Indian e-commerce: laying foundations

India may be the next big thing for online retailers, but in the first of a two-part series, FinanceAsia examines how payment issues stand in the way of progress.
Jeff Bezos of Amazon. Who will emerge as the Indian equivalent?
Jeff Bezos of Amazon. Who will emerge as the Indian equivalent?

India is often touted as the next mega technology play after China. With its vast population of internet-loving millennials and robust economic growth, it’s not hard to see why. There is a proviso though: it could be a while before Indian e-commerce truly fulfills its potential, given the country’s onerous financial and logistical shortcomings must be adequately addressed.

Vying to become India’s Jack Ma or Jeff Bezos is a rising cohort of entrepreneurs, both hyper-ambitious new young players and stalwarts of the country’s business elite who have seen the light.

After being denied an H1B visa to work in the US, Kunal Bahl returned to his home country in 2007 and began selling discount coupon booklets. His first business venture was a flop, leaving him with 50,000 unsold booklets. Three years later the Wharton School graduate decided to sell these coupons online and was born.

Sanjay Baweja, with his old-school moustache, took a different route, ditching his coveted high-profile role as the chief financial officer of blue-chip Tata Communications to join co-founders Sachin and Binny Bansal at Flipkart.

Despite their different backgrounds, Bahl and Baweja both know that the internet could be a spectacular treasure trove in India by revolutionising the way Indians buy things and pay for stuff.

In a February report, Morgan Stanley said it expected the total value of Indian online sales to rise to $137 billion by 2020 from $11 billion in 2013 as the number of online Indian shoppers rises to almost 320 million from just 50 million last year.

So it’s no surprise that competition is intense as America’s and China’s internet titans and other early-bird investors pour billions of dollars into the market.

Flipkart and fast-expanding Snapdeal are currently in a three-way battle in India with US e-commerce doyen Amazon. Meanwhile mobile specialist Paytm is also keen for a piece of the action.

Some major players also appear to be hedging their bets: Alibaba of China is a backer of both Paytm and Snapdeal and is also looking to enter the market directly, while New York-based Tiger Capital is the largest investor in Flipkart and the second-largest investor in

Access to capital is not a problem, at least for the larger start-ups. Flipkart, Snapdeal, and Paytm have collectively raised more than $5 billion since 2014, when Bezos also pledged to invest $2 billion to turn India into Amazon’s second-largest market.

However, these would-be conquistadors of the Indian internet face onerous structural challenges, since 40% of Indian households do not have a bank account and the country’s physical infrastructure is fairly run-down.

Whoever emerges as the Alibaba of India will need to resolve these payment and logistical issues.


The lack of e-commerce liftoff so far in India is partly down to the challenging financial landscape. Unlike in China, where most ordinary people have a bank account or have easily adapted to online payments, more than 80% of Indians do not have electronic means of payment and only 59% of households have a bank account, according to Morgan Stanley.

Further, due to a relative lack of trust in electronic payment, cash on delivery still dominates online transactions. Goldman Sachs in a May 2015 report estimated that Indian consumers settled about 60% of their online transactions with cash, compared with 2% in the US and 30% in China.

That is creating a bottleneck and limiting the opportunities for growth as Indian consumers hesitate from adapting to new technologies. “E-commerce in India has many first-time buyers and they have not yet made up their mind about what to expect from online shopping,” Baweja told FinanceAsia in a  telephone interview .

Baweja joined Flipkart in November 2014.

Paments: Flipkart

To try to address this, Flipkart in early March launched a new mobile wallet service called Flipkart Money, 18 months after it shut down its payments gateway PayZippy due to a weak response.

Mobile wallets allow consumers to put cash on their phones by entering card data to spend in shops or online. The adoption of mobile wallet technology started with mobile recharges, and is now moving up the value chain to enable shopping, paying for food, and hiring taxis.

Flipkart Money was launched following the company’s September acquisition of payments services start-up FX Mart Pvt., which holds a prepaid wallet license. It hopes to take a bigger market share in the mobile wallet market.

Paytm, which claims to be India’s largest mobile payment platform, said in August that it had more than 100 million wallet users, who carry out 75 million transactions each month. The New Delhi-based company had 50 million wallet users in 2014.

Newer payment options, especially digital wallets, have found good traction and acceptability among Indian consumers but there is still a way to go.

“We expect wallet payments to continue to gain more traction in coming years,” Baweja said. “[But] cash on delivery remains the most prevalent way of making payments for online shoppers, representing about 70% of our overall sales. I don’t think the industry has the solution yet.”

Baweja’s concern over the development of online payment systems highlights the lingering mistrust between buyers and sellers and fear of security issues. Since credit card penetration in India is less than 2%, cash still remains the dominant mode of payment.

Sellers usually bear most of the overhead expenses arising out of cash on delivery and it hurts the profitability of e-commerce companies that have already spent heavily on marketing and deep discounts to grow their consumer base.

“Profitability for the leading players may be still some time away,” Pragya Singh, vice-president at Technopak Advisors, a New Delhi-based retail consultancy, told FinanceAsia. “Going forward, with increasing investor pressure and some market consolidation, there may be more rationalisation on discounts and marketing, and bottom lines may start improving.”

The development of mobile wallets is not the only incremental step being taken in India towards a cashless society.

The Reserve Bank of India granted licenses to 11 businesses to launch so-called payments banks in August last year. That means they can hold up to $1,485 at a home and conduct transfers. But these providers are limited to handling payments and so can’t issue credit cards or loans like regular banks.

The list of successful applicants includes Bharti Airtel, India’s largest mobile operator by revenue, UK telecoms group Vodafone, plus Paytm.

According to local media reports, Paytm plans to offer remittance services (money transfers from one account to another) for free, as part of its campaign to generate public attention. “Remittances will not be a revenue item for us, but it will generate a lot of interest,” Vijay Shekhar Sharma, founder of Paytm, told news website NDTV Gadgets in November.

Paytm, which entered the e-commerce sphere in 2014, sold $2.5 billion-worth of merchandise last year. This year the company is poised to surpass $10 billion in sales — the same amount targeted by larger rivals Flipkart and Amazon India.

The launch of payment banks is intended to help Indian consumers convert cash into digital deposits or a mobile wallet, which can be managed through an app or SMS-based system.

In Part 2 tomorrow: the logistics challenge, and why the money is still pouring in to Indian e-commerce

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media