Bengaluru: The entry of WhatsApp into digital payments is set to significantly expand the digital payments market in India and could threaten the dominance of Paytm, highlighting the challenges that pure consumer payments firms face in defending their turf.

The payments launch by WhatsApp, one of the most popular internet platforms in the country, is likely to introduce tens of millions of users to digital payments, industry executives said.

Paytm, the runaway leader in payments with nearly 300 million registered users, stands to lose most if Facebook Inc.-owned WhatsApp can push its payments service to the 230 million people who use its app frequently to send messages, pictures and other content. (While Paytm claims roughly 300 million registered users, the number of people using WhatsApp on a regular basis is far higher.)

Based on the UPI (Unified Payments Interface) platform, WhatsApp launched payments on trial for some of its users this month. It is expected to introduce the service to its entire user base soon.

On Thursday, Paytm founder Vijay Shekhar Sharma alleged that WhatsApp was flouting rules and putting consumers at risk because it was skipping steps in the payments process. Sharma also alleged that WhatsApp was restricting access to other UPI-based platforms.

In response, the National Payments Corp. of India (NPCI), which owns UPI, said all UPI apps have to allow interoperability.

Beyond the issue of interoperability, what is at stake is Paytm’s dominance of the digital payments business that has helped catapult the company into India’s second-most valuable internet start-up after Flipkart.

Driven by a massive spending spree and Sharma’s ambitious vision, Paytm beat rivals including FreeCharge and MobiKwik to emerge as the country’s largest digital payments brand.

Paytm has been the country’s most stunning start-up story in recent years. The company has enriched many of its investors and employees and become a household name. It raised more than $2 billion and counts China’s Alibaba Group and Japan’s SoftBank Group as two of its key investors. From a valuation of less than $200 million at the end of 2014, its valuation soared to $10.2 billion this month.

That valuation is based mostly on expectations that Paytm will continue to dominate payments, expand its fledgling payments bank business and introduce new services such as wealth management.

Now, WhatsApp, with its easy-to-use interface and spending power, will offer the biggest challenge to Paytm yet.

Unlike payment apps such as BHIM, Flipkart’s PhonePe or Google’s Tez, all of which had to start from scratch, WhatsApp represents a unique threat to Paytm: it is already one of the most-used internet platforms in the country.

While Google and Flipkart are large internet platforms by themselves, their payments platforms aren’t nearly as well known. WhatsApp will offer payments on its existing app—a key difference in terms of useability and reach.

“WhatsApp is already one of the most popular apps in India and with messaging as the key hook, they offer a compelling use case for payments, particularly P2P. They’ll be competing on the back of their UI (user interface), which is really smooth, and it will force everyone to up their game," said Amrish Rau, chief executive of PayU India, a payments processor.

“I’ve always believed that payments by itself is not enough of a hook to build customer loyalty. You need other services as the main hook and then you add payments. That’s why I think WhatsApp’s entry is a threat to the incumbents."

Digital payments is a nascent business and while Paytm has a massive lead, what makes it vulnerable is that digital payments have far fewer entry barriers than operations-heavy businesses, such as e-commerce or cab transportation.

Platforms that are willing to spend loads of money and whose interfaces catch customer fancy can quickly build large businesses in payments. Paytm itself has benefited from this over the past two years. After adding services such as bus and movie tickets, and air travel, it quickly became a formidable force in these businesses, threatening to upstage specialty ticketing platforms like RedBus and MakeMyTrip that had painstakingly built their businesses over several years.

WhatsApp will aim to do just that to Paytm in the latter’s core business of payments.

“You have to see what happened in China—Alipay was the biggest payments company for years but the market moved towards mobile payments suddenly when WePay (owned by Tencent) came in and became really big, because it was a higher-frequency app," said Kunal Shah, founder and former CEO of FreeCharge. “Similarly, WhatsApp has the most number of daily active users, exponentially more than anyone in payments. How will Paytm or Tez or anyone compete with that? WhatsApp will lead to a digital payments revolution in India. Not just wallets, even services like NEFT could potentially become irrelevant or less used," he added.

To be sure, Paytm has significant advantages over any rival. Its brand has become synonymous with digital payments over the past year, aided by demonetisation. The company has years of valuable experience and has diversified into many payments niches, including offline spaces such as petrol pumps and various retail stores. It also has more than $1.5 billion in cash as well as investors with the appetite to pump in billions of dollars more.

Still, Paytm hasn’t yet faced a competitor as formidable as WhatsApp.

Whoever wins, one thing is clear—the digital payments market is set for a big leap. Consequently, payments will become one of the most intensely competitive and expensively fought markets in India’s internet world.

“WhatsApp’s entry can bring in the next 100 million users into the digital payments fold and that will be a massive boost for the digital payments ecosystem overall," PayU’s Rau said.

Paytm didn’t respond to emails seeking comment, while WhatsApp declined to comment on the matter.

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