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End of an era: Paypal shuts down operations in India
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PayPal had had a strong run in India. The US-based payment application was a secure based payment app used by millions of users since its inception in India. PayPal's stint in India is commendable, but alas, the digital payment aggregator ends its run on April 1. What could be the reason?

On Friday, the global PayPal digital payment platform decided to wind down its domestic payment services in India on April 1. Instead, the digital payment solution provider believes that it will enable more global sales for Indian businesses. The company will now shift towards focussing all its attention on allowing more international sales for Indian businesses from April 1 and shifting focus away from India’s domestic products, PayPal said. “From April 1, 2021, we will focus all our attention on enabling more international sales for Indian businesses and shift focus away from our domestic products in India,” the company said. “This means we will no longer offer domestic payment services within India from April 1,” it added (1). 

Based in San Jose, California, PayPal was a payment option for many Indian online apps, such as MakeMy Trip travel and ticketing service, BookMyShow online film booking app, and Swiggy food delivery app. In Bengaluru, Chennai, and Hyderabad, PayPal has three centers, touted as the largest outside the US. The company noted that for over 3.6 lakh merchants in India last year, it had processed 1.4 billion dollars worth of international sales. In the fourth quarter of 2020, with revenues of 6.12 billion dollars, the company reported strong growth on Thursday. It reported 277 billion dollars in total payment volume (TPV), growing 39 percent. The fourth quarter added 16 million Net New Active Accounts (NNAs) (2). 

The US-based digital payments player’s domestic operations include its payments gateway and aggregator services for online merchants and brands. The move is expected to streamline operations in the highly competitive market for digital payments in the country. “The company will soon launch a restructuring exercise and, from February 6, will begin to notify Indian merchant partners who use their gateway services of plans to terminate contracts by April 1, “Throughout the initial periods of the pandemic, when the government’s measures to curb the virus were gaining momentum, we began planning on how we can protect our business and optimize our growth here (3). 

The Indian operations of PayPal are mainly split into two different operations. One focused on allowing payments through gateway services for domestic brands such as Myntra, Swiggy, BookMyShow, and the second unit focused on cross-border remittance services for exporters and small enterprises. The company’s three technology centers in Bengaluru, Chennai, and Hyderabad, which are among the largest outside the United States, will now concentrate entirely on cross-border trade and global business, the person added, along with its business development teams. While the domestic payment service will have run its course by the end of the current fiscal year, for any dispute resolution and refund related reconciliations, the company will keep special operations alive, the person said. 

Let’s look at how Paypal conquered the market in India.

Entering into a new dimension

PayPal had customers in 200 markets were over 286 million, and its traders were 23 million. The company did not reveal national numbers but currently had a small market shared in India. Data from veratech, the department of corporate and data intelligence, (4) reported 258 crores from its Indian payments in 2018, a 12-times jump over twenty-one crores in 2017. The fiscal year of 2018 reported a loss of approximately 2. 28 crores in its “investment mode. ” in India, PayPal was in a crowded space, where rival paytm was a market leader, supported by Softbank and Alibaba, with its mobile wallet being part of the payment bank. In addition to a range of fintech firms and payment banks, other rivals in the digital payment space include Walmart-backed e-commerce and digital wallet phonepe, amazon pay, and google pay (5). 

As of March 2019, digital per capita transactions in India stood at 22.4, far behind economies such as Germany and Brazil, where they were 96. 7 and 148. 5, respectively. That being said, according to Nandan Nilekani, who directed the high-level council set up by the reserve bank of India on widening digital payments throughout India, the number of digital payments per capita had increased exponentially in India, up from 2.4 in March 2014 (6). Given the potential for advancement, PayPal, which initiated its peer-to-peer payment services in India in August 2016, invested in workforce and technology at its Chennai and Bengaluru innovation laboratories, which were the largest in the world after its headquarters in San Jose (7). 

Paypal was not the only global conglomerate to pursue the huge income opportunity in India’s digital payments market. Also in the race were Alibaba, Walmart, Amazon, and google. Alibaba backs paytm, one of the leading providers of digital payments in India. Among its backers, paytm also counts Softbank and Berkshire Hathaway. Berkshire Hathaway invested over 350 million dollars last year to buy a stake in paytm, Reuters reported. Through Flipkart, which runs a mobile payment service called Phonepe, Walmart participated in India’s digital payment market, to buy a 77 percent stake in Flipkart, one of India’s leading e-commerce providers, Walmart invested 16 billion dollars (8). 

What managed to stand out as particularly shocking was PayPal’s fame in India. Even though PayPal was on the market for a while as a mediator for the acceptance of cross-border payments by Indian merchants, it was only in late 2017 that the company began helping merchants accept domestic consumers’ payments. With 39 percent of online adult survey respondents saying they use PayPal’s payment app, PayPal by then had already gained decent traction among Indian consumers. This was a significant share for a payment app that does not offer a stored-value wallet or facilitates the more popular interbank payments through the Unified Payments Interface system (9). 

Demographics show how PayPal stands out from India’s other top 5 mobile payment apps. The lowest proportion of young adults aged 18 to 29 and more users over 40 have PayPal. With 46 percent of its users falling into the 18 to 29 bracket, PhonePe appears to have the youngest users. Although the trend for PayPal users peaks simultaneously as the trend for all respondents, it has another peak that is not seen in the other four brands, between 700,000 rupees and 1 million rupees. On the other hand, Amazon Pay and Google Pay peak at between 500,000 rupees and 700,000 rupees.

 

The Razorback Integration

Indian SMEs hoped to bounce back by leveraging digital technologies after facing severe challenges because of the ongoing pandemic. They thought it would help them increase their revenues. A recent study had revealed that India saw a 46 percent increase in new freelancers, even though the freelance economy flourished. While the potential rise for MSMEs (10) and freelancers had continued to grow, because of the highly complex payment system and banking infrastructure, processes, and systems that lack seamless integration, businesses still lose out on prospective global customers. 

Earlier, Commenting on the partnership, “MSMEs have been most affected by disruptions caused by the ongoing pandemic,” said Amitabh Tewary, Chief Innovation Officer, Razorpay. While they do their best to adapt to the changes and embrace a digital way of doing business, we at Razorpay strive to help them overcome their payment and banking-related challenges to speed up the pace of digital adoption. Our relationship with PayPal is an important step towards achieving that objective. Partnering with the expertise and experience of enabling digital payments for SMEs and freelancers with a globally recognized organization such as PayPal will enable us to empower our partner companies further and open up new growth avenues not only within India but internationally for them. We hope that this partnership will help us better serve and enable our resilient MSME customers to gear up for the new normal.”

 

Violations and instigations

There might always be a reason for anything drastic that might have happened. The present scenario for PayPal to leave India would have been due to this. The company has been charged with defeating and frustrating the public interest principles and the Money Laundering Prevention Act provisions, aiming to keep the country’s financial system safe from economic crimes, terrorist financing, and black money transactions. In a 27-page draft that was issued on December 17, 2020, the Financial Intelligence Unit found the company charged on three broad counts, calling the breaches “deliberate and willful,” the important being its failure to enroll itself as a “reporting entity” with the federal agency as required under the PMLA (11). 

It mentioned that “there is abundant proof of the willful breach of the law and, consequently, PayPal cannot be freed with a penalty which should normally be imposed for minor offenses” The order directs the company to pay the penalty within 45 days and to register with FIU (12a) as a reporting entity, to assign a chief officer and a communications officer within two weeks of receiving the order. An appeal against the order could also be filed within 1.5 months well before PMLA’s Appeal Board. A PayPal spokesman told PTI that it “is committed to regulatory requirements.”

PayPal supported its action as well as cited guidelines from the Reserve Bank of India stating that it only continues to operate in India as an Online Payment Gateway Service Provider or a payment mediator and is not covered within the definition of a payment system operator or financial institution and in turn, not covered under the definition of a reporting entity under the PMLA. Therefore, during that time, payment mediators, such as PayPal, cannot signify with the FIU India. It is mentioned in its response to the agency. PayPal also mentioned that it had filed to the RBI its decision before June next year to stop domestic payment aggregator operations in India completely.

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