Are Paytm’s goals too ambitious for India?

India’s latest efforts to shift to digital payments and reduce the nation’s tight grip on cash are in the spotlight, following the government’s recent cash recall and the Reserve Bank of India (RBI) giving its blessing to about a dozen digital payments startups. The newest, BHIM, is controlled by India’s government and is off to a fast start after its first week.

It remains to be seen if the newcomers will help or hurt momentum for Paytm, which launched in 2014 to become one of the most ambitious of India’s emerging digital payments operators. Paytm this week said it’s received permission from the RBI to launch a digital bank, Paytm Payments Bank, which aims to extend a broad range of payments and financial services to consumers via computers and mobile devices. Paytm plans to soon reach “hundreds of millions” of unbanked consumers, the company said in a Jan. 3 blog post.

Paytm has generated a lot of momentum in just two years. Its digital wallet has gained rapid adoption among consumers that already had bank accounts, soaring 45% in the last 12 months to 177 million wallets in force, the company said. Paytm also got a windfall of new business in the days following the government’s Nov. 8, 2016 demonetization initiative. Paytm’s transaction volume soared and the company added about 10 million digital wallets within two weeks of the Indian government switching out all 500 and 1000 rupee notes in circulation, according to reports.

Kuni Takahashi/Bloomberg

Paytm founder and CEO Vijay Shekhar Sharma will lead the new digital bank, according to the blog post, pursuing an ambitious agenda that includes driving adoption from the millions of rural unbanked consumers to partnering with urban banks and adding new services including lending and wealth management.

But observers note that despite the RBI’s support, Paytm will likely face challenges as other contenders vie for a consumer base that is freshly skeptical of cash's staying power. Paytm in recent quarters has logged steep losses to fund its rapid expansion.

The Indian government’s own payments app also could steal some of Paytm’s growth. Since its launch Dec. 30, BHIM drew 5 million users in its first four days on the Android platform alone, according to reports. The app links to 30 different banks in India.

And the early momentum in new digital banking apps ignores the fact that there are many obstacles to India going cashless, according to Ketharaman Swaminathan, founder and CEO of India-based GTM360, a bank technology and marketing firm. Many banks are reluctant to issue merchant accounts to micro merchants, he said in a recent blog post. Merchants also balk at forking out the higher merchant discount rate required to accept payment cards, and India's interchange rates are “prohibitively” high for thousands of retailers, he added.

In India, most in-store mobile payments occur offline and require a PIN, which increases friction, and many consumers fear a loss of privacy from data their transactions may generate. “Even if people have nothing to hide, they tend to get put off by spam when their purchase information—what, where and how much they bought—falls into the wrong hands,” he said.