Flipkart and Paytm become instant rivals, setting stage for ecommerce battle

New announcements by both companies make them rivals in both the payments and the ecommerce spheres.
Written by Rajiv Rao, Contributing Writer

Just yesterday, the ecommerce landscape witnessed two announcements that could have far-reaching implications for consumers in India, in addition to pitting two of India's new economy companies against each other.

According to Mint, Indian online retailer Flipkart, which is feeling the heat from an aggressive and well-endowed Amazon in India, will release a UPI-based app in partnership with Yes Bank called "PhonePe" that will allow its shoppers to connect their registered accounts to their banks via their smartphones, thus allowing them a seamless experience all the way through to the virtual checkout counter. PhonePe is a clever pun, since "Pe" means "on" in Hindi while is pronounced "pay".

Security for transactions comes courtesy of National Payments Corporation of India's encrypted libraries. Now, shoppers will be able to use their own PIN rather than the customary one-time password process that most transactions currently need in order to thwart online fraud but is generally viewed as a monumental headache.

There was also a simultaneous revelation by Mint on Monday from unnamed sources that online payments service Paytm will be raising $300-350 million from investors including MediaTek, Temasek Holdings, and Goldman Sachs Group that will vault this leader in the payments space from $2 billion to around $5 billion in valuation. (Last year, Chinese giant Alibaba and its financial services affiliate Zhejiang Ant invested more than $500 million for a 40 percent stake in Paytm's holding company.)

What is most salient about the impending Paytm investment is not the admittedly impressive valuation bump of the company, or its ability to raise this kind of money in a parched environment, but the fact that once the deal closes, the Paytm payment mechanism will be embedded into Mediatek chipset phones -- significant considering Mediatek is the market-leading chipset in India at 35 percent share and ahead of rivals Qualcomm and Spreadtrum. The deal will instantly provide a large chunk of smartphone-toting Indians with Paytm's solution. (MediaTek is also an investor in Paytm's smaller rival MobiKwik.)

There are so many levels at which these two bits of news will impact the Indian ecommerce landscape in a major way.

The de-facto payment method in India is still cash-on-delivery (COD). Only a little over half the population have bank accounts although Indian Prime Minister Narendra Modi is trying to rectify that with his plan to provide every household with one, something that has met with mixed results. Also, the number of Indians wielding credit cards has actually fallen over the years, post the global financial meltdown, from around 27 million to 18 million. India's average number of card transactions per inhabitant is actually the world's lowest at 6.7, far behind Brazil and China. So, quite clearly, credit cards are not and will never be the answer to helping India's ecommerce industry.

Therefore, COD is the only prevailing payment mode that has any implicit trust behind it on both sides of the commerce fence, but the unwieldy nature of the process -- and the problem with no-shows at the time of delivery -- makes this an expensive and irritating mode of conducting business. Therefore, both Flipkart and Paytm's solutions, which are secure and a cinch to use, could be instrumental in driving up the number of online transactions.

Flipkart's PhonePe app can do all of the things that existing mobile wallets in India can -- pay electricity bills, mobile recharges. It can also send or receive money from friends and relatives without knowing the bank account details of the other party. It instantly allows 75 million of their registered shoppers to make purchases with a click of a button.


Here's where it gets interesting. Guess who, apart from Amazon and Snapdeal, has become a keen rival to Flipkart in the ecommerce realm? If you guessed Paytm, you guessed right. In a sort of "wolf in sheep's clothing" strategy Paytm, while growing its registered user base to 135 million in terms of downloads of its digital wallet and having tied up with 115,000 vendors to become India's largest payments solution provider, is also gunning to grab a large chunk of India's ecommerce business.

Apparently, the company at a group level garnered close to 2,000 crore rupees ($300 million) in gross merchandise value (GMV, or cost of goods sold) in July, making it a neck-and-neck competitor with Flipkart and Amazon.

The fact that Alibaba is Paytm's major investor suddenly makes things in the ecommerce space even more urgent and interesting than ever. Alibaba has long nurtured a desire to enter India's ecommerce landscape and has been rumoured to be sniffing around for a way to enter the market. Paytm may just be Alibaba's Trojan horse, having already become an accomplished seller of footwear, clothes, bus tickets, and movies. Rumour has it that by next year, Paytm will spin-off its ecommerce platform into a separate company. No prizes for guessing as to who may be spearheading those efforts.

In others words, payments and ecommerce are spaces that are getting inextricably intertwined. As I had written in my previous blog about Hike messenger's recent cash injection, looking at China could be a good way to gauge how things could unravel in India. In this case, Tencent is leveraging both its payments service WeChatPay (300 million customers) with its messenger WeChat (over 700 million users) into a formidable one-two punch that not only brings in cash ($46 million in just the month of July) but also makes it the most formidable competitor to Alibaba's Alipay, valued at $60 billion.

China, of course, is eons ahead of India in how its citizens use the internet. But with Amazon declaring last month that it will up the ante in the country by investing an additional $3 billion (over 20,000 crore rupees) after shelling out $2 billion so far, Alibaba trying to enter the game, Flipkart trying to survive after its disastrous year of churn and de-valuations, and Paytm's under-the-radar quest for ecommerce glory, the some-$36 billion ecommerce Indian market is more exciting and perilous than it has ever been.

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