Mobile wallets have become the latest startup sensation. Companies like PayTm have the first mover advantage in this space. However, other companies like MobiKwik, Phone Pe, M-Pesa etc. are quickly moving into this space. It is surprising that an area of business which did not even exist a few years ago is now on the cusp of cutthroat competition. The consumer understanding about these wallets is also very less. In India, when Prime Minister Modi demonetized 86% of currency by value, mobile wallets became an instant hit.

In this article, we will understand about the different kinds of mobile wallets there are. Also, we will try to have a closer look at the value proposition that they have to offer:

Types of Wallets

Although the entire market seems to be proliferated by mobile wallets, not all of them are the same. There are three distinct kinds of wallets on the market. Let’s understand them one by one.

• Closed Wallets: A closed wallet allows customers to exclusively buy goods and services from themselves. This means that the money in the wallet is only useful if it is used to make purchases with the same vendor. However, it cannot be withdrawn and used as legal tender. These wallets have been created by many travel-related companies like Cleartrip and MakeMyTrip. The purpose of this wallet is to increase customer loyalty. For instance, if Cleartrip has to make a refund to the customer, they do not give away cash. Instead, they refund the money in the customer’s wallet. Hence, it can only be used at Cleartrip at a later date.

  Since there is no depository relationship between the wallets and the customer, the regulators are not involved in the operation of such wallets. The money that is in these wallets is simply shown as liabilities on the books of the company. Once the service is provided, the liabilities are written off.

• Semi-Closed Wallets: Semi-closed wallets are different from closed wallets in the sense that the can be used to make payments to a wide variety of vendors. Also, the money entered in this wallet does not necessarily come from refunds. Customers willingly load money into the wallets. Later they use it for many day to day needs such as paying utility bills, paying for movie tickets and so on. These wallets can be used at maximum point of sale terminals which accept credit and debit cards as a mode of payment. Some of these semi-closed wallets can also be used to buy financial services! However, the wallets are called semi-closed because users cannot withdraw cash from these wallets. Once the money has come into these wallets, it has to be used for some sort of purchase. Some wallets allow the money to be sent back only to the original account where it came from. Regulators do get involved in the maintenance of semi-closed wallets. They have mandated that the money held in these wallets should be kept in escrow accounts. This is to ensure that the wallet company is not able to embezzle the cash that they are supposed to hold on behalf of the customers.
• Open Wallets: Open wallets are like semi-closed wallets. The only difference is that these wallets also allow customers to withdraw cash. Earlier wallets like PayTm used to allow withdrawal of cash without any additional cost. However, people started using this facility. They started adding money to their wallets using credit cards and then withdrawing it as cash. In effect, people were obtaining interest-free loans and the wallet was losing money since they had to pay for transaction charges. However, now wallets charge a nominal fee to allow withdrawal transactions. This has been done to discourage fake transactions. Also, open wallets are actually managed by banks at the back end. The payment companies only manage the front end i.e. interaction with customers. Once again regulators tend to be involved in these transactions. The net balance from the wallet is reported under demand and time liabilities while calculating the capital adequacy ratio of banks.

How Wallet Companies Earn Money?

The business model of mobile wallet companies is fairly simple. They earn interest on the money that people leave interest free in their wallets. Since companies like PayTm can provide bulk deposits to banks, they negotiate special rates which are very close to what fixed deposit rates are offered. Wallet companies almost never pay any interest to the customers. They do offer some cash back promotions. However, these promotions are always temporary and can be rolled back. They are designed to induce the customers to get into the habit of using the wallet in their day to day lives. Similarly, wallet companies do not provide any advantage to the merchants that accept their services. They simply use the money lying in people’s wallets to make deposits in the bank and pocket the entire interest income. Since the charges to maintain the infrastructure remain roughly the same, the more users that a mobile wallet is able to add, the more money it stands to make!

To sum it up, mobile wallets are an innovative way for individuals to manage money. At the same time, they have the potential to rapidly scale up and become profitable multinational corporations.

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