One of the biggest casualties of the coronavirus pandemic is discretionary spending, as consumers turn to conserve cash in times of economic distress and uncertainty, which is bad news for the fledgling digital payments and fintech ecosystem of the country.

The sector, characterised by a heavy burn, high cost of acquiring customers and narrow margins, is looking at stressful times, say industry insiders.

“Overall my portfolio is down by more than 30%, established players still have a good mix of players across sectors and they can survive. Smaller players concentrating on certain verticals are under stress,” said Vishwas Patel, cofounder of CCAvenue, a Mumbai-based major payment company.

India on April 14 extended the lockdown to May 3 as coronavirus cases continue to inch up. The home ministry has come up with a set of guidelines to allow some economic activity from April 20 but with most of the 1.3 billion people expected to stay in, thee business will be far from usual.

A turning point?

While the viral outbreak and the lockdown have encouraged quick adoption of digital payments for certain sectors, experts are divided if this marks a definitive shift away from cash as a lot of sectors are hardly seeing any business.

Bill payments, food, grocery and health are seeing rapid digitisation but travel, tourism, entertainment and fashion, the money spinners for payment companies, are at a standstill, industry insiders say.

Innoviti Payments, a Bengaluru-based player which deploys payment terminals at merchant outlets, said hospitals, pharmacy, food and grocery were the only three major segments functional for them.

The data shared by the company showed that food and grocery were at 60% of its pre-lockdown volumes of 85 lakh transactions per month.

The hospital vertical, with almost every outdoor service shut, was recording 30% of its normal volume of around 6 lakh and pharmacy was at 80% of its almost 10 lakh monthly transactions.

“We have more than 50% of our portfolio in food and grocery and healthcare sector, which has seen a limited impact and is already showing some signs of recovery,” said Rajeev Agrawal, chief executive officer, Innoviti Payments.

The startup processes more than Rs 40,000 crore of payment transactions through terminals deployed across more than 3,000 stores in 270 cities.

Industry executives say given the slowdown, even the festival season, which usually starts in September and extends till December, is set to be disrupted. Typically, payment volumes spike during these months that offer major business opportunities.

“The ensuing situation around job loss, reduction of bonus, salary cuts are bound to affect the consumption patterns through 2020, only essential purchases will not be enough to drive uptake in transactions,” said Bhavik Hathi, who is the managing director at consultancy firm Alvarez and Marsal.

But, payment companies do not make money only on transactions. Services like Unified Payments Interface (UPI) and RuPay debit cards are free of cost, hence payment players make money on credit-card transactions and those done by Visa and Mastercard debit cards.

Then how does a drop in volume affect the top and bottom lines of these players?

Let it flow

It is because their business model is based on higher transactions, higher cash flow, followed by lending to those businesses. If transactions fall, cash flow gets hit, which comes in the way of lending and collections.

The outbreak has disrupted cash flow-based lending, which was seen as the game-changer for the lending business.

The problem would be that their lending algorithms would reject most of the applications since many of the businesses would show no or minimal cash flow during the lockdown months, Hathi said.

Not only will new loans be hard to come by, collecting repayments will be challenging as well.

Collections happen as a share of the payments received by the merchant through the terminals. If consumption slows down, so will the transactions, leaving the merchant with little to repay the loan with.

“Cash-flow lending is the need of the hour but given this situation, lenders will rather try to secure their existing book than giving out new loans. Overall, they will be hesitant to take risks, given the shock and given the moratorium,” said a founder of a payments startup that offers working capital loans to its merchants.

He was referring to the Reserve Bank of India (RBI) allowing lenders to let borrowers put on hold repayment of term loans for three months, one of the many measures announced by the central bank to lessen the coronavirus pain.

There is a sense of gloom in the financial sector but some things are working too.

Contactless payments have seen a big rise. The RBI has been pushing card payments to go contactless and even allowed transactions of up to Rs 2,000 without a second factor of authentication like a PIN.

As per Innoviti data, contactless transactions on its platform for food and grocery increased to more than 7% of all card payments by March-end against 6% in the first week of February.

“We are also expecting a universal mandate from many of the large retailers to go 100% digital in the coming months, this will also help us increase the scope of the business,” said Agrawal of Innoviti.

Bengaluru-based digital payments player Ezetap has received orders for 3,000 mobile PoS terminals from some of the big banks. These terminals will be installed at retail stores for home-delivery staff.

The handy device can be used for card-on-delivery transactions when they drop groceries at doorstep, which has picked up majorly as lockdown forces people to stay in.

“These will be a few tough months but after that once the situation improves, there will be a new normal. Contactless payments will see major adoption. Bill payments will largely go digital and investors will place their bets on players who can capture the opportunity then,” said Vivek Belgavi, partner for fintech and payments at PwC India.