India’s digital payments space is getting more competitive with PhonePe spinoff

India’s digital payments segment is set to become ultra-competitive with Walmart looking to raise stakes in the space.

The American retail giant is planning to demerge its Flipkart’s payments arm, PhonePe, local media Economic Times reported, citing sources. The unit is reportedly raising US$1 billion at a US$10 billion valuation through a primary and secondary sale of shares. It’s currently valued at US$7 billion.

This will intensify the competition among the payment heavyweights like Alibaba and SoftBank-backed Paytm, Google Pay, Amazon Pay, and WhatsApp Pay, which have been locking horns to grab a bigger pie of India’s US$200 billion+ digital payments industry.

A rosy market

The segment is expected to see a 10x growth in India, crossing US$500 billion by 2020, up from US$50 billion in 2016, according to a report by Google and Boston Consulting Group. The global digital payments market is projected to reach US$21 trillion in the same period.

The Reserve Bank of India, the country’s central bank, estimates that India has 100 million active digital payments users per month and expects it to grow to 300 million in three years. In FY 2018-2019, as per government data, India witnessed 31.3 billion digital transactions. Considering there are over a billion Indians who are still not transacting online, the industry is set to see explosive growth in the coming years.

The growth in online payments is fuelled by a rapidly rising number of smartphone users and more consumers opting for digital transactions. The South Asian country has over 450 million smartphone users at present, and the number is expected to reach 900 million by 2020, accounting for almost a third of smartphone users globally, per a 2018 report by Data Security Council of India, an industry body for data protection.

Alibaba, SoftBank, Walmart, Google, Amazon, and Facebook are already keeping a close watch on the Indian digital payments opportunity, which is very much untapped since more than half the population in India still doesn’t have smartphones.

Walmart’s serendipity

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

Within a year of starting operations, the early-stage payment startup was acquired by homegrown e-tailer Flipkart. Apart from offering peer-to-peer money transfer, 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 US$16 billion, PhonePe came along as an unnoticed part of the deal. According to a recent Bloomberg report, after investing US$300 million in PhonePe and debating for months on “whether to keep funding the payments business internally or whether to separate the operation so it could raise outside funds,” Walmart decided to go with the latter.

In March 2019, the Flipkart board agreed upon creating a separate board for PhonePe and raising money from external sources by divesting shares.

The Economic Times report states that Walmart, which now owns 82% of Flipkart, following the de-merger, will have 82% stake in PhonePe separately, and the combined entity (i.e., Flipkart-PhonePe) will have a valuation of US$27 billion to US$30 billion.

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