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Payment apps will do just about anything to make money

The Nutgraf is a 10-min newsletter sent at 10 AM IST every Saturday. It connects the dots and synthesizes one big event in business, technology and finance that happened over the week in India. In a way you’ll never forget.

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Good Morning Dear Reader,
 

Let’s dive in straightaway.

 

Here’s an interesting article I found in Business Standard this week. It’s about the Reserve Bank of India (RBI) and payment aggregators. 

The Reserve Bank of India (RBI) has decided to review the business models of payment aggregators in view of a spate of frauds hitting customers due to unauthorised sharing of financial data, sources aware of the development said. The banking regulator has sought information from these entities on their activities, including the sharing of customer data, the sources said.
Data breach: Business models of payment platforms under RBI scrutiny, Business Standard
By payment aggregator, the RBI is referring to companies which process and receive money from customers. This includes apps like Google Pay, PhonePe, Paytm*, most of whom accept payments via UPI and wallets.  
 

But what is the RBI looking for exactly?

 

Well…

RBI sources indicated that the department of supervision had been tasked with engaging with payment aggregators and other players in the payment ecosystem to find out the issues.
 
Payment history data is “precious”, said another source, as there are not many agencies which collect such data. “The aggregators have the actual data on payments. The data is then used for making lending decisions; the aggregator who sells the loan on behalf of the NBFC earns a fee.”
 
“The RBI is trying to understand how data sharing works, whether they are taking consent from the customer to share the data. Whether the loans they are extending are on their books or in the books of some other entities,” the source said.
Data breach: Business models of payment platforms under RBI scrutiny, Business Standard
If the RBI is indeed trying to find out how payment apps and others in the ecosystem are using and sharing data in order to regulate them, I wish them luck. 
 

Partly because I suspect payment apps use and share data in myriad ways, and it will take the RBI a long time to understand what’s going on. Of course, by that time, there will be much more data used in many other complicated ways. In general, regulating what data can be used and shared is one of the hardest jobs there is, so I expect this will be a long, and complicated endeavour. 

 

Also, this is a moot point because I think most payment apps are already using customer data in all kinds of sketchy ways. By this, I don’t mean that they are taking your transaction data and directly selling it on the internet, or transferring it to data harvesters. I just think that payment apps legitimately see themselves as using data to innovate and, in the process, make some money. I suspect most of them view customer data like how, say, companies like Facebook view your data. It’s a resource to be mined, in order to build compelling products. 

 

Perhaps this makes you uncomfortable. 

 

You may even want them to stop doing this. 

 

Which brings me to the final reason why payment apps are playing fast and loose with your data. 

 

Because they are really left with no choice. 

Payment apps will do just about anything to make money
The story of why payment apps have no option but to leverage customer data is the result of a sequence of events that has taken place over several years—almost all of it regulatory. 
 

But it all began with something called the Merchant Discount Rate (MDR), which was abolished a couple of years ago. 

 

In simple terms, the MDR is a fee charged to merchants for processing payments made using a financial instrument. If you go to a mall and buy a pair of jeans from, say, Levi’s, and swipe your debit card, Levi’s has to pay a small fee to your bank for processing that transaction. Until 2020, MDR was collected from merchants irrespective of whether you paid using a credit card or debit card or even UPI.

 

But suddenly, overnight, in the budget speech in 2019, MDR was abolished for RuPay cards, and more critically, for all UPI transactions. The reason given by the government for abolishing MDR was to hasten the adoption of digital payments by merchants. And what would make adoption faster than driving all transaction costs to zero?

 

Well, in that regard, they succeeded. UPI adoption skyrocketed, and over time, more and more people started to prefer using it as a financial payment instrument. In fact, in just a year, some of the large online merchants had started disabling other forms of payment on their website. 

 

And when I mean large, I mean the largest. 

In an indirect fallout of the zero-merchant discount rate (MDR) regime on Unified Payments Interface (UPI) and RuPay cards, some state-owned establishments have disabled the netbanking option for certain banks and card networks. The idea behind the move is to save on MDR outgo especially on low-margin transactions by nudging customers to pay using UPI or RuPay cards, payment industry executives said.
 
For instance, the netbanking option for HDFC Bank customers is unavailable on the Indian Railway Catering and Tourism Corporation (IRCTC) website, while Tata Memorial Centre (TMC), Mumbai, does not allow users to make payments using a Mastercard debit card. Emailed queries sent to HDFC Bank, IRCTC and TMC, Mumbai, did not elicit responses till the time of going to press. A Mastercard representative said the company’s team in India would respond on Thursday; the response was awaited till the time of going to press.
Zero-MDR regime: Govt sites skip netbanking, foreign card schemes
Sure, banks are unhappy, which is expected because they are losing transactions to UPI. 
 

But guess who else is really unhappy? 

 

Yes, the UPI payment apps themselves—apps that were making money off MDR. 

 

Except now, they suddenly weren’t. 

When the MDR was driven to zero, it effectively meant that payment apps had to do other things to make money. The problem was that there were few options. Since UPI was built as an interoperable payment system with standard APIs, payment apps couldn’t differentiate based on product features or user experience. 
 

So, payment apps tried a couple of things. 

 

First, they flirted with building soft-walled gardens. If you use, say, PhonePe as your preferred app, PhonePe could get you to try other products when you open the app to make payments. Or show you ads. Or make financial investments. Also, they could introduce network effects. PhonePe could make it more convenient for you to make payments to other users who were also using PhonePe. That’s how walled gardens work. It’s much better for multiple users who are in the ecosystem. 

 

This is also why consumers started using multiple payment apps, and depending on what the recipient was using, they could switch between apps to make payments. This wasn’t ideal, but at least it provided some differentiation to a payment app.

 

The problem was that both the RBI and the NPCI really focused on the interoperability part and took this out of play. Over time, they did everything they could to ensure that users could do everything they needed irrespective of the app they used.

 

Take, for example, something that they just introduced called the numeric mobile id mapper. This will enable anyone to transfer money to anyone else using just their phone number.

 

If you are a payment app, what’s your unfair advantage over your competitors? 

 

Well, if the product is a commodity, then the only differentiator is the brand itself. Because at this point, if you are a payment app, you really want as many people to think of you first when they think of making a payment. 

 

And so, payment apps spent crores of rupees to acquire users through a combination of offers, discounts, and brand ads.

 

In the middle of the crippling war for acquiring users, the regulators dropped another bomb. 

 

Payment apps could acquire users. 

 

But just not too many users.

The National Payments Corporation of India has set out new guidelines for digital payment apps limiting their share in the overall volume of transactions on the unified payment interface at 30% in a bid to enforce parity in the country’s fast-growing digital payments industry. The new rules, effective from the quarter beginning January 2021, also provide existing players with dominant market shares with a window of two years for compliance, in order to minimize friction for customers, NPCI said.

Walmart’s PhonePe and Google Pay—with a market share of around 40% each at the end of December 2020—will have to now “moderate” new customer acquisition and reduce transaction volume to within prescribed limits by the end of 2022. While for other UPI apps such as Amazon Pay and Facebook’s WhatsApp Pay, the revised guidelines will come into force from the ongoing quarter itself.
NPCI caps market share for UPI apps at 30% of overall payment volumes, Economic Times
Let’s summarise. 
 

If you are a payment app, you can’t do much to make your product better to get users. By some miracle, or by spending tons of money, if you did, you can’t succeed too much. 

 

Thanks to all the regulation, millions of people adopted UPI, but it also resulted in a form of convergence—i.e., all UPI apps started looking the same, and did exactly the same thing. 

 

So how are payment apps going to make money?

 

I think customer and transaction data is the obvious, if not the only, option. 

 

Even for this, there are things looming on the horizon which may make it redundant. Most notable is a new type of entity called Account Aggregator, which will make data into a commodity itself—available for anyone to mine and access. 

 

But until then, payment apps are going to use customer data to do whatever they can. They will try to get as much data from customers from as many places as possible. From the app that you use to make payments. From the QR code they install at the merchant. And even by creating a payment bank so that they will get a view on where the money is coming from and where it goes. 

 

Some of the ways payment apps are using your data today isn’t necessarily shady. They may try to find out what products you buy in order to send you a promotion for a complimentary product. Or they will try to figure out how many transactions you are making to offer a personal loan to you at the end of the month. Or they may look at your transaction history and offer loans to a merchant. 

 

The possibilities are endless.

 

And as it stands, the possibilities ahead of us are even more complicated. 

 

Payment apps will do just about anything to make money. 

 

Because they have to. 

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Regards,
Praveen Gopal Krishnan
 
*Paytm's founder Vijay Shekhar Sharma is an investor in The Ken.
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