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.

Making Digital Education Work In India

Internet is a great enabler. Is has an ability to make quality education accessible. A teacher can share her knowledge with thousands of students. While this sounds grand, like most things, execution and interaction is the key. The hottest thing after e-commerce in the Indian startup ecosystem is education. If VC investment were an indication of the value of a sector, education would definitely be among the top 3. The question is how much of value have we created in this space?

When I started Samuday Technologies, my intent was to build a great product that could enable better collaboration in areas beyond the enterprise – such as education, healthcare and CRM. About 10 months into the company, I understood that problem in Ed-Tech – low (actual) adoption rates among students. We realigned significantly at that point. While you can build the coolest and smartest softwares, usage levels are going to be frustratingly low because students and teachers are swamped with existing problems.

One of the reasons for low adoption is expecting significant change in user behavior. I am a big believer in building products that fit into existing workflows instead of expecting changes in user behavior and workflows. Here are some of my learnings from my experience in the education space.

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Infectious Credibility and Idolization

There is a strange problem in India – we idolize. Idolization is not that bad, what makes it worse is a distorted mapping of credibility. Credibility becomes infectious and it seeps into areas which the person might not have any expertise in. We make them our universal idols who will solve all our problems and guide us to Shangri-La, the land of universal excellence.

Very recently Mr. Narayan Murthy, India’s entrepreneurial idol, made a claim that 80% of the IIT students are of poor quality (read here). I am not sure what data Mr. Murthy has, but I am surprised to see a man who has always believed in numbers, state a conjecture that will be difficult (read impossible) to prove. I am not too surprised or offended to hear Mr. Murthy’s comments and I have a simple “I don’t think so” response to it. I don’t care if Infosys is a body shop (read Chetan Bhagat’s response here) or is doing ground breaking R&D. What worries me more is that this statement is taken so seriously that we end up reading about his statement in all the newspapers and discussing it on Twitter and Facebook. Are we generalizing his entrepreneurial credibility into areas that may not be relevant? Continue reading

Is a Central Jan Lokpal scalable?

I just finished reading both versions of the Lokpal (Government and Anna Hazare Group) Bill. The Government’s version of bill appears to be too tamed down, while the Anna Hazare version tries to shoot for the star by bringing in everything you have heard of under the same enforcement/investigation/appellate authority. While there are several concerns about the centralization of power with a single authority and its dangers, there is another issue which is not discussed. Even if we decide to put in place a Jan Lokpal, will it be able to handle the expectations efficiently. It is important to understand the constitution and scope of work for this new institution that will clear up the evil of corruption from our society. Continue reading