m-payments- a good investment opportunity?

The buzz about m-payments

Mobile payments or m-payment are not new buzz in India; attempts at creating m-payment solutions go as far back as 1999 and has even seen some VC investment in the space. However, the market was clearly not ready for it and m-payment was more a conceptual experiment than any real paradigm shifting opportunity. The second coming of mobile payments in recent months is an entirely different story. It has the backing of a 135 million user base that is growing at 5% a month, and a retail economy that is poised to take off into stratosphere.

m-payment is a broad term for any mechanism that allows a user to make a payment for a service or goods, or transfer money to another person using a mobile phone. The m-payment solution typically works in conjunction with an existing bank account or credit card the user holds.

The basic hygiene factors for an effective m-payment solution are:

– Ease of use
– Maximum device support to cover a large user base
– Support for a number of banks or credit cards
– Security
– Large merchant base

m-payment providers in India:

The m-payment space in India has seen two recent investments by leading VC’s. Sherpalo Ventures and Kleiner Perkins Caufield & Byers, two of Silicon Valley’s most reputed venture capital firms invested about $5 million in Paymate, a Mumbai based m-payments solution provider and Helion Ventures invested $2.2 million in Ji Grahak, a Bangalore based m-payments company.

Paymate and Ji Grahak offer very different solutions and a comparison is shown below:


  • SMS based, no GPRS connection needed.
  • Currently available only for Citibank credit or debit card customers
  • Works on almost every phone model in India
  • No need to enter and submit credit/debit card details on the phone
  • Current model will only work for online purchases
  • Person to person payments currently not supported

Ji Grahak:

  • Needs GPRS and a java client to be downloaded
  • Currently available for any credit card holder
  • Works only on high end java phones
  • Need to enter credit card details at least once on the phone
  • Current model seems online focused, but no real clarity
  • Person to person payments currently not supported

The fact that Paymate works on any phone model with SMS capability, does not require the user to hold a credit card and works without GPRS makes it appear to be much more compelling proposition than Ji Grahak. Moreover, Paymate does not require the user to enter or submit card or account details over the phone, another huge benefit in India where consumers are only just beginning to become comfortable with using their credit cards online. The only advantage Ji Grahak seems to have in the short term is that it supports any credit card and is not restricted to Citibank customers. However, this may not be such a great advantage as Paymate signs up more banks eventually.

In the long run however, as data usage in India becomes more widespread (GPRS), the Ji Grahak solution offers a much more secure infrastructure for payments than Paymate’s simplistic SMS based solution. Moreover, a Java client on the phone also provides scalability in terms of exchange of information with Point of Sale (POS) systems to purchase goods in physical retail stores should Ji Grhak go that way.

While the Paymate model seems to be more in tune with Indian market needs than Ji Grahak, it still needs to address several issues in order to have a chance of success. For starters, the current model only supports on-line retailing, i.e, the user browses a web site such as rediff.com and decides to buy an item. When the user reaches the purchase screen she is presented with the option of paying via her mobile phone and enters her mobile phone number and clicks submit. If the user is a pre-registered Paymate user, then an sms is sent to the users phone with the item code and the user needs to reply with the item code and PIN number to confirm the purchase. Secondly, SMS is inherently not very secure and it’s not uncommon for messages to get lost or remain undelivered.

The biggest hurdle faced by both paymate and Ji Grahak is extending the model beyond online retailing to physical store retailing. The big advantage of m-payments in the Indian context is that it takes advantage of high mobile penetration to provide an effective alternative payment method to cash. So what exactly is the benefit of solutions that merely displace the last click of an online browse and buy transaction?

And from an investor’s point of view, what is the revenue model for m-payment providers? Both Paymate and Ji Grahak are free of charge to the user; does the merchant pay them for every transaction? Can they break even with only online merchants?

A third m-payment solution, mChq, and has been around for over a year now. This is again SMS based but the transaction process is one where the retailer/merchant sends an SMS mentioning the amount to the customer. The customer enters his/her personalized PIN number and sends an SMS back to the retailer acknowledging the amount to be paid. Both the parties then get a confirmatory SMS indicating the completion of the transaction. The mCheq solution addresses physical retailing more effectively than paymate or Ji Grahak. mChq pilots were launched by ICICI bank and Visa cards and SBI also launched a solution on the platform subsequently.

Are m-payment solution providers a good investment opportunity for VC’s?

There is no big m-payment success story anywhere in the world today, barring maybe Japan. Having said that, India probably has the best chance of producing an m-payment success story. Market factors for an alternative payment mechanism to cash are clearly evident – high mobile penetration even in tier-2 and 3 cities, relatively low credit card penetration (98% of transactions in India are cash and cheque), a relatively low internet user base and rising middle class consumption and disposable income.

The biggest challenge will remain consumer adoption. The market is large enough to support 3-4 m-payment solution providers with different solutions that cater to different consumer segments. Moreover, competition is essential to create consumer and merchant adoption on a mass scale. Several m-payment solutions are likely to emerge in the next few years in India, as the market evolves and lessons are learnt. From a VC investment perspective, a solution that effectively addresses the hygiene factor of m-payment and then goes that extra mile, and a management team that has strong networks with the banking community are certainly worth taking a closer look at.

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