PEER PRESSURE

Why the digital payments space is abuzz with WhatsApp’s entry

Facebook-owned WhatsApp’s announcement to enter the digital payments space in India has created a flutter. Several top executives, including Paytm’s founder Vijay Shekhar Sharma, took to Twitter to express concerns about the messaging platform’s foray into this space. Their apprehensions, though, are not unfounded.

WhatsApp is the most popular instant messaging app in the country with over 200 million monthly active users. Undoubtedly, its entry in the digital payments space would offer users a very convenient option to transact online. Paytm claims to have around 280 million users in the country, but it is not clear how many of them are active.

According to a recent Credit Suisse report on the digital payments space in India, Google’s Tez accounts for 53 per cent of UPI transactions in India, Paytm for 23 per cent, PhonePe 15 per cent, government’s BHIM app 6 per cent and others have 4 per cent of the share.

WhatsApp’s arrival is definitely going to cause a disruption in this space.

Sachin Seth, Partner - Financial Advisory Services, EY India, says that digital literacy is far higher than financial literacy in India. “People using messaging apps are far more in number compared to those using mobile banking, UPI or other payments apps. Those at the bottom of the pyramid are very comfortable using them. The option of payment within the app is, obviously, even more convenient for money transfer.”

Experts believe there is enough scope for multiple players. The Credit Suisse report pegs the digital payments space in India currently at $200 billion and predicts that it would reach $1 trillion by financial year 2023, led by growth in mobile payments.

“In payments apps, the use case is not just money transfer but also e- commerce and other utilities; they can build a niche for themselves here,” says Seth.

Hemant Jhajharia, Partner, PwC India, cites the example of WeChat and Alipay in China. “When WeChat got into payments in China, it took over the already present online payment platform in a very short time. While WeChat focussed on peer-to-peer transfers, Alipay started concentrating on business transactions,” he says. Today, while WeChat leads in user numbers, Alipay commands larger transaction amount.

“The market is still evolving and the recent launch of UPI payments by big platforms is likely to change the market dynamics and potentially reshape it,” says Pathik Shah, VP Product at Hike, which was the first messaging app in India to launch UPI payments. Easy social payments is its differentiating factor. “We have fun features that integrate payments within groups – like Bill Split, Group Payments, etc. We enable extremely easy and small-size micro-payments between people on the platform,” Shah adds.

DIGITAL PAYMENTS SPACE IN INDIA EXPECTED TO REACH $ 1 TRILLION BY FY 2023

Shivprakash Yadav, 26, teaches in a central government school in Daman and his wife Riya is a homemaker. The couple is about to start saving and investing for their future goals. Yadav has an annual take-home income of ` 6.24 lakh while the family’s annual expenses, including insurance premiums, amount to ` 3.44 lakh ( see table Assets, Liabilities and Networth). Yadav wants to buy a house in three years, save for his child’s education and have enough funds to lead a comfortable life post- retirement. Here is how he can achieve immediate and long- term financial goals.

Immediate Goals

Contingency fund: Yadav must build a contingency fund that will cover the family’s expenses for three months. His savings in the bank and the cash earmarked for this purpose add up to ` 26,300. The gap has to be filled through regular, systematic investments in ultra-short-term liquid mutual funds. This fund should not be used for any other purpose as the key to financial success is discipline. Life insurance: Yadav holds an LIC savings-cum-insurance product, but this alone will not fulfil the family’s overall insurance requirement. So, he should buy a term plan of ` 1.5 crore that will meet all future expenses (if required) and also protect other critical goals such as their child’s education. Getting a term plan is the most cost-effective way of acquiring the required coverage. Yadav will have to pay about ` 15,000 a year, and it can be claimed as a tax deduction under section 80C of the Income Tax Act.

Premiums paid towards health insurance and critical illness cover can be claimed as deductions under Section 80D of the Income Tax Act

Health and disability insurance: As Yadav is a central government employee, he and his spouse are currently covered under the Central Government Health Scheme. Even then, each should get a personal health cover of ` 3 lakh. It can be deferred for some time, though, till they have complete clarity regarding the quantum of coverage available during employment and also after retirement.

Yadav should also buy a critical illness cover of ` 15 lakh for the couple and an accident disability cover of ` 25 lakh for himself, which will cost around ` 14,000 per year. However, premiums paid towards health insurance and critical illness cover can be claimed as deductions under section 80D of the Income Tax Act. At the time of buying an insurance policy, disclose all information to avoid future complications. Here we are assuming that the income surplus generated during the next few months will be utilised to purchase all recommended insurances.

Long-term Targets

Now that the immediate goals have been taken care of, Yadav must look at the long-term targets and start investing accordingly (see tables Financial Goals and Current Cash Flow & Recommended Allocations).

Retirement: Retirement planning in India is not an easy job, given the falling interest rates and slowing economic growth. However, this goal should never be compromised. Yadav wants to retire at 49, but there is a need to postpone it till 60 so that he can tick off all major goals and build the necessary retirement corpus. The couple will require

` 4.8 crore after retirement assuming that the husband will live until 85 while the wife’s life expectancy is 90 years and household expenses will be ` 25,000 per month in present terms plus 6 per cent inflation.

To build this corpus, Yadav currently invests ` 60,000 a year in the Public Provident Fund (PPF). This amount plus the pension income from the government will fund a portion of his requirement, but he should also invest part of the income surplus till he retires to fill the gap. We recommend an additional saving of ` 10,600 a month starting from January 2022 after Yadav saves enough money to fund a property purchase (more on that later) in 2021. In fact, with focus on building the contingency fund and ensuring portfolio liquidity for property buying, he will have to reduce his annual contribution to PPF for the next four-five years. Post that, the investment value must increase by 5 per cent annually.

Child’s education and marriage: As of now, the couple has no children, but they are ready to start saving for this future requirement. But based on their current cash flow, they may have to reduce the corpus from ` 10 lakh to ` 5 lakh in each case.

With focus on building a contingency fund and ensuring portfolio liquidity for

property buying, Yadav will have to reduce his annual contribution to PPF for the next four- five years

To meet these goals, Yadav should invest in mutual funds via two monthly SIPs – one of ` 2,800 (from 2018 to 2035) for the child’s education and another of ` 2,000 (from 2019 to 2038) for his/her marriage. These investments should be increased annually by 10 per cent and 5 per cent, respectively. Investments in diversified equity mutual funds can be considered for the purpose.

Property purchase: Yadav, along with his father and brother, is looking to invest in a property. He wants to contribute 35 per cent of the property value – ` 28 lakh out of ` 80 lakh. But due to cash flow restraints and growing investment requirements to fulfil other goals, he can only contribute 20 per cent as down payment and the rest will be obtained through a loan. For this purpose, Yadav must start a monthly SIP of

` 10,800 this year and continue till 2021, increasing the sum by 15 per cent every year. The money should be put in a combination of hybrid and debt mutual fund schemes. In case a larger amount is needed, it will affect his future goals such as funding the child’s education and marriage.