E-wallets and failure to gain prominence

By Imesh Ranasinghe 

E-wallets first started in Kenya in 2007 and following upon the success, many countries started to adopt the technology. Sri Lanka launched its first e-wallet in 2012 with Dialog Axiata launching Ezcash, which was then followed by Mobitel a few years later withthe launch of Mcash.

However, since then, although many e-wallet apps have entered the market, they have failed to entice customers to go digital with their transactions.

In 2019, e-wallets overtook credit cards to become the most widely-used payment type globally. In 2020, the Covid-19 pandemic became another accelerant of the continued digitisation of the global payments landscape. 

The pandemic has merely been an accelerant of the digital payments revolution that has been underway for years. Mobile payments, and more specifically mobile wallets, have been the greatest driver of this revolution on a global basis.

At the end of 2020, there were over 2.8 billion mobile wallets in use. That number is projected to increase by nearly 74% to reach 4.8 billion mobile wallets in use by the end of 2025 – nearly 60% of the world’s population.

Similarly, in Sri Lanka, this push towards e-wallets was seen and according to LankaClear, there was a 195% increase in JustPay volume transaction in 2020/21 when compared to 2019/20.


Why have e-wallets failed to gain prominence?

According to J.P. Morgan, countries like China, Norway, and the UK had 47%, 42%, and 24% of their population using e-wallets in 2020; it became the most widely-used method of payment overtaking cards. In 2021, this number was increased to 54% in China.

Speaking to The Sunday Morning Business, Cyber Security Adviser and Educator Asela Waidyalankara said the pandemic enabled things to move fast as people were pushed towards e-wallets due to the travel restrictions.

However, he said the issues hindering the further growth of e-wallets were twofold – one is that there is no ecosystem that supports mobile payments, and secondly, Sri Lanka is still a predominantly cash-based economy.

“In countries like Kenya, the reason e-wallets work is due to the underbanked population, but Sri Lanka’s population is not underbanked,” he noted.

However, Waidyalankara said Sri Lanka was backward in adopting new technology.

For example, he said that although ATMs came to Sri Lanka in the ’90s, it was only now that people had heavily started to use ATMs for withdrawals and deposits.

Similarly, he said although credit cards came to the country in the late ’90s and early 2000s,  credit card penetration was still very low.

According to the Central Bank of Sri Lanka (CBSL), as of the end of November, total active credit cards (local and global) numbered 1,902,948.

Further, he said even merchants did not encourage digital or electronic payments as they would  place the extra 3% charge from card payments on customers, prompting customers to make cash payments.

But he said e-wallets worked in India because the Indian Government had demonetised its big currency overnight.

In 2016, India demonetized Indian Rs. 500 and Rs. 1,000 banknotes overnight, comprising 86% of the currency in circulation at the time in terms of value, with the four objectives of checking terror-funding, the printing of counterfeit currency, black money, and corruption

Moreover, he said although people were pushed to e-wallets due to the pandemic, most of them trusted bank-based digital wallets rather than e-wallets launched by FinTechs.

“But those are not original e-wallets as they are an extension of the bank,” Waidyalankara said.

Speaking on the barriers, LankaClear Chief Executive Officer Channa De Silva said that prior to the pandemic there were barriers to the development of e-wallets in Sri Lanka as people had easy access to cash in Sri Lanka with ATMs and banks everywhere.

Commenting on the lack of awareness among the people, he said that in a normal scenario no matter how much awareness was created, if people had access to cash and merchants accepted cash payments, moving digital was not easy.

However he noted that the pandemic had changed this situation as people had no option but to go digital to make their payments. Further, he said that the use of e-wallets should be made easier for people than handling cash.

OGOpay Chief Operating Officer Imesh Liyanage said since the investments FinTechs get were small, they didn’t have a problem in creating e-wallets through the use of technology but noted that investment should be made towards user education and enabling Sinhala and Tamil languages with proper translation in the app, enabling and ensuring ease of use. 

“This cannot be done by the engineers; language experts need to be hired to get the accurate translation for technical terms but in Sri Lanka, those people are not hired by the tech companies,” he said.


Is regulation too harsh for e-wallets?

With the emergence of e-wallets in Sri Lanka, the Central Bank started to issue circular guidelines to regulate e-wallets under the Payments and Settlements Act No. 28 of 2005.

Speaking on the CBSL regulations on mobile money, Waidyalankara said that they were very heavy towards the banks. “So you are not really encouraging FinTechs to come up; overregulation is one of the reasons why FinTech startups don’t really take off,” he noted.

Further, he pointed out that there were many international payment providers such as Google Pay, PayPal, and Whatsapp Pay which would be willing to come to Sri Lanka but strict regulations had not enabled their entry.

He added that LankaClear had done a great job in developing the interbank payment system, which updates transactions up to a certain amount instantly.

Now, however, he said it was time to link that payment system available locally to an international partner, while CBSL and the Finance Ministry needed to be more forward-thinking and visionary to invite international partners to the country. 

“In the last two to three years the CBSL has liberalised; since FinTechs are not regulated financial institutions, they have been asked to partner with one regulated bank. All they need to do is work with a bank and get their approval,” LankaClear CEO De Silva said. 

He said Sri Lanka had about 25 e-wallets, out of which 10 were FinTech apps. According to the regulations, in FinTech and bank partnership, the bank should take responsibility for the transactions done via e-wallets.

Further, Liyanage said if the regulations were amended by the CBSL to allow FinTechs to hold money, then it would be possible for Sri Lanka to move towards being a cashless society.

“For now there is no big incentive for the customer to go cashless,” he said.

According to Liyanage, CBSL in its regulations tells financial institutions what can be done unlike in the US when PayPal was launched, where the US Federal Reserve told it what could not be done, enabling PayPal to launch without getting stuck to a bank.


Role of LankaClear and JustPay 

Speaking on the role played by LankaClear to develop e-wallets in Sri Lanka, De Silva said that LankaClear facilitates customers other financial institutions to sign up with the relevant e-wallet and when a transaction is made by the customer, LankaClear facilitates the backend payment between the two financial institutions (bank of the merchant and the bank of the customer).

He said that LankaClear had also introduced JustPay which allows the e-wallet of a particular bank to carry out transactions with other banks even if the e-wallet user did not have an account in the bank which had launched it.

According to him, with JustPay, if a customer of bank A wants to use an e-wallet launched by bank B, the customer can sign up with that particular e-wallet with his bank A credentials. After the registration when the customer makes the payment, bank B will request money from bank A in real-time, which is actually a debit transfer as the customer pulls money from their bank using another bank’s app.

Usually when a person wants to transfer money he/she would have to log into their bank mobile or internet banking and transfer the money to the other bank, which is called credit transfer, but with JustPay it would be the reverse of credit.

De Silva said through this facility a FinTech company could partner with a small bank and cater to any customer of any bank through its e-wallet.


Importance of cashless society 

Speaking on the importance of a cashless society, De Silva said that in a country normally the cost of circulating roughly adds up to about 1.5% of GDP, with the cost including printing, distribution, security, and recycling. In Sri Lanka, in the last few years the Government has spent less than 3% of GDP on education, which shows the huge cost the Government has to bear in circulating hard cash.

According to the CBSL, as of Q3 2021, Sri Lanka had Rs. 996 billion of cash in circulation, out of which only Rs. 264 billion had been in the banks.

“If you are successful in moving 30% of the population to digital, then Sri Lanka can save 0.5% of GDP from the cost of cash which can be used for welfare or education,” De Silva said. 

He said the second benefit of going cashless was increased access to credit, as the small merchants or three-wheel drivers would be able to access credit from their banks if they deposited their money to the bank accounts, showing the banks their monthly income.

He said LankaQR had more than 300,000 merchants around the country and had allowed e-wallets to operate which had created a robust mechanism where FinTechs could actually give a fight to some of the large banks.

He noted that JustPay had a customer base of almost one million, while the number of digital transactions had grown fivefold over the last couple of years, indicating more customers going online.

According to him, it can be said that between 15-20% of the population in Sri Lanka has gone digital in their transactions. 


No huge profit margins from e-wallets in Sri Lanka 

Liyanage said that an e-wallet in Sri Lanka was somewhat different from what other countries called e-wallets as Sri Lankan law only allowed banks to keep the money.

“So unlike Paytm in India, we cannot load money to e-wallets in Sri Lanka directly,” he noted.

Further, he said small FinTech companies did not have huge profit margins from e-wallets as the transaction fee was divided into three shares among the sending bank, receiving bank, and LankaClear.

“Since the market is small, I don’t think small-time startups could be sustainable with e-wallets,” Liyanage said.

Moreover, he said increased cost also reduced profit margins as development and regulatory costs were high in Sri Lanka.

According to him, if a business is to survive through transaction fees of the e-wallet, a large volume of transactions should happen, but this is impossible when e-wallets are launched by every bank. “This results in the market being divided into smaller parts and there is no incentive for the FinTech startups to launch e-wallets,” he noted.