Walmart (WMT 1.00%) might have run into regulatory troubles in India as of late, but that hasn't stopped the company from pumping more money into what PwC calls "arguably the world's most promising internet economy." After all, PwC believes that e-commerce in India will be a $100 billion industry within the next three years -- which is why Walmart paid a princely sum to acquire local player Flipkart last year.

But Flipkart is making its own moves. It recently invested approximately $111 million into PhonePe, its digital payments arm. This might not seem like a major investment at first glance, but it could end up playing a big role in Walmart's ambitions to capture a bigger share of India's e-commerce market. Let's see how.

Animated image of a person shopping on a smartphone.

Image Source: Getty Images

What is PhonePe?

Simply put, PhonePe is an online payments application that aims to boost cashless transactions in India. The app is a one-stop solution for a variety of transactions ranging from mobile recharges to utility bill payments, credit card bills, and even insurance purchases.

But one of the more important capabilities of PhonePe is that it allows users to directly transfer money to other users. It also allows customers to make quick payments at point-of-sale locations using their smartphones. Walmart is leveraging this technology to boost its reach in the Indian retail space.

In February this year, Walmart announced that shop owners registered with the company's Best Price cash-and-carry stores will be able to pay for their purchases using PhonePe. Walmart has 23 cash-and-carry stores across India with more than one million registered users, who primarily run local mom-and-pop stores.

PhonePe reportedly had a user base of 750,000 merchants at the end of 2018, so Walmart's introduction of this app to its cash-and-carry stores could give the user base a significant boost. But how will this impact Walmart's growth in the country?

Digital payments will power e-commerce sales

PhonePe reported in November last year that it had clocked one billion transactions in just over two years since its launch. And thanks to convenience offered by digital payments, it's estimated that around 55% to 60% of e-commerce purchases in India during festive sales periods are paid for via digital channels. As a result, the integration of PhonePe into Flipkart and the potential growth of its user base could boost Walmart's e-commerce sales in the country.

For instance, Walmart's cash-and-carry customers who now use PhonePe for receiving payments from their customers can use the balance in their accounts to make purchases on Flipkart. Walmart could also lure more customers into the fold by offering attractive cash back deals.

According to the new e-commerce rules in India, companies like Flipkart cannot offer deep discounts to clear inventory. However, Walmart can subsidize buyers through offers on PhonePe. For example, Flipkart is known for offering cash back to users who pay for purchases on its platform through PhonePe.

A customer can use that cash back to pay for other purchases using PhonePe, which effectively means that the user is getting a discount anyway. Users making payments through PhonePe are also eligible to win scratch cards that offer rewards of up to INR 1,000 (approx. $14.50). A PhonePe user can use that money to make purchases on Flipkart, another potential funnel to the company's e-commerce sales.

The bottom line

The digital payments ecosystem in India is expected to grow at an annual rate of 20% in the coming years according to one estimate. This space is already crowded, with the likes of Amazon and Alibaba-backed Paytm aggressively adding new features to their own digital payments services.

It's essential for Walmart to keep investing in PhonePe so it can keep users hooked by way of offers and discounts -- otherwise, it may lose out to rivals and cede territory in the e-commerce space.