WhatsApp Payments – A House Of Cards Or A Behemoth In The Making?


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When payments regulator National Payments Corporation of India (NPCI) gave Facebook-owned messaging giant WhatsApp the go-ahead to launch its payments service after two years, it came with two caveats. First, the messaging platform can only open its UPI service (powered by the Unified Payments Interface) to 20 Mn users with an unclear provision for a gradual increase. Second, and more importantly, the NPCI will cap the total volume of UPI transactions at 30% for any third-party app provider (TPAP). This will be with effect from January 1, 2021.

Interestingly, the NPCI made both announcements on the same day and its implication was not lost on the country’s fintech ecosystem.

“WhatsApp already has 400 Mn users on its platform while UPI has a user base of 100 Mn or so. Allowing the former a free hand could have decimated all other players overnight,” says BharatPe founder and CEO Ashneer Grover. The Delhi-based fintech startup enables UPI payments at storefronts via QR codes.

But in a space already dictated by deep-pocketed industry behemoths like Google, Amazon, PhonePe (owned by Walmart) and Paytm (the Indian company backed by Alibaba and SoftBank), preventing market monopoly might not have been the only trigger behind the mandate. What concerned the regulator more was the possibility that a tech bug in WhatsApp Pay might put the entire UPI system at risk if it was allowed to function at full capacity, several experts have told Inc42. NPCI also harped on the same when it said that the 30% limit would help “address the risks and protect the UPI ecosystem as it further scales up”.

[Unlocked] WhatsApp Payments - A House Of Cards Or A Behemoth In The Making?

What is more surprising is the two-year-long wait and the constant regulatory prodding WhatsApp had to undergo to offer a service free of cost. But more on that later.

The core of WhatsApp Pay is built around conversational commerce – a new form of ecommerce where consumers can order anything from food to furniture while chatting with the brand’s bot.

Bots have been around for a long time, but businesses have mostly used them on websites and apps for customer communication. Now, these can be integrated with the messaging platform to usher in an all-in-one user experience where product cataloguing, ordering and payment happen on the whiteboard of its interface. It is a new approach, reminding users of a functionally built super app.

However, WhatsApp does not follow the more elaborate WeChat super app model that includes messaging and embedding a plethora of light apps within the parent app to build stickiness. The company has already shared a demo video on how to make the best of its new ‘shopping’ feature. And WhatsApp Pay is one of the most critical cogs in that wheel.

Decoding WhatsApp’s Ecommerce Play

Take, for instance, the case of fast-food chain Burger Singh. It was beta-testing a WhatsApp chatbot when the news of the approval came in. The company quickly informed its technology vendors and asked them to integrate the payments feature. So, what is the convenience factor that attracts the restaurant brand to the messaging app instead of going to third-party aggregators and food delivery platforms like Zomato or Swiggy?

To start with, it gives the seller complete control over the buying cycle – right from awareness to consideration to purchase – something that many D2C brands are trying to achieve via their business apps. But most people want fast, hassle-free transactions and navigating through different apps every time they want to order a pizza will put them off. In contrast, WhatsApp offers its list of businesses and their products, an effective communication channel, a secure payment option and the opportunity to cross-sale and up-sell, all within the same app.

The next big headache: Trimming the delivery cost and making the pricing more attractive for customers.

While food aggregators have served as an effective distribution channel, they also pocket a sizable chunk from each order in the form of commissions at the rate of 20-30%. Additionally, what they charge as the delivery fee is not the actual cost of delivering an order. There is an arbitrage profit they keep for themselves.

What changes with WhatsApp commerce is that direct-to-home (D2C) businesses need not pay that commission and may use the pricing headroom for customer benefit. This, however, hinges on the ability of last-mile logistics providers such as Dunzo, Delhivery, Shadowfax and others, which have emerged as fulfilment partners of many D2C brands.

So, what happens when a D2C brand logs out of a traditional aggregator platform and partners with a last-mile delivery service provider? Here’s an example of how unit economics works in this case.

Burger Singh’s average order value is roughly INR 300 of which it pays 20% or INR 60 to aggregators. On the other hand, a customer pays an additional delivery fee up to INR 50 for a single order. The delivery fee would still be there if the order is placed through WhatsApp to meet the charges of last-mile logistics. But the food outlet can split the aggregator fee and give an extra 10% discount to its customer and also raise its margin by another 10%.

The lifecycle of an order will pan out a bit differently now. When an order is placed on WhatsApp, it will directly go to the restaurant’s kitchen and the delivery will be done by last-mile logistics providers instead of aggregators.

However, with D2C brands going beyond Tier 1 and Tier 2 cities, it remains to be seen whether they will still opt for WhatsApp commerce when it involves greater distances. Delivery beyond city limits without the support of aggregator networks could dent their margins considerably.

Another key reason that may attract D2C brands is access to consumer data. “Aggregators like Zomato and Swiggy have taken away all direct communications between restaurants and their customers. We no longer know who we are serving as the data is masked in a lot of cases. Ordering on WhatsApp will solve that problem,” says Rahul Seth, chief marketing officer at Burger Singh, highlighting a key concern raised by restaurateurs and other D2C businesses operating in a marketplace.

Why one of the biggest companies in the world decided to face constant regulatory prodding to offer a payments service free of cost

Financial services is another data-driven segment where WhatsApp Pay could become a game-changer.

According to a Business Standard report, the messaging app plans to offer loans, pension products and insurance – targeted at lower-income sections in rural areas and small and medium enterprises. The financial daily quoted WhatsApp India head, Abhijit Bose, as saying that the company had been working with leading banks such as HDFC Bank, ICICI Bank and Kotak Mahindra Bank to provide financial services to those outside the banking system. Interestingly, many of these traditional banks (even Yes Bank and IndusInd have got on the bandwagon) already offer a bouquet of services through their WhatsApp banking channels. These include bill payment, checking credit card limit and account balance, card blocking, tracking transaction history and more.

Financial services may turn out to be the earliest adopters of conversational commerce on the messaging app as payments in this segment are recurring in nature such as loan EMIs or insurance premiums.

Agrees Sahil Kini, founder and CEO of Setu, a startup that builds application programming interfaces (APIs) – software programmes which help apps to communicate with each other. His company is working with several financial institutions to create a mechanism so that EMI payment, fixed deposit booking and loan disbursal can be done within WhatsApp chat.

The total addressable market of these use cases is huge. For instance, SBI alone has more than 400 Mn depositors, a number comparable to WhatsApp users in the country, with total deposits above INR 30 Lakh Cr. The market for personal loans in India is more than INR 25 Lakh Cr while digital lenders scramble to reach the country’s estimated 6 Mn MSMEs with small loans.

This massive financial services market is important for WhatsApp in two respects. First, these transactions are recurring to a large extent and second, the message volume is high due to mandatory communications between banks and non-banking financial companies (NBFCs) and their customers.

One may scoff at WhatsApp’s current monetisation model – it is charging businesses around 30 paise, or 5 cents, per message. But the app-to-person (A2P) communication opportunity it is ultimately targeting was $27 Bn in 2019 and is projected to grow to $40 Bn by 2024, according to market research firm Analysis Mason.

Building Software Bridges To Disrupt Businesses

In spite of the huge A2P market, the tech giant may not be content to remain a text messaging channel for businesses.

Harsha Kumar, a partner at the venture capital firm Lightspeed Ventures and a former product head at the ride-hailing app Ola, says, “The pertinent question is: How do WhatsApp Business APIs dictate how companies will get built in the future? I think payments are a narrow subset. It is now important to think about how the entire business API stack of WhatsApp is going to shape up. A lot of interesting business models might come out of that.”

If SaaS (software as a service) is eating software today, APIs are expected to be the next big milestone for digital businesses. Although APIs are now widely used to funnel metadata such as name, address and other identity parameters from one application or website to another, they are increasingly becoming the bridges connecting disparate digital touchpoints.

Right now, WhatsApp Business APIs are quite rudimentary as they only allow a few use cases such as integrating text messages, multimedia and interactive buttons like ‘purchase’ on the chat interface.

But as the messaging platform makes efforts to gain a deeper footprint in the digital lifecycle of brands, its voice and video-calling features could be leveraged for newer APIs.

Maaz Ansari, cofounder of the conversational chatbot company ORI, says “I think a good idea that WhatsApp could explore is voice. We are already getting requests from brands who want to integrate their chatbot experience with their contact centres. That way, if someone is chatting with the WhatsApp bot, he/she can be connected to a human agent straightaway. A button like that would open up an entire sales frontier.”

Can WhatsApp Become A Super App?

It may seem WhatsApp is on the cusp of becoming the de facto super app of the country by disrupting established business models. But this assumption is far from reality.

India’s ecommerce market, estimated to hit $84 Bn in 2021 by India Brand Equity Foundation (IBEF), is dominated by the likes of Flipkart, Amazon and Snapdeal. These companies have not only made a deep penetration into every nook and cranny with the help of their vast supply chain networks but have also set a high benchmark in terms of quality control.

The ecommerce head of a leading luxury wear brand, who does not want to be named, pinpoints the issue. “The problem with the open marketplaces of Facebook and Instagram is that they have not been able to solve the problem of fakes. It would be a crucial factor even for WhatsApp Business. Big brands would think of it before they take the plunge and decide to sell on the messaging app.”

Another key issue here is the lack of business discoverability. 

When a buyer decides to look for a particular product, he/she would like to surf through multiple brands and price points — a feature the messaging app does not provide.

“The conversational commerce route is a change in interface. Whether it will reduce people’s inclination to explore different platforms depends on how WhatsApp, and the sellers on it, match and exceed the value aggregators provide in terms of product and price comparisons,” says Anirban Das, product head of the last-mile logistics startup Dunzo.

At this point, the core of WhatsApp’s pitch seems to be in its appeal for small merchants such as neighbourhood grocers and food outlets. But that, too, is a segment that the San Francisco-based technology giant might find hard to monetise as several low-cost to no-cost kirana tech apps such as OkShop, MyStore, Dukaan.io and DotPe are driving adoptions in a big way.

Why one of the biggest companies in the world decided to face constant regulatory prodding to offer a payments service free of cost

Suumit Shah, founder and CEO of Dukaan, tells Inc42, “WhatsApp Business has not seen huge traction with small merchants despite the huge user base of Facebook and WhatsApp combined. And the payments feature is unlikely to be a game-changer in this space as our country is seller-centric in terms of payments. Here, the seller decides which payment mode he is going to accept.”

Does it mean WhatsApp will make it big only in a couple of segments in the foreseeable future? Will it be the go-to place for businesses with recurring transactions in the form of subscription-based products such as streaming platforms, phone and broadband connections or LPG refilling and small vendors who accept peer-to-peer payments?

According to Kumar of Lightspeed, “If you often transact with a particular vendor, you are likely to use WhatsApp in that case. WhatsApp payments will grow rapidly in terms of P2P transactions, but a lot of people do not save their vendors’ numbers on their contact lists. If you have someone new coming in from Urban Company every time, you are unlikely to save all those new numbers and would rather pay through another app like Google Pay.”

Navigating A Laundry List Of Regulatory Hurdles

WhatsApp may resolve these product (and growth) issues by pouring billions of dollars from Facebook’s deep cash reserves. But the regulatory hurdles faced in India continue to haunt the company.

When Facebook’s role in the Cambridge Analytica scandal was exposed in March 2018, the incident compelled regulators from all over the world to sit up and take note of the power and reach of the social media giant’s data reservoir.

The Indian government and its regulators are no exception. They have framed stringent data localisation norms in the aftermath of the scandal and a data privacy law is in the works.

Meanwhile, WhatsApp has borne the brunt of this regulatory wrath for the past two years. In spite of a 400 Mn user base in the country, it was not allowed to extend its UPI payments feature beyond the beta stage until recently.

Even now, its regulatory woes are far from over.

There are at least three petitions to which WhatsApp is a respondent, and all these petitions broadly deal with two questions — in what manner and to which extent WhatsApp has complied with the data localisation norms and what kind of user data it can share with third parties according to its privacy policy.

Sriram Parakkat, a lawyer representing Rajya Sabha MP Binoy Viswam who has petitioned the Supreme Court against the alleged dilution of data localisation norms by the Reserve Bank of India (RBI has mandated these norms for payments providers) to allow Big Tech players an easy pass, tells Inc42 the messaging platform has been vague in its affidavit in the apex court.

“If you look at the way the affidavit has been drafted, you will find the company has not said how and on which date it has complied with the norms. Even for the smallest of things such as receiving an email, you need to file an affidavit saying which server and IP address you were using and state at what time and on which date you got the email,” he explains.

Why one of the biggest companies in the world decided to face constant regulatory prodding to offer a payments service free of cost

But that is not the only thing WhatsApp has been vague about.

Apar Gupta, executive director at the Internet Freedom Foundation, which is an intervenor in another case WhatsApp is embroiled in, says, “The privacy policy is so vague that one does not know, with a certain level of clarity, what data WhatsApp shares with Facebook. And they have not stated that with a high degree of clarity even to the Supreme Court.”

The government has, however, taken a strong line against WhatsApp over the past few years and Ravi Shankar Prasad, Minister of Communications and Information Technology, has said on numerous occasions that sensitive data cannot be allowed to go out of the country.

The main point of contention is: If the tech giant is at liberty to use metadata collected by the messaging platform for other purposes such as targeting ads, it will be a greater concern now. As WhatsApp will have access to payments data of a large mass of users, it can dissect these datasets for insights into user behaviour.

Moreover, Facebook’s business model is mostly based on profiling users for targeting advertisements. If WhatsApp’s privacy policy allows data transfers within the Facebook group of companies, could these inferences be used by political campaigns for micro-targeting?

Interestingly, Facebook was at the centre of a huge controversy in August 2020 as its policy head in India, Ankhi Das, was accused of not curating the ‘hate speeches’ posted by the members of the ruling Bharatiya Janata Party. Following the controversy, Das quit Facebook in October this year.

Another issue that may crop up soon is the provision of a level playing field. Will WhatsApp provide the full list of UPI options when people go shopping on the platform (the company has not yet disclosed the payment options to be made available to its users). Even if users are compelled to pay via WhatsApp Pay, the argument in its favour cannot be easily discarded. The messaging platform is not an ecommerce marketplace like Flipkart or Amazon, and hence, the push to its own payment services. Some, however, argue that WhatsApp should be neutral in terms of payment options as it is a social media app first and not a dedicated payments player.

Questions Galore

The debate over data sovereignty also entered the C-Suite when Facebook’s global affairs head Nick Clegg last year countered RIL supremo Mukesh Ambani’s statement that the country’s data should not cross its borders.

It is another matter that the tech giant has invested $5.7 Bn for a 9.99% stake in the telecom juggernaut of Asia’s richest man. While Facebook’s investment in Jio brought two money-spinning behemoths together, there are many unanswered questions about how this partnership will play out.

Will JioMart give preferential access to WhatsApp Pay? Will the oil-to-telecom conglomerate find favourable real estate for its retail platforms on Facebook and WhatsApp? Will they share data and funnel users into each other’s platforms?

Until now, WhatsApp has taken a regulatory beating in India, but one cannot ignore the luck the Facebook-Reliance Jio deal has brought it. As we have mentioned before, WhatsApp’s long-awaited payments play has seen a satisfactory resolution after Facebook signed on the dotted line.

Although no one knows how the billionaires plan to reshape the Indian consumer tech market, we will surely witness a great strategy game as both businesses seek pride of place on our smartphone screen.





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