There were about 27 million credit card users in 2016, according to the Reserve Bank of India (RBI) data. And these users make up nearly 35-40% of the mobile wallet user base. However, this large base of users is also somewhat of a sore point for mobile wallet companies. Because every time someone transfers money to a wallet, they pay a Merchant Discount Rate (MDR) to banks. MDR is pegged at 2% on credit cards and only 0.75% on debit cards. But wallet companies are willing to bear the MDR fees, in anticipation that the users will spend more money willingly.
So when users devise schemes to use mobile wallets other than their intended purpose, Paytm, or any other wallet provider, has no incentive to serve them. And Paytm made that amply clear in a blogpost dated 9 March 2017.
To quote from it
“Paytm pays fee to card networks or banks whenever you use any payment instrument like any other online commerce company. Paytm pays a hefty charges when you use your credit card to card networks & issuing banks. If user simply adds money and takes to bank, we lose money. Our revenue model requires users to spend money within our network and we make money from the margins available to us on various products/services we offer.”
In a move that briefly exposed the company’s vulnerability, it said that it would pass on the MDR fee—which it was previously bearing—to the credit card user. It also added that it would reimburse the 2% charge as a voucher that had to be spent within the Paytm ecosystem.
The fact that Paytm decided to bring this up revealed two things:
- That it desperately needed to manage the unit economics and couldn’t afford to waive MDR just to retain all types of customers
- It was concerned about the number of credit card users misusing the payments platform, which predictably increased post-demonetisation
- In a sense, many of these credit card woes for mobile wallet companies surged after November 2016.
The demons of demonetisation
Until 8 November 2016, it was business as usual for wallet companies. But withdrawing 86% of the cash in circulation overnight increased the use cases for mobile wallets. And companies like Paytm wanted to use this opportunity presented by Prime Minister Narendra Modi to make the most of the expanding digital payments ecosystem.
Wallet companies made a fervent pitch that everyone from paan-wallahs to pet clinics could accept payments through mobile wallets. And since merchants would need to move that money into their accounts, companies completely waived that bank transfer charge.
This, in a way, resulted in a loss of a revenue stream for them as they initially charged 1-4% to transfer money from the wallet to a bank. This bank transfer fee was charged to disincentivise people from transferring money out of the wallets.
“Wallets charged that fee to make up the MDR hit they took. But by waiving it off, they would now make a loss at a unit level,” said a senior payments executive who didn’t want to comment on Paytm on record.
And doing away with that charge became the harbinger of misuse.
For instance, people could now use a wallet to solve quick cash flow issues with a simple hack.
Everyone knows the cardinal rule about using a credit card. It is to never withdraw money from an ATM using one. After all, no one wants to pay a 36% interest rate annually. But with a wallet in the picture, one could now use a credit card to transfer money into the wallet, free of charge. Then transfer it to a bank account, again for free. And finally, use a debit card to withdraw that money from an ATM. Yes, you guessed it right, for free.
It gets better if a user has two credit cards.
The RBI explicitly disallows paying the bill of one credit card with another, but one could now do precisely that with a wallet. By using two cards with different due dates, one could potentially use one card to credit money to a wallet and then the bank account. And use this money in the account to pay the bill of another credit card. And vice versa. So one could keep rotating this money until one hits the credit limit. In the end, it is one card company simply paying the other.