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Flipkart's payment spinoff intensifies rivalry in India

Likes of Alibaba and Facebook keen on sector eyeing large number of untapped consumers

Indian e-commerce group Flipkart competes with Amazon and counts Walmart as a major investor.   © Reuters

BANGALORE -- Competition in India's digital payment sector is set to rise with Walmart's plan to spin off its local unit to raise funds.

The American retail giant is planning to carve out its Flipkart payments arm, PhonePe, reported local media Economic Times citing sources. The unit is reportedly raising $1 billion at a valuation of $10 billion through the issuance of primary and secondary share sales. It is currently valued at $7 billion.

This will intensify competition among Alibaba Group Holding and SoftBank-backed Paytm, Google Pay, Amazon Pay, and WhatsApp Pay which have been locking horns to grab a bigger slice of India's $200 billion digital payment industry.

The segment is expected to expand substantially, crossing $500 billion by 2020, up from $50 billion in 2016, according to a report by Google and Boston Consulting Group. The global digital payments market is projected to reach $21 trillion in the same time period.

The Reserve Bank of India, the country's central bank, estimates that India has 100 million active digital payment users per month, and expects it to grow to 300 million in three years. In the financial year 2018-2019, government data showed that there were 31.3 billion digital transactions in India. With a population of 1.3 billion, the industry is set for explosive growth.

The surge in online payments is fueled by rapidly rising smartphone users and more consumers opting for digital transactions. India already has over 450 million smartphone users, and the number is expected to reach 900 million by 2020, accounting for almost a third of smartphone users globally, according to a 2018 report by Data Security Council of India, an industry body that oversees data protection.

PhonePe, founded by three former Flipkart executives -- Sameer Nigam, Rahul Chari, and Burzin Engineer -- in 2015, was the first mobile wallet service that employs unified payments interface, a government-backed payment mechanism.

Within a year of starting operations, the early-stage payment startup was acquired by homegrown online retailer Flipkart. Apart from offering peer-to-peer transfers, recharge, utility and bill payments, gold purchases and insurance, PhonePe has been ramping up its peer-to-merchant transactions, bringing small retailers on its platform.

In 2018, when Walmart acquired 77% of Flipkart for $16 billion, PhonePe was absorbed into the fold. According to a recent Bloomberg report, after investing $300 million in PhonePe, Walmart decided to separate the operations and to raise funds from other sources. In March 2019, the Flipkart board agreed to divest shares.

The Economic Times report said Walmart, which now owns 82% of Flipkart, will have a 82% stake in PhonePe following the demerger. The combined entity of Flipkart-PhonePe will be valued at between $27 billion and $30 billion.

Walmart seems to be taking the same route as Alibaba, which made its payments arm Alipay into a separate entity in 2011 when it created Ant Financial.

"Unbundling PhonePe from Flipkart will help grow the company really fast," said Neil Shah, partner and research director at Hong Kong-based Counterpoint Research. "The growth prospects would be higher if it becomes more independent and that can get it additional funding because then Walmart can show more value to the investors."

He added: "Walmart can also use PhonePe's IP (intellectual property) and launch a similar platform in the U.S. and other markets. So this will help them scale globally as well."

The direct Walmart support would also benefit PhonePe at a time when the online payments industry is going through significant changes. Until a few weeks ago, all the top players in payment services were fighting to woo retail customers. However, the focus is now shifting toward offline retailers, as Indian regulators are reportedly working on guidelines that put a 33% market share cap on payment apps that use UPI.

"It would be good for PhonePe because then Walmart will be able to infuse more money," said Arnav Gupta, analyst at Forrester. "PhonePe is not lagging behind its rivals, but it will have more resources to compete against the likes of Google, Amazon, and WhatsApp. Now that the regulators have come up with the guidelines on how much market share players can have of the industry, the natural route for the expansion would be toward the small offline merchants, because that is going to be a deal-breaker for all the payment services."

Over the last two years, PhonePe has been targeting small merchants and businesses, trying to bring them on its platform. In June, PhonePe claimed that it had acquired five million offline retailers, playing catchup with rival Paytm, which has 13 million offline merchants onboard.

KrASIA is a digital media company focused on technology-driven businesses and trends across the Asia-Pacific region. It is part of 36Kr, a tech news portal based in Beijing. Nikkei has a minority stake in 36Kr.

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