Digital Payments is Dead, Long Live Digital Payments

India has leapfrogged its way in technology adoption, beginning with the penetration of smart phones and most recently digital payments. Digital payments in India is going through rapid evolution and is being steered by government regulators and banks. This makes the growth of digital payments in India very different compared to the US and China, where banks and government agencies stayed mostly away.

A quarter into 2017, it is clear that digital payments in India is not going to be the same.

The role of the intermediary is over. Revenue from MDR will disappear in the next 2 years; offline digital payments will be disrupted as POS devices will make way to mobile payments; and data will be the new profitability.

First, a quick peek into the history. Digital payments grew as card schemes (Visa, Mastercard, Amex, RuPay, Union Pay, etc.) worked to create a standard for enabling consumers to pay using their credit/debit cards across different businesses – online and offline. This led to the design of what is known as the “Card Present” (offline payments using a POS machine) and “Card Not Present” (online payments using a payment gateway) payment methods. Both these payment methods have multiple banking and technology stakeholders with the card schemes laying the working principles and resolving deadlocks. A consequence was the associated cost of a transaction – the more the stakeholders, the more you shell out for the service. Businesses did not have a choice, and either absorbed the cost (sometimes up to 200 basis points) or passed it on to the consumers (as was seen in some local retailers and utility companies).

This no longer works well in India for the following reasons:

  1. In a low margin and hyper-competitive market like India, 200 basis points is often a good enough reason to not use a technology, especially when cash payments are readily accepted and the ATM network is well built. If there was a way to execute the transactions ‘directly’ without running it through the interchanges, the cost of a transaction would fall.
  2. India is a 2FA market, meaning that the risk is passed on completely to the card issuer. The acquiring bank’s risk is often limited to an issue in service delivery – which again is limited to online transactions. There is very little value you get in return to a high interchange fee.
  3. The credit economy in India is still in its infancy and credit cards account for a mere 4% of overall cards issued – as a result, debit cards dominate digital transactions. Transaction fees for debit cards are regulated by the government to a maximum of 100 basis points, thereby limiting the revenue potential for payment providers. Unlike markets like US, where companies like Stripe and Paypal operate around 300 basis points across all cards, India doesn’t give this advantage to PSPs.
  4. Indian banks and government bodies, like NPCI, have been at the fronts of the digital payments battle. Unlike the US, where the banks and government saw the digital payments growth from the sidelines, India is a different market altogether. With the introduction of platforms like UPI, the focus is to ride on the penetration of mobile devices and eliminate the intermediary from the payment flow.

The future of digital payments in India is bright, but will look dramatically different.

  1. Banks, riding on public rails like UPI and Aadhaar, will drive digital payments through their mobile apps. Money transfer will no longer need an intermediary or an aggregator, thereby allowing the unit economics to support micro-transactions.
  2. Offline digital payments will be disrupted as mobile devices and banking apps will disrupt traditional POS devices. Larger banks that have a legacy of POS acquiring will struggle to cannibalize their revenues from POS and painfully transition to the world of mobile payments. The new age banks will lead this change and will not even bother entering the POS business. This change will be slow, but will eventually be a reality in another two years.
  3. As MDR revenue vaporizes, payment aggregators will turn to data for profitability and try to become FinTech players. Leading consumer players (think Amazon, Flipkart, PayTM) and the upcoming banks & financial services institutions (Equitas, Bajaj Fin Serv, IndusInd, …) are already moving strong in this space and have a significant edge on either data and/or access to capital. Current PSPs have neither advantage and will collapse under this competition, eventually getting assimilated by global omnichannel payment players (Ingenico’s acquisition of EBS and Techprocess), banks, or large consumer/e-commerce companies.

Digital payments in India is a large opportunity and has been pegged to be around $500B by 2020 [ref. BCG-Google Report]. The winner of this, however, may not be the traditional PSP, as we know it.

Omnichannel retail in the eCommerce world

Omnichannel Commerce

Earlier in 2015, the NRF released its list of Top 100 retailers. The article opens with a very interesting line.

It’s no longer bricks-and-mortar versus e-commerce — omnichannel is the path to success.

There is growing convergence between online and offline commerce. It is beginning to make sense to both sides that consumers just want to buy and while convenience and variety (the online advantage) are important, so is experience and consultation (the offline edge). The proven success of omni-channel for the retail stores is well documented – Macy’sBest Buy and Inditex have successfully (or are planning to) improved their bottom-lines by embracing a tighter integration of their online and offline retail experiences. This success is limited to the offline-first retailers – those who started as offline retailers and had a consistent offline shopping experience across stores.

Let us turn our attention to India where a different story is unfolding. Similar to it’s leapfrog to mobile (+internet) technology where it skipped broadband and desktops, eCommerce rose sharply before organized retail stores were part of an everyday Indian life. A KPMG 2015 report pegs the organized retail market share in India at 8% (~$42B) of the total retail industry, while China and US are at 20% and 85% respectively. The Indian eCommerce industry closed 2015 at $16B. The hypothesis of the eCommerce industry annihilating Indian retail has not necessarily turned out true and both continue to thrive as consumerism in India wins. In this hot pursuit, omni-channel is an attractive strategy for both sides, online and offline retail, to increase market share by leveraging the unorganized sector – a whopping 92% of the overall market.

For the offline retailers, building an omni-channel strategy is now standardized – build a top notch eCommerce website, integrate delivery/pickup/inventory with stores and bring customer intelligence to both store sales and eCommerce algorithms. The journey for the eCommerce companies, however, is non-trivial with no demonstrable peer success. Here are some of the things eCommerce companies can do to deploy their omnichannel strategy.

Store-to-Web Capabilities

The archetype omnichannel customer looks for convenience and cost. In India, cost trumps convenience – that usually ends up a customer looking for the best deal. A store-to-web capability aims at better tracking purchases discovered in stores and completed on the web. This is a problem for offline retailers who view this as a business leak. Building a capability to track and integrate the web purchases with the offline partner allows eCommerce companies to deliver great value to their partner network, while still enabling the omnichannel experience for the customer.

Omnichannel Payments

Allowing customers to pay through any channel whether they are in a store or online. Offline commerce has been limited by a POS device for the longest time. In recent years, while the POS device has evolved (think Square, et. al.), customer experiences have stayed the same.Apple’s launch of Apple Pay for the Web, is a step towards a great omnichannel payment experience for the customer. eCommerce companies, with their capabilities of designing beautiful payment experiences can deliver the same for offline purchases.

The Partner’s Network

While offline retailers have an advantage of their branded stores, eCommerce companies neither have this capability nor an expertise in running their own stores. Some eCommerce segments, like groceries, pharmaceuticals and food ordering work through a network of hyperlocal retail stores. eCommerce companies can think of India’s large unorganized retail segment as their offline partners. Segments like furniture and high-end electronics can leverage the offline long-tail retail as both a sales and service channel. eCommerce companies are often perceived as stiff competitors to offline retails. In order to build an effective offline partner network, eCommerce companies need to change this perception and deliver compelling value propositions to the retailers.

If you follow the Indian eCommerce space, Omnichannel (and hyperlocal) has become a buzzword companies use liberally. We are yet to see an eCommerce company implementing an omnichannel strategy and succeeding. Hopefully, that will change sometime soon.

A case for productized services – why a pure services play is not always awesome

Mark Suster (@msuster) has written a very insightful post (What Should You Do with Your Crappy Little Services Business?) on his blog. If you haven’t read it already, you should. He sums up with the following advice.

I’m not advocating that companies are crazy to try and be product companies. In fact, that’s all that I fund as a VC. But I don’t want the narrow world of venture-backed companies and the trade rags that report on them to dissuade the overwhelming masses of potential entrepreneurs from building meaningful businesses that are both fun and economically rewarding.

Basab Pradhan (@basabp), further extends Mark’s post here, where he suggests that services companies never need to find a product strategy “given their lack of skills and management experience of the products business“. Rightly so considering he is mainly referring to the offshore services business.

There is, however, an interesting case for product companies (particularly early stage technology companies) to have a services focus to solve the cash problem. I call it productized services, and this is exactly what we do at Samuday. This is particularly relevant if you are not VC-funded and need to build high quality products with sustained revenue stream. If you are an India based technology company, this might be even more relevant.

Early stage technology companies that are aiming to build high quality products have a tough life in India. Indian VCs mostly invest in e-commerce driven (technology) companies, so funding is scarce for pure technology players. Indian customers have a slightly misplaced definition of technology, thanks to the plenty of offshore/outsourced/software services companies. Several potential customers do not appreciate the difference in technology capability for building a website as against building a real-time communication and collaboration solution. Anything delivered through a website falls in the same league. This leads to a perception problem where your product may not be valued at what it deserves, posing a challenge in building sustainable revenue streams.

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The value of professionalism

[ This post is in context to part-time freelancers ]

We are gearing up to launch our flagship collaboration product – www.unirow.com . While the design and development of the product happened in-house, we thought it would be a good idea to get the marketing material developed by a professional. Our first requirement was to get some product videos made that would demonstrate the capabilities and simplicity of our product. We engaged with a freelancer, whom I knew from before. He runs a neat production house, but mostly in freelancing mode as their primary job commitments are different.

We had agreed on a set of requirements before beginning on this project. I spent a few hours going over what we wanted in the script, to the extent of giving the sequencing for shots. He was pretty excited and said he would be able to deliver the three videos within our budget. We bought all the iStock materials he wanted and ensured nothing stops him from moving forward. What followed from that point was a chain of disasters, ending up with him freaking out and not beeing able to meet expectations. Continue reading

The rise and rise of Apple App Store

Today Nokia released its much publicized Ovi Store and reviews have not been too kind. Nokia expects 3.5 million developers in Forum Nokia ‘creating hundreds of thousands of apps‘. Nokia had originally released Ovi in October 2007 allowing customers to buy music and games. By that time, AAPL had already crossed $600M revenue in it’s ‘other music related product & services‘ segment [AAPL includes sales from iTunes Store in this segment]. This prompted me to look deep into Apple’s numbers around the App store using Gridstone’s SEC & Transcripts Search Engine.

Apple has always maintained an edge on all its peers, far and close, and grown consistently. The number of iPhone Apps hosted on the Apple App Store has grown QoQ: 900 (Jul 08); 5500 (Oct 08); 15000 (Jan 09); 35000 (Apr 09).

The July 2008 pricing outline for the app store cited “90% of the apps being priced at less than $10”. Considering 1 billion app downloads over 9 months, Apple would have sold 900 million paid apps over last 9 months. As of today, the top 10 downloaded paid apps on Apple App Store averages to $1 – translating to a whopping $900M revenue in the 9 months period and a yearly $1.2B revenue from Apple App Store. Even if we take a slightly conservative approach and put the number of paid apps to 2/3rd of its 2008 ratio, it would still be $800M of yearly revenue!

Where did Apple report all these numbers? In it’s April 09 10Q Apple reports a $1.2B (6 month ended) of sales from it’s software, service and other sales segment. This includes ‘sales of Apple-branded operating system, application software, third-party software, AppleCare, and Internet services’ and probably includes revenue from the App store. Apple is probably going to make close to $250M revenues from the App store in coming quarters, which is incredible!

[update 27/05/2009] I noticed that the valuations going around on the the internet seem to be between $20-40M in one case (http://mashable.com/2009/05/14/apple-iphone-apps-profit/) and an excess of $500M yearly revenue in another (http://seekingalpha.com/article/131730-how-much-profit-is-apple-making-from-the-app-store). The devil is in the details. Nobody seems to have an estimate of how many paid apps are actually downloaded. The answer (or approximately so) is embedded in AAPL’s July 2008 transcript where it has announced around around 90% of the apps to be paid and priced below $10. Even if this number has changed, it probably will not be very different.

Which companies are impacted by swine flu?

The swine flu epidemic (leading to a pandemic) has terrified the world. It’s impact can be felt across industries – with travel and hospitality being the worst hit. I tried to see which companies report a hit in performance because of swine flu. Using Gridstone’s Search Engine, I searched for swine flu. Here is a sneak-peak of the results:

Search results for swine flu using Gridstone Search

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The next big thing

This is a great talk by three Silicon Valley serial entrepreneurs – Tony Perkins, CEO of AlwaysOn; Tim Draper, Founder and Managing Director of Draper, Fisher Jurvetson; and Michael Moe, Founding Partner of ThinkEquity. They talk about several different ideas around opportunities in the current slow-down and the global marketplace.

Source: Entrepreneurial Thought Leader Lecture, Stanford Technology Ventures Program.