A new player has entered the world’s largest untapped mobile money market. Last week, India’s state-backed authority gave WhatsApp the green light to roll out its digital-payments service after almost two years of regulatory delay. The company is now able to offer its service to 20 million new users, about 5% of its more than 400 million users in India. 

Facebook CEO Mark Zuckerberg heralded the decision in a video message. “Now you can easily send money to your friends and family through WhatsApp,” he said. “There is no fee. It’s supported by 140 banks.” All an Indian user needs is a debit card with an authorized bank to set up payments.

WhatsApp Pay is built on India’s state-backed digital-payments system, a 2016 innovation meant to make digital payment as universal as electricity. But the innovation came at the cost of local digital wallets. Today, about 80% of payments on the government-backed interface are made through Google or Walmart. WhatsApp’s entry into India will challenge the dominance of these two giants, but critics argue it all but guarantees that Indian fintechs will be stamped out by foreign players. 

Up until 2017, digital wallets reigned supreme in India. The Indian government’s 2016 decision to cancel 86% of cash in circulation drove millions to adopt them, and local fintech companies reaped the benefits: SoftBank- and Alibaba-backed Paytm saw its digital wallets grow from 125 million to more than 185 million within three months of India’s move to demonetize, and the Sequoia-backed MobiKwik witnessed a 40% jump in downloads within days. But the euphoria for Indian digital wallets was short-lived. 

In 2016, India’s digital-payments authority, NPCI, introduced a new payment system called the Unified Payments Interface (UPI). Unlike Paytm or MobiKwik, UPI apps didn’t require users to create new wallets; consumers and merchants alike could make payments directly from their bank accounts. Although it launched in the same year as the government’s demonetization campaign, UPI wasn’t widely adopted until 2017.

For customers, the new platform was a fast and seamless option; for digital wallets, it made their services obsolete overnight. Legacy banks, long weary of companies like Paytm, quickly bought into UPI. It led to unprecedented digital adoption: There was a 300% increase in digital payments in 2019. Wallet transactions, though, declined from 96% of digital transactions in 2016 to a little over 30% in 2018.

“UPI was to payments what electric vehicles were to combustion engines,” said Sharad Sharma, co-founder of iSPIRT, an Indian think tank that promoted the UPI. “People in the old business of digital wallets, with their captive audience, were slower to move,” he said. The challenges for digital-wallet players like Paytm were steep: They had to invest several billion dollars to incentivize adoption, while at the same time jumping through hoops for licenses from regulators. By contrast, UPI apps were lightly regulated and built on top of a preexisting platform. These “wrapper” apps only controlled user information, while money flow was controlled by the banks.

The opportunity UPI presented drew the interest of global giants. In 2017, Google launched Google Pay in India. In 2018, WhatsApp began offering trial versions of WhatsApp Pay to 1 million users, but it quickly ran into a web of controversies stemming from concerns over data privacy.

In the two years WhatsApp Pay languished in regulatory limbo, its competitors covered a lot of ground. Google introduced scratch cards that gamified their transactions on Google Pay, a model that resulted in widespread adoption, though many users engaged in dummy transactions to try their luck at winning coupons. The strategy proved to be lucrative, and ultimately secured Big Tech’s preeminence in India’s digital-payments market. In 2019, Google alone spent more than $140 million in cash-backs and garnered 67 million customers. Walmart-owned PhonePe, originally an Indian startup, drew users to its platforms with similar gimmicks.

WhatsApp Pay is built on India’s state-backed digital payment system called the United Payments Interface, or UPI.

Within three years, multinational tech companies had divided up the UPI market: As of October 2020, PhonePe and Google Pay had 40% and 38% of the market share, respectively. Even Paytm, the old leader in digital wallets, embraced UPI, but its deep-pocketed competitors Google and Walmart continued to spend money on cash-backs to attract more users. Between 2016 and 2018, many local e-wallet companies, including Trupay shut down, and several others, like Chillr, merged with their competitors. Local media outlets called UPI “the e-wallet killer.”

Bipin Preet Singh, the co-founder of MobiKwik, witnessed its value crumble from $327 million to $269 million. “It impacted growth because UPI opened up the market for Google,” Singh said. Despite raising more than a $100 million from marquee investors, MobiKwik was squeezed out and overtaken by UPI players Google and PhonePe. “The open market has disadvantaged us,” said Singh. Even the government’s own UPI app, BHIM, couldn’t compete with the aggressive cash-backs offered by foreign companies. 

Nikhil Kumar, the engineer who led the team that built the UPI, said Big Tech’s lead in India’s digital payments comes as a surprise. “We never expected this to be the equation, where it would become a FAANG fight,” he said, using the acronym for Facebook, Amazon, Apple, Netflix, and Google. “We hoped a lot of Indian entrepreneurs would build multiple apps where it would spur a lot of local innovation,” Kumar said. 

UPI’s creators had envisioned a future of multiple specialized payments apps: for women-first payments, children-first payments, a hyper-secure variant for the armed forces, etc. “Having hundreds of interoperable apps was the vision,” said Kumar. “But it gradually began to get concentrated.”

“The concentration aspect was never looked into because, at that time, all they wanted was growth,” said Srikanth Lakshmanan, founder of Cashless Consumer, a consumer protection collective for digital payment services. “For NPCI, the overall growth of the platform was important, and for that, Big Tech’s adoption was paramount.”

To make matters worse for competing smaller companies, regulators forbade apps from charging for transactions. “There is no revenue model here for smaller companies,” said Anand Lunia, an Indian venture capitalist and outspoken critic of Big Tech’s influence in India. “Google offered cash-backs and discounts to grow users, and the market was cornered by deep-pocketed companies.” 

There are hundreds of UPI apps operated by banks and other smaller payment companies, but all of them combined account for only about 20% of the market. Still, Google’s and Walmart’s adoption efforts can’t be undervalued, as even Kumar, the UPI engineer, conceded. “You cannot ignore the fact that it’s actually the adoption of Big Tech and their aggressive promotion that led to this exponential growth of UPI,” he said. 

To account for potentially lopsided growth, India’s digital payments regulator has declared that no single player may account for more than 30% of the total volume of transactions beginning in 2023. The cap leaves a lot to be answered. “What would happen if a player hit the 30% quota for the day? Would transactions start failing? How’s the cap beneficial if the user is not served? And why isn’t there concentration risk on the bank side?” asked Lakshmanan of Cashless Consumer.

Google has already expressed its displeasure with the government’s decision to install market caps. “Digital payments in India is still in its infancy,” said Sajith Sivanandan, a Google Pay India executive, in a statement. “This announcement has come as a surprise and has implications for hundreds of millions of users who use UPI for their daily payments and could impact the further adoption of UPI and the end goal of financial inclusion.”

But for local digital wallets looking for a share of the market, the caps are too little, too late. “Let’s be honest: UPI isn’t a small-player game anymore,” said former Paytm executive Deepak Abbot. “No small player can compete. That ship has sailed.”

For Zuckerberg and Facebook, the entry into the market is a big win.