Very nice recap of current behaviour. I'm just not sure any of this will translate into long term habits once the epidemic abates. In my experience (and by the logic you have cited at the beginning of the article) no long-term habit is ever formed voluntarily under sufferance. It is formed through the reinforcing effect of a rewarding experience. A case in point in Singapore. After about 8 weeks of a partial lockdown (in which malls and restaurants were closed), there is frenetic activity today on the streets. Shopping and eating out are back with a vengeance! (But then the citizens of Singapore never really do anything else anyway). You may find, as India passes it peak and the real fear of Covid disappears, that people will revert to their old ways.

Ateesh Tankha

"The core takeaway is that once you own demand, these food delivery startups can bolt on additional services on the supply side and patch together a business model that makes sense from an overall perspective. " So any food delivery company can start cross-selling or up-selling other products (based on a very loosely-held captive group of customers) and make the overall business profitable? It may be instructive to look at Amazon's model abroad. My knowledge is dated no doubt (at least 5 years old), but for Amazon to make money off the average Prime customer, they would need to sell a minimum $1700 worth of goods a year to cover free shipping, returns, et al (all the aspects linked to deliveries, but not including discounts and incentives paid for by Amazon). In India, this is not easy, especially if you are restricted to food delivery, grocery delivery and a few others. This problem is compounded further if customers do not restrict their purchases in these categories to one or two e-tailers. This is one of the reasons why none of the companies mentioned above, including Amazon in India, are anywhere close to turning a profit.

Ateesh Tankha

Pranav While what you share does not come as a shock, it was interesting to see the figures and understand the magnitude of the problem. Again, it begs the question whether Mr. Aggarwal ever intended to make this a going business in the first place. Or was Ola originally created to be sold to the likes of Uber? If the former, I would dearly like to see a sample P&L (even a simple waterfall will do), that shows how a gypsy cab service model - with its incentives and overheads - can turn profitable. I am unable to do so. A supply side economic model only ever works - if it ever does - when the supplier controls all the means of production (which Ola certainly does not), and the market regulators are predisposed to the supplier (as when Grab, after its merger with Uber in Singapore, was able to have a field day as a monopolist charging whatever it felt was reasonable, until Gojek came along).

Ateesh Tankha

Srikanth, it is possible. It's just that I don't think that the RBI has the wherewithal to supervise our regular licensed banks, let alone the long tail of NBFCs. If the RBI makes structural changes (especially to those NBFCs it classifies as ICCs and MFIs) to tighten criteria, it may be possible.

Ateesh Tankha

Arundhati, this is a really wonderful article with, for me, the right level of detail and insight. Notwithstanding Mr. Srinivasa's somewhat misplaced image (NBFCs maybe considered the resistance in France or say, the partisans in Yugoslavia; banks are really the regular troops), I think that there is a structural problem that India needs to deal with first. And that is, that NBFCs should only be a lender of last resort. Then, truly, their usurious rates will be justified. But for this to happen, banks will need to up their footprint and their game. In regards to RBI's policy of discrimination, it is only natural. No Central Bank will seek to absolve the inherent risks of a non-bank except through the office of that non-bank's lender - i.e. the regular banks. Thanks again for the article.

Ateesh Tankha

Spot on. But I think the world of bumper sales is coming to an end. Exits are few and far between. And mergers, the flavour of the month, just shows how deep the rot is.

Ateesh Tankha

Sumanth Thanks for the writeup. I think your comments are spot on. When I first learnt of CRED, they were still not offering RentPay or Stash. The very idea of a "credit card bill pay platform" that would make money by offering access to coupons was itself mystifying. When much larger, better capitalised and integrated companies abroad had failed at this, I was sceptical about CRED reversing the trend. But I also wonder re: startups, how long a random bait and switch strategy will continue to attract VCs and other investors. When a model is not particularly credible to begin with, what prompts investors to bet on the fact that the model will somehow evolve in the future?

Ateesh Tankha

I don't know much about raising the stakes in the e-commerce gamble so much as the fact that you will start seeing some serious consolidation. Spurred by failing VC funds like Softbank, expect all-stock mergers and unnatural synergies now being touted as strategic fits once there is a mad scramble to save companies whose own business models become increasingly more unprofitable. The truth is that neither customer acquisition at scale nor better supply and delivery models ever guarantee success (profits). And a model that works in the US is not guaranteed to work here in India. A credit card company is willing to pay up to $350 per acquisition in the US, in the full knowledge that there will be 40% attrition in the first year after a 20% activation rate, because with the small remnant, there are enough revolvers to cover all the costs including default. In India, such a strategy will bomb, despite all the bombast about cross-sell and up-sell. So with e-groceries. In a commoditised market, where loyalty does not exist and the expanding number of orders are circumstantial (on account of the curfew), is a heavy investment (in warehouses and personnel) the best move?

Ateesh Tankha

Hi Arundhati I find that I tend to agree with Mr. Vora here. The statistics provided seem a trifle premature. There have been some 9000+ confirmed cases in India so far, and not so very many hospitalisations. By contrast, In Singapore there have been more than 1400 hospitalisations/ monitored quarantines, and the average stay is considerably longer. Not sure how statistically relevant the 5.5 day number is. Separately, I find it amazing that insurance companies have chosen to launch a Covid based policy (retail or group) at the start of what was obviously a worldwide pandemic. And why would a government or regulator (IRDAI) urge such companies to launch such a product unless they were desirous of shirking responsibility and enabling consumers to pay for their own convalescence? Similarly, why would an insurance company sell something potentially ruinous in the hope of up-selling something more lucrative in the future? The experience of countless startups who used this tactic to drive acquisitions should surely serve as a cautionary tale for an insurance company. In terms of the actuarial calculations, if we assume that more than 1% of the Covid policyholders contract the disease, are we even sure that there are enough sequestered wards/ beds (in or outside network) that can cater to their needs? Or is the assumption that if policyholders cannot claim (because they were denied treatment), the insurance company gets a pass?

Ateesh Tankha

Sumanth Thanks for sharing. You are spot on when you state that OYO isn't going anywhere soon. But to be fair, none of India's much-vaunted startups (especially the larger B2C behemoths) have business models that lends themselves to long-term profitability anyway. They are disruptors, yes, but more in the sense of a Mongol horde. As long as you are able to quickly destroy your enemies and then restore order (including the tidy collection of taxes and the protection of steady harvests) all will be well. But if, after destroying the market, with wild freebies, unheard of discounts and fallacious promises, etc. you discover that competition is still hanging on, that they are the only ones with a steady brand promise, and that customers are unwilling to pay you any more than they paid you in the past, then you quickly realise that the violins will shortly stop playing. Having lived through the market collapse (2007-2010) - in the US banking and payments sector - I can assure you that no one is too big to fail. If some of our larger startups - hardly as important as banks - collapse because gamblers like Son cannot afford to fund them any more (and his Japanese bankers have already expressed their reluctance to continue to fund him), so be it. In the ultimate analysis, if India can avoid a South Sea bubble, we may be the wiser and safer for it.

Ateesh Tankha

Arundhati and Sumanth There's a very good reason why non-banks and tech startups have either failed in this space or have been "thwarted" by regulation. First, unlike, say, buying food on the cheap or merchandise for free because you make the payment through a digital wallet, a consumer's life-savings and investments are not something he or she can walk away from without a care in the world. It is, therefore, imperative that governments hold all companies to the same standard - capital ratios, credit quality, compliance reporting, etc - that the bigger banks are forced to follow. In this, tech firms have been found to be wanting and, in many ways, in default. The costs saved by eliminating physical infrastructure are sometimes far less than those associated with an unforgiving compliance regime. Secondly, in the banking space, the lack of profitability or the rising rate of default (especially on loans) takes a toll that many VCs would find hard to underwrite beyond a point. In this case, unlike say in the case of Flipkart - that frankly may have gone under if Walmart had not rushed in to buy it, a decision the latter may live to rue - the government cannot allow a large financial institution or NBFC with ties to the entire financial system to go under. If Navi really becomes big (through a process of relaxed regulation or the creation of nimble, exotic financial products), and unprofitable, the government may need to absorb these losses to offset an even scarier outcome. While we are all hopeful that financial products and services become simpler, cheaper and more reliable, I think we may be better served by hoping that change happens across the ecosystem rather than through a few individual attempts by technology companies.

Ateesh Tankha

Arundhati, great article again. I do have one comment though. The FinMin has said that all payments processed with RuPay badged debit cards and on UPI will not attract any MDR. Not that all digital payments will be free of MDR. So credit cards are excluded and other POS systems (that work outside UPI) can carry on BAU. Separately, while I believe that some fintechs have done a commendable job in the last 5 years tapping into the market, I really feel that - sans a global threat to middlemen like blockchain based peer-to-peer payments and lending systems - the coming decade may belong to the banks. In addition to their lower cost of funds, there may be at least 3 reasons for this: 1. Their underwriting prowess and strength (fintechs have a long, long way to go before they can catch up): In fact most NPAs in banks today, I believe, are on account of poor oversight and corruption rather than on account of poor risk modelling. 2. Online and Offline distribution strength: The overlap between bank customers and fintech customers is large. And when banks get into the action of seriously cross-selling on the back of primary bank products that customers already own, fintechs may begin to stare at an existential crisis. 3. Second mover advantage: If fintechs are really able to drive inclusion (payments, banking products, etc.) in previously unbanked/ digitally inactive populations, nothing stops the big banks from swooping in, post-facto, and stealing their lunch. I think a bank like HDFC is one to watch. A traditionally conservative bank, it is slowly loosening up and beginning to explore areas it would typically have viewed as too risky or outside its ambit only 2-3 years ago. (Notice its more flexible focus in regards to MSME lending and to consumer merchant offers).

Ateesh Tankha