Earlier this week, The Ken reported that Facebook-owned Whatsapp is entering the payments business in India, working on launching a peer-to-peer payments offering, expected to be built on the UPI, in the next six months. Some thoughts on this development:

1. Whatsapp is a telecom operator: Whatsapp has been built on the idea of replacing telecom operators by providing the services that telecom operators do. They started with messaging (a telco service), then moved to voice calling (a telco service), and now are doing video calling (a telco service which telcos failed to do). The monetization plan that Whatsapp – which has still not been rolled out – been about providing transactional messages, which is another telecom service. As such, we’ve always seen Whatsapp as a telecom operator riding on the Internet protocol. With telecom operators getting into payments, it’s not surprising for Whatsapp to get into payments.

The only anomaly in the feature rollouts from Whatsapp is the introduction of status messages, which telecom operators don’t (and can’t) do. I wonder if Whatsapp would have done status messages if it weren’t owned by Facebook.

2. Whatsapp will be want to be just a pipe: Companies getting into payments in India have 3 options for enabling transactions:

They can become a wallet: The thing to remember with wallets, is that they’re a storage of money: you own the customer because she holds money with you. Wallets, in that sense, are a threat to banks, because they’re an alternate store of money. Starting a wallet, however, is fraught with danger because the Reserve Bank of India, which is essentially biased in favour of banks, and NPCI, which is owned by banks, are out to hurt wallets: the UPI, which is owned by NPCI still excludes wallets from transactions, and the NPCI has gone on record in the past to say they want to give banks a competitive advantage; the RBI, probably unhappy with the Watal Committee report, has issued some fairly stringent (draft) guidelines for wallets.

The thing to remember with wallets, is that they’re a storage of money: you own the customer because she holds money with you. Wallets, in that sense, are a threat to banks, because they’re an alternate store of money. Starting a wallet, however, is fraught with danger because the Reserve Bank of India, which is essentially biased in favour of banks, and NPCI, which is owned by banks, are out to hurt wallets: the UPI, which is owned by NPCI still excludes wallets from transactions, and the NPCI has gone on record in the past to say they want to give banks a competitive advantage; the RBI, probably unhappy with the Watal Committee report, has issued some fairly stringent (draft) guidelines for wallets. They can become a payments bank: which has significantly higher threshold than wallets for launching and needs to be majority-owned by an Indian company. Both wallets and payments banks are, in India, licensed entities, which is probably something that Whatsapp might not want to do, because typically global companies would want to operate in an unregulated environment. Note that Neeraj Arora, Whatsapp’s business head, is on the board of Paytm, which has a Payments Bank license.From a licensing perspective, if Whatsapp wants to take the payments product global, it becomes cumbersome to manage different regulatory relationships across the globe, especially because the payments ecosystem is constantly evolving, and countries are more conscious of the movement of money, instead of, say, the movement of personal user data. Remember the issues that Paypal faced in India several years ago? A Paypal vs RBI timeline here.

which has significantly higher threshold than wallets for launching and needs to be majority-owned by an Indian company. Both wallets and payments banks are, in India, licensed entities, which is probably something that Whatsapp might not want to do, because typically global companies would want to operate in an unregulated environment. Note that Neeraj Arora, Whatsapp’s business head, is on the board of Paytm, which has a Payments Bank license.From a licensing perspective, if Whatsapp wants to take the payments product global, it becomes cumbersome to manage different regulatory relationships across the globe, especially because the payments ecosystem is constantly evolving, and countries are more conscious of the movement of money, instead of, say, the movement of personal user data. Remember the issues that Paypal faced in India several years ago? A Paypal vs RBI timeline here. They can become a payment gateway/pipe: by enabling payments from linked accounts to other linked accounts, whether to merchants or users, Whatsapp can essentially become the aggregator of users, enabling transactions between them. Now with 200 million monthly active users (or connections?) Whatsapp is the largest social app (telecom operator?) in India. The network effects already exist: it is what allows it to launch voice calls, and for usage to scale rapidly.

3. But UPI is the pipe, so will Whatsapp seek to own the identity? UPI is the pipe that enables faster, quicker payments than any other mode of payment, and it is the pipe for transfer of money from user to user. But what is important here is that it allows the creation of Virtual Payment Addresses, which gives users a unique identity outside of a bank account number, and unbundles identity from an account. So you’re transferring money from identity to identity, and that is linked on the back-end to an account. In future, that account could be held by a Bank, a Payments Bank or a wallet: it’s almost irrelevant, as to where the money is stored. The need to own the identity is why Banks don’t want other storage players connected to UPI.

If the user gets, for example, a VPA that says nikhil@WA, once Whatsapp is linked to the UPI, Whatsapp effectively owns the user.

Shashi adds: Note that the draft paper for the UPI said that it was technically possible to make an email a financial address. So it could be possible for WhatsApp to create a financial address such as nikhil@WA. What is more interesting in the draft guidelines for the UPI also mentions the provision of creating a “one time use” addresses or “amount/time limited” addresses to customers.

WhatsApp may finally get a one-up on Snapchat and pioneer ephemeral payments. But that said, Snapchat introduced Snapcash and allowed its users to transfer money via the messaging platform. (Man, Facebook is really really trying to beat Snapchat.)

4. How will Whatsapp monetize? Monetization in the payments business is largely in two ways. The entity which stores the money (for example, bank) monetizes the float. The entity that enables the payment charges a fee for completing the transaction. In case of Peer to Peer payments such as what has been reported of Whatsapp’s plans, there is no such fee in case of UPI. There are two ways that Whatsapp can make money here: firstly, Whatsapp could enable merchant payments and charge a fee from merchants. As it is, small merchants do conduct commerce on Whatsapp groups, and collect payments by sending payment links on the web, or event collecting payments offline. Secondly, Whatsapp was planning transactional messages by opening up its API to a limited set of merchants. Payments are transactions, and it could make money by enabling payments.

Whatsapp has build features with the intent of serving its users and building scale: monetization isn’t something it appears to be concerned about as of now. What is happening though is that the company is sharing data with Facebook for ads (my take on it here), and that appears as if it is going to lead to Whatsapp being regulated in India.

The Ken story has an illustration of their assumption of how Whatsapp might work with UPI, but it suggests linking a Whatsapp profile to a VPA. If same VPA can probably be used across multiple user Whatsapp accounts, it will help Whatsapp identify users across different accounts too, and really, Whatsapp doesn’t actually need its own VPA if it can be linked to a Whatsapp account.

Where Facebook sees the benefit in Whatsapp rolling out payments is probably the transaction data: more data on who’s paying money to whom, and how much: transaction data is probably not among the 98 data points about users that Facebook is currently able to track.

Data is the new oil.

Wonder when Google will get into the payments game in India.