WhatsApp Pay: Boom or Bust? (#27)

Also: the story since inception, and what the future likely holds for the product

Mar 28, 2021

No mobile application has entered the Indian psyche as much as WhatsApp. We do not see it as just another colourful icon on our screens. Nor do we treat it as another social media application. Instead, for roughly half a billion Indians, WhatsApp is routine.

Are all the doors locked? Yes?

Are there any messages on WhatsApp? No?

We are good then.

We do it out of habit. A habit adorned as much by teenagers as by those nearing retirement. Such is our dependence on WhatsApp that it has replaced the act we use it for. We do not message people anymore, we WhatsApp them.

So, when WhatsApp wants to introduce payments – with the might of half a billion Indians – what happens?

People take notice. From regulators, payments companies, to merchants and users – everyone listens intently. Not least because WhatsApp is backed by Facebook, which is notorious for reasons of its own. But because of the routine, the influence it carries over the people.

A Little History: WhatsApp’s Long Wait

This was in 2017. UPI had started making big splashes in the payments ecosystem. And rumours had surfaced of WhatsApp planning to introduce UPI-based payments. But for WhatsApp, the decision to choose UPI was as forced as it was strategic.

Wallets had gone out of favour due to RBI’s directions that made the KYC norms, storage amount caps, and other such features heavily regulated. The low-cost nature of UPI further meant that Facebook could seem less predatory with its new initiative – especially since the last one (free basics) had not gone down too well. Overall, UPI had simply become more convenient than wallets. This made the choice easy.

At the time, only ~15Mn monthly transactions were over UPI. PhonePe was less than a year old. And Google Pay was yet to launch in India. But fast forward to today and we see ~2.3Bn monthly UPI transactions, with PhonePe and Google Pay making up ~80% of the volumes.

Between all this, what happened to WhatsApp (WA) Pay?

In one word: regulations.

The rumours turned true soon, and WhatsApp was granted a license to launch a UPI-based beta version of WhatsApp Pay in early-2018. This should have been the start of WhatsApp’s dominance in payments. Instead, it turned into a long legal battle.

In Apr-18, RBI released a circular titled ‘Storage of Payment System Data’ that raised concerns over where the payment service providers were storing their payments data and called for better monitoring of the same. The regulation had made it mandatory for PSPs to store the data locally in India, except for certain edge cases – and it set a deadline to comply with the data localisation norms by Oct 2018. So began a long series of back and forth dialogue.

WhatsApp was dragged to the Supreme Court through petitions claiming several non-compliances. The company strategically broadened its leadership positions. And amongst all this - WhatsApp’s CEO, Chris Daniels, optimistically submitted a request to the RBI in Nov-18 for permission to roll out payments to all users – hoping that their data storage adjustments would be deemed acceptable. Instead, RBI noted in Mar-19 that WhatsApp continued to stay non-compliant with Indian data localization norms.

As for the expansion of the user base, data privacy concerns against WhatsApp heightened with the Spyware Pegasus attack in late-2019. The sound of the rattle got louder with RBI directing NPCI to “not allow a full-scale launch of WhatsApp's payments service in India”.

Whatever WhatsApp did, the approval only seemed to get tougher to obtain.

It had no choice but to go back to the whiteboard. It did go back. And in early-2020, WhatsApp submitted a revised data localisation compliance appeal. To expedite the case, Supreme Court directed the appeal to RBI and NPCI, who were asked to submit their response within three weeks.

The above breakdown missed a few key external details that were likely relevant:

Facebook bought a 9.99% stake in Jio Platforms in Apr-20. There were speculations, not completely unfounded, on the relevance of this deal to the lobbying power required to get WhatsApp Pay off the shelf.

WA Pay was launched in Brazil in Jun-20 after similar deliberations. And in a haste, the service was suspended only a week later citing a need to “preserve an adequate competitive environment”. The talks are ongoing and it is likely to go live again for the P2P use case. Make whatever of this as you may.

Finally, in Nov-20, the long wait ended.

WA Pay was allowed to go live in a graded manner. That is, in the first phase, it could get a maximum of 20 million registrations – up from the one million cap it had had since two and a half years. Not quite enough for its strength of almost half-a-billion users, but a relief nonetheless.

Lastly, on the day that WA Pay earned the approval, NPCI announced limits to the market cap for third-party apps for UPI transactions. The graded roll-out for WA Pay and the 30% cap were strong signals that NPCI was anticipating - and stood against - concentrated power in the market for payments. But was this directed as much towards WA Pay as it was towards PhonePe and Google Pay? The timing sure was ominous.

WhatsApp Pay Goes Official. Game won? Not really.

Despite the two and a half years that WhatsApp lost due to the data compliance issues, when the time came for expansion – everyone believed that WhatsApp would change the power structure of the UPI ecosystem.

Yes, the limit on registrations and the 30% cap on market share were restricting – but the limit on registrations would rise over time and 30% was still significant.

In short, WhatsApp Pay had reasons to smile wide and get back to work.

It is also important to remember that acquiring users is the big money-burner for payments players, who as it is rely on small margins. Now, WA had enough money to burn and a large enough platform to make little work of acquiring users. Especially given the swiftness that we had seen previously in the case of Kakao, Tencent, Ant Group.

The fear, if present amongst others, was understandable. WA Pay was – and is - expected to create a big dent.

So, how has it done since Nov-20?

Well, not bad. Although the trendline is odd, an almost 2X increase in the average volume of transactions in three months is a great achievement. But it does not feel that way – does it?

It does not because WhatsApp started with a lower base and continues to make up only 0.02% of the monthly UPI transactions. That is, ~0.0275 monthly transactions per potential registered user (overall: 20 Mn).

Also, our expectations were high. We had simply expected WhatsApp to gallop the market share. Was it unfair? A little, perhaps. But we were right to assume a greater usage than what we currently see. Kakao Bank went from 0 to 1.5Mn registrations in a week, for reference.

What is ailing WhatsApp Pay?

There are little to no insights on how WA Pay is approaching this out on the web. There are some whispers, though, that this slow start is all part of strategy. Regardless, I have a few hypotheses that might help answer this.

Platform != Acquisition

Access to millions of users on a platform is a distribution play that many companies would give arms and legs for. That is why partnerships become crucial as you scale up. The platform was the big lever for WhatsApp – access to 450 million users.

But contrary to belief, simply adding an icon would not lead to high acquisition for the payments product. Instead, it would still require constant effort for WA to educate its users of the new feature, and of the benefits of using it. I am likely biased here, but there has been little to no communication on both fronts from WA.

Without this communication, there undoubtedly remains little incentive for the users to go through the KYC process to get registered. And there will be no volumes without registrations.

Need for More Use Cases

It is great that we do not have to switch applications to pay with WA Pay. We can chat and transact on the same screen. But is it reason enough to use it for payments?

Remember that India has quite sophisticated digital payments applications. And to introduce WA Pay to the public, the application should be made more attractive than others for certain use cases. Presently, the most obvious use case of WA Pay is for Peer-to-Peer payments, i.e. payments amongst friends, family, and anyone you talk to over WA.

But, why is it not working then? I can think of two reasons.

Double coincidence of Sign-ups: a UPI payment requires that both parties, i.e. the payee and the payer, go through the KYC process on WA Pay. Unless people have been incentivised to do so, and unless there are means to recognise whether the other person has completed the registration (maybe a small check on the payments icon? a pop-up notification?), there remain hurdles to initiate P2P transactions.
P2P payments are not as big: for every P2P transaction that a user does, he/she does multiple merchant transactions. Look at your history of transactions for instance. Moreover, given that applications such as Google Pay and PhonePe reward you through coupons and scratch cards for such payments, why would someone choose to go through the WhatsApp route?

Many have imagined that the bigger objective of WA Pay is to integrate into its commerce business. There is ground for scepticism there as well for the following reasons:

The unclear commerce strategy of WA itself (where does Jio come in?), and
The unilateral channel of communication for companies to converse with customers, e.g. we can receive tickets from Bookmyshow or MakeMyTrip on WhatsApp but we cannot communicate or add / remove services. This limits the scope for conducting commerce in-app.

Once there is clarity on the particular kinds of commerce payments that WhatsApp wants to promote, it should make use cases outside P2P payments more attractive to the public. For example, a request-to-pay feature for businesses would encourage users to sign up on WA pay and pay within the application. Similarly, adding WA Pay at the e-commerce checkout pages would increase its share of voice to the general public – even if the transactions are low initially.

Bottom-line: To solve for volumes, WA Pay needs to define more use cases and with greater clearly.

Incentives: Where art thou?

The added convenience of not switching windows is offset by the multiple cashbacks, coupons that other UPI applications offer. This discussion goes back to the first point again. Access to a platform will not equal acquisition unless there are incentives attached to it.

Therefore, it is necessary that WhatsApp loosens the strings of its wallet and offers merchant discounts and other rewards. For WhatsApp, what may be stopping it to do so is that it maintains a standard consumer interface across users and regions. Integrating these offers and payments-related communication would mean the introduction of a dynamic and dedicated set of payments pages to the application – perhaps at the cost of convenience to its core purpose, i.e. messaging. This is perhaps WIP at the backend presently, but if it is not - it should be.

Data Privacy is an…issue

You would think that with the data that WA potentially collects, they would be great at targeting users that are likely to use WA Pay. But with the scrutiny surrounding WA’s and Facebook’s practices around data privacy, WA has little room to take any steps that raise the suspicions.

So, despite the large platform, WA has to play safe and that is likely the rationale behind what seems to be a plain-vanilla approach to targeting customers, i.e. no targeted stories, notifications, ads within the application. How does it balance the data privacy concerns with the need to push payments? This is larger question to the parent company itself, which often does not help its own case.

So, where does WA Pay go from here?

For starters, there are reasons for WA to remain optimistic. The market for digital payments, and particularly for UPI, is growing at over 10% - which makes the 30% rule less unsettling. Second, it is still early days for WA Pay and no one is putting them down based on only the last three months of performance.

As for where it goes from here, there are three perspectives to start thinking from: Acquisition, Engagement, and Monetization.

How can WA Pay acquire users: let us define a user as acquired when he/she has completed the registration and made their first WA Pay payment. The literature suggests orthodox measures such as merchant discounts, cashbacks, marketing, referrals as some of the popular and high-cost measures to do so. We are likely to see all these in greater measure in-app and on checkout pages in the future. What, however, should also interest WA are the conversations amongst millions of its users every day. Many P2P conversations on WA can be tied to payments: discussing a trip to Goa, splitting payments into groups, finalising orders to vendors, and sending gifts or money to a family member. WA stands at an advantage to all other applications with such use cases, and identifying and building specific solutions around these would go a long way to making WA Pay common to Indian users. For example, for WeChat, the introduction of Red Envelopes as gifts around the new year completely changed the scale of the application. Similarly, can Splitwise be a simple add-in for the users on the platform. WA Pay needs to channelize this creativity and come out with something of its own.
How can WA engage its users: engagement here refers to the continuous use of WhatsApp for payments. Once WA Pay can get sizeable registrations, it must expand the use cases to make itself a choice for the majority of everyday consumer payments. This would imply that sooner rather than later, WA Pay would need to take P2M payments seriously – since those continue to remain a large portion of our payments. To further engage its users in-app, WA needs to build specific dashboards for users to keep track of their payments – effectively integrating a complete payments UX with messaging.
How can WA monetize its users: this is an important question, but I doubt that Facebook is losing sleep over monetization. With the pockets as deep, WA has enough time to not feel hurried over how much it is adding to the top-line. But before going down the monetization route, I imagine that WA wants to build a critical mass of businesses and services over its platform – and make payments an integral part of them. The monetization would likely then be in the form of platform fees for enabling commerce in-app and this would come with a more sophisticated strategy for WA Business, incl. integration with applications and businesses associated with Jio Platforms.

Lastly, we realise that the road ahead for WA Pay is long. And we have reason to believe that the company is playing a strategic waiting game. Moreover, given the track record of Facebook, it would be foolish to underestimate WhatsApp.

For the next few years, we should be intently watching each step of the messaging giant – because it could be handling hundreds of billions in payments before we realise.

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