back home, of the three top marketplaces, Paytm is the only one that started out as a digital payment service and used the platform as a gateway to launch its marketplace under the same brand name. Both Snapdeal and Flipkart added their wallets as they grew bigger.

Vijay Shekhar Sharma, founder of Paytm, has often said that a player who's serious about the e-commerce business will have to build its own payment system because payments and marketplaces share a symbiotic relationship. While a payments gateway helps build trust among consumers, a marketplace helps to forge strong relationships with merchants who can avail of the payment gateway to transact easily.

A similar logic would have encouraged Snapdeal and Flipkart to go down the same road. Snapdeal acquired online recharge platform FreeCharge for an estimated Rs 2,400 crore ($400 million) last year. A company spokesperson says a strong payment ecosystem like FreeCharge plays a pivotal role in driving "habit" commerce. For a habit to form the consumer experience has to be better than cash transactions. "FreeCharge becomes the avocation tool for consumers to try online commerce," says the spokesperson.

The company is hopeful that as the integration deepens, the exposure of users to a wide assortment will only help it widen reach. Currently, the e-commerce player has over one million transacting users per day, a large number of which is driven by the payments platform, FreeCharge.

Notwithstanding the advantages that digital wallets offer, can they help drive customer loyalty in an industry that has grown on the back of heavy discounts?

A company-owned digital payment platform helps promote continued customer loyalty, as customers are not diverted from the main platform, says Madhur Kathuria, chief executive officer (CEO), AgiVetta Consulting. "Also, it helps build a loyal customer base among the young generation as they look for faster ways to shop and pay. For an existing customer, the e-wallets help create a single user interface, which helps them have an integrated experience," explains Kathuria.

Further, a company-owned digital payment platform also opens up a window for innovation. Sameer Nigam, CEO of PhonePe, says while there are a lot of payment gateways supporting transactions, there is no elaborate refund solution. Refunds take anything between four and seven weeks. Also, if a refund is on the higher side, say above Rs 10,000 or so, companies often put this money back in a closed loop or semi-closed wallets. But with a unified payment interface-based wallet that is connected to a user's bank account, a company is in a position to instantly transfer refunds to customers. This simple solution will also offer customers cash backs in the real sense rather than offer options such as deferred cash back, gift vouchers, loyalty points and so on.

Extolling the virtues of his own wallet, Nigam says, existing digital wallets offer incomplete buying solutions as they offer consumers the convenience of buying only small-ticket purchases. Unlike other digital wallets where the cash holding and payment limits are set at Rs 10,000 or so, consumers using PhonePe can carry out transactions worth up to Rs 100,000. "Since Flipkart sells a lot of electronics, larger appliances, and consumer durables, PhonePe will facilitate bigger-ticket transactions."

Of course, having a strong payments platform gives an e-commerce player an edge, but how does one explain the march of Amazon which doesn't have a company-owned payment platform?

The key here is the type of business and the sector one is operating in along with the target market. The digital wallets have been successful when they are closely integrated with the mobile experience. But online, browser-based web users tend to use the service less as for them the wallet payments add one more step to ordering their purchases. "That, to an extent, explains why Snapdeal and Paytm's online transactions lag behind Amazon and Flipkart. Even Flipkart's acquisition of Myntra started with a mobile-only platform but then to sustain they shifted back to web plus mobile," points out Kathuria.

Net net, having a wallet facility integrated with mobile apps definitely improves the chances of customer retention; but it is only one of the many things a player ought to do to achieve that goal.

Expert Take: Focus on product

A digital payment platform provides advantages, but it doesn't guarantee success.

E-commerce players need to equally focus on assortment of product, convenience and services.

> Company-owned digital payment platform could help with quicker refunds, can be used to limit cash on delivery, and also increase customer stickiness by ensuring cash backs and refunds are locked in the wallet.

> Success in e-commerce is driven by other factors such as technology platform, value chain capabilities, number of sellers, variety of products, global market access and experience.

Vijay Mani
Partner, Deloitte Touche Tohmatsu India