After a continued tussle with Indian authorities over lack of two-factor authentication support for its payments, Uber has announced that all future payments will be carried out exclusively through a digital wallet powered by Paytm. Customers interested in riding with Uber have to set up their debit cards on Paytm and add money to their digital wallets.

To incentivize the move to Paytm’s service, Uber has been offering five free rides last week to all users who have linked their cards to Paytm’s digital wallet. Uber has been vocal with regards to the Reserve Bank Of India’s mandate that requires all businesses to provide two-factor authentication for all transactions online, calling the move “a major challenge for businesses trying to offer Indian consumers a better purchasing experience.”

Two-factor authentication woes

Back when Uber launched in the country earlier this year, it allowed customers to pay using a credit card without two-factor authentication, which drew the ire of the RBI. Uber was able to circumnavigate Indian business rules by processing transactions through its Netherlands subsidiary, leading to a formal inquiry by the RBI to curtail such measures. The Indian regulator dictated that any service operating out of India has to offer payment services within the country.

Uber was given until Nov. 30 to comply with RBI’s regulations, which led to the service collaborating with Paytm. Uber’s reticence to do so was evident in a blog post on its official blog, which labels the mandatory two-factor authentication as “an antiquated solution that is cumbersome for consumers and stifling for businesses.”

“India’s current regulations require every transaction made with an Indian credit card, no matter how small the amount, to include two-factor authentication (2FA). As you are aware, we recently expanded the available payment options on Uber to include a Paytm Wallet, which allows you to pay for your rides through Debit Card, Credit Card and Net Banking. Paytm is the leading e-wallet provider in India, and this solution is 100% compliant with all applicable regulations including 2FA.“

With the new system in place, customers will be able to add money to their wallets using a debit card using the Verified by Visa or MasterCard Securecode two-factor authentication systems. The points Uber mentions in its blog post are all valid. While the two-factor authentication is a vital security measure, the RBI should be willing to allow certain service providers to make it convenient for users to pay without having to undergo an additional step.

Tough for the customer

As a long-time Uber customer in India, I can say that the two-factor authentication is more cumbersome to use in this particular instance. Adding money to a digital wallet before availing the service is often frustrating, and the redirection to Visa or Mastercard’s authorization services is not always seamless.

Furthermore, while the collaboration with Uber may seem like a profitable move for India’s Paytm, the service’s CEO revealed that it is not as lucrative as it seems:

Our RBI licence doesn’t allow any interest earning or other use of this money in ur wallet. Kept in a nationalised bank escrow on ur behalf. — Vijay Shekhar (@vijayshekhar) December 1, 2014

Uber is now asking the RBI for a 45-day extension to allow existing customers to move to the digital wallet service. As for new user acquisition, Uber is set to challenge the autorickshaw industry with its latest pricing tier, UberGo. The low price tier, which is now being rolled out in ten cities across India, allows customers to ride in a taxicab for far less than what it costs in an auto. Uber even made a chart to highlight the price difference:

With several pricing tiers and affordable pricing across categories, it is clear that Uber is targeting growth in the country in lieu of profits. UberBlack, for instance, is priced at an aggressive Rs. 18 ($0.3) per kilometer. As to whether any of this succeeds in getting the service a considerable amount of traction remains to be seen.