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What Other Markets Can Learn from India's Emerging Fintech Sector

Digital payments leader Paytm looks to expand into fintech with new bank

May 24, 2017 | Retail & Ecommerce

India’s radical move to eliminate large-denomination currency from its financial system has driven changes in the ways consumers pay for purchases, and now may have a ripple effect of increasing the portion of the population that uses financial services. This is a dramatic change for a country that traditionally has had a huge unbanked populace.

The government moved late last year to demonetize two high-denomination cash notes. The change was aimed at cracking down on corruption and tax evasion, but had the unintended effect of driving consumers in India—who historically have relied on cash to make purchases—to adopt newer digital payment systems.

The change in payment behavior has been rapid and dramatic. Research firm RedSeer Consulting recently reported that mobile wallet transactions in India totaled $3.6 billion in the first quarter of 2017, up 60% from the previous quarter. And India’s smartphone users were already more likely than those in other countries to use mobile wallets.

Smartphone Owners in Select Countries Who Use/Are Likely to Use Mobile Wallets, July 2016 (% of respondents)

One company that benefited from the change was Paytm, a popular homegrown digital payment and ecommerce service, which saw a strong uptick in the number of both users and transactions following the demonetization.

Now Paytm is pushing to go beyond payments into financial services, opening a limited-service bank. The Paytm Payments Bank operates savings accounts that can accept deposits of up to INR100,000 (roughly $1,500) and will let users make digital payments with their accounts, but will not issue loans. In addition, Paytm’s 220 million mobile wallet service users will get folded into the Payments Bank.

The consumers who have adopted digital payment services are the perfect target market for Paytm Payments Bank: people who have lacked access to traditional retail banking services.

Paytm is offering its new customers a 4% interest rate on deposits made into its savings accounts, and isn’t charging them for online fund transfers. On top of all that, there’s no minimum balance requirement.

For many consumers who have never had a bank account, payments banks represent a first step toward a more full-fledged suite of financial services.

India’s emerging consumer class is likely to access such services via a smartphone. eMarketer estimates the number of smartphone users in the country will grow by 19.5% this year to hit 267.1 million.

Paytm’s growth and understanding of the Indian market has not gone unnoticed by deep-pocketed investors looking to capitalize on this vast pool of potential customers.

Just last week, Japan-based telecom SoftBank invested $1.4 billion in Paytm’s parent company, One97 Communications. The company plans to use the funds to hit its goal of 500 million customers by 2020. First steps to that goal include the launch of 31 physical branches of its payment bank this year, along with 3,000 other locations where customers can access services.

Rahul Chadha

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