What's the Next Big Transformation in Digital Payments?

Rohit Kumar Pandey
November 29, 2020

Do digital payment providers need a transformation, post pandemic?

While they have weathered the winds of change with innovative products and pivoted to the surge in digital payment demand, they have also played every card at the table.

Payment providers are now expected to continue facilitating credit card payments, and support myriad payment options, even if it means that they have to absorb costs involved.

Can digital payment providers stretch to fulfill the consumer demand? 

Even if providers go the extra mile, they will be expected to keep moving forward, as they have now become a part of a consumer’s everyday life.

And any deviation from consumer expectations will zap the strength that payment providers have worked so hard to build over the years. 

But Didn’t the Pandemic Favour Digital Payment Providers?

Not really. 

It started in January 2020, when the Indian government decided to waive off MDR completely for UPI transactions. Merchant Discount Rate (MDR) is a fee that merchants would pay the issuing bank, payment network and payment provider.

While banks exacted a lion’s share of the MDR, the remains were shared between payment networks and digital payment providers. Unlike the others, digital payment providers were depending solely on MDR, as their only source of revenue.

Understandably, all payment providers are alarmed on hearing the waiver, as their only revenue source is now wiped off, probably forever.

And this was before the pandemic.

With the post pandemic world witnessing a sustained up-trend in UPI payments as compared to other payment modes, digital payment providers are expected to continue delivering seamless services, unaided by any revenue.

Preferred Mode of Payment (FY 2019-2020)

Source: RBI Bulletin  

Financial experts have also expressed their concern for the digital payment provider ecosystem. Naveen Surya, the Chairman Emeritus of the Payments Council of India had this to say:

This announcement of industry bearing MDR would lead to the whole digital payment industry without any business and revenue model.” 

What’s at the Eye of the Storm?

Payment providers have not only lost their only revenue source, but also pay banks every time a customer uses credit cards on their platform.

Unsurprisingly, one prominent payment provider has recently announced that users would have to pay a transaction fee when they refuel their eWallet using their credit card.

With the daily customer having many payment providers to choose from, this provider stands to lose out to competition who decide to absorb the cost, momentarily.

Which begs the question: Does this storm spell the end for existing digital payment providers?

Not if they fire-fight.

Digital payment providers still have their new-found strengths: significant daily user traffic, and more importantly, high-intent, transacting customers. Herein lies an opportunity: the payment provider who rewards existing customers for their daily use, effectively, would be able to make customers willing to pay for this digital convenience.

Easier said than done.

The same payment provider, mentioned above, has begun rewarding their customers with cash back vouchers worth the exact fee, whenever they refuel their eWallet with their credit card. So, has this reward been effective?

Here’s what customers experience if they use a credit card:

  • Transfer ₹10,000 for eWallet recharge from credit card
  • Accept the 2% processing fee 
  • End up transferring ₹10,200 (₹200 as processing charges)
  • Receive ₹200 as a cash back voucher  

Now, things go awry.

  • Customer wants to redeem the cash back voucher worth ₹200 on a bill of ₹170
  • Each voucher can be redeemed only at one go
  • The customer ends up losing a noticeable ₹30  

In an era, where customers prefer clinching multiple rewards for every purchase decision, this experience cannot compete as a rewarding one. The dissonant user experience of paying more, using a credit card, for a one-time voucher of the same amount, actually threatens to drive customers away and explore other payment options.

And if payment providers place their faith on traditional, momentary rewards to retain customers, this storm can turn catastrophic, depleting their strengths.

Rising above the Storm: Forging a Path with New-found Strengths

Traditional rewards did work when digital payment providers wanted to onboard their first customers, with an instant cash back or attractive offers and discounts on select brands.

However, the perceived value of momentary rewards turns lackluster today, when we take the consumer’s POV.

Let’s look at how banks ousted competition and encouraged customers to transact, with unique benefits for credit card holders. 

This holiday season, they teamed up with retail e-commerce giants to craft premium reward programs (not singular rewards):

  • Customers unlock a whole bevy of rewards, when they choose a specific bank credit card on a retail e-commerce platform.
  • Unique long-term reward bundles are doled out: right from cash backs on bank wallet reloads, to year-long complimentary airport lounge access and exclusive discounts on select luxury brands.
  • Also, customers keep a constant track of increasing credit card reward points for redemption on the bank’s exclusive rewards

This is the secret sauce of credit card providers, the world over. Equipped with impactful reward programs, banks are able to broaden the perceived benefits of their credit card, uniquely in the eyes of the consumer.

And so can digital payment providers. By leveraging their new-found strengths to win strategic partnerships, they can secure a permanent role in a consumer’s daily life, if they are perceived to be more rewarding than the competition. 

Coupled with impactful rewards, digital payment providers are poised to create stable revenue streams that could fuel future investment towards business growth and product innovation. 

And they will emerge successful in the battlefield of the consumer’s mind, even if users have to pay that extra 2%.

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