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

Arundhati and Shreedhar Nice coverage. I think you have laid it out really well. I think the problem of consciously or unconsciously selling the wrong financial product to a less-than-aware customer is a problem the world over. No matter how hard you train a sales rep or carefully script a sales pitch, there are always going to be mistakes, misconceptions and aggressive deal closings. That's why laws need to be in place that demand records of the sales pitch/ call with stringent methods to redress/ penalise wrongdoing. In the US, a law against UDAP (Unfair or Deceptive Acts or Practices) came down very heavily (less than a decade ago) on banks that were cross-selling customers all sorts of products that they either dd not understand or did not need. The fines were sometimes equal to two-years of turnover from these products. As with the problem with KYC, UDAP will need to be strictly enforced to get banks in line. Lastly, I think just using a piece of paper that is written in a language somewhat familiar to the customer is not enough. I have examined the English version (all legalese) and the Hindi version of the same product manifest. I did not know whether to laugh or to cry. If one had not been adequately explained the workings and charges relating to the product, one would be miserably confused. As it is - the unbanked sector is so large in our country - we may need special products to be designed and developed as a kind of intermediate step before facilitating exposure to the full suite. With the advent of payday loans (maybe even without usury caps) and licences being granted to wallets and suchlike pandemonium, it may become even more critical to enact some measures like UDAP and a bouquet of special products to protect the inexperienced and the unwary.

Ateesh Tankha

Arundhati Thanks for the article. I hope The Ken was not asked to do a story by an investor. Assuming that this is the case, I have three points to make: 1. Talking about operating profits without factoring in promotional costs, emoluments, KYC costs etc is absurd. Paytm is nowhere near breaking even or making profits. 2. I find the comparison with Jack Ma ironic. While the former is a self-confessed party member, Mr. Sharma is also in bed with the current government. Is it any wonder that the government passed a law saying that no merchant discount fees could be charged to entities with turnover greater than INR 50 Cr. Who do you think a law like that benefits?A closed wallet is like a merchant. Obviously even this doesn't help Paytm to make enough money. 3. While turning his gun turrets on America is laudable, this writer believes that this endeavour will be an exercise in futility. I have never yet seen a standalone wallet succeed in the US. (Apple pay, Google Pay and Samsung Pay are not standalone wallets). In any case, the wallet functionality makes no money. Having said all this, I firmly believe that Mr. Sharma is now, willy-nilly, in hock to Ant Financial and his Chinese investors have him by the... whatever you choose to imagine. His playbook is merely an echo of their commands. And given how the US views any Chinese or Chinese abetted company today, I wish Mr Sharma the very best in his American adventures.

Ateesh Tankha

Whether you look at the US or the UK, Latin America or China, non-cash payment growth (credit and debit cards/ Mobile payments, etc.) has always been linked to the ability to access funds before payday and as a line of secured or unsecured credit. Without digital "liquidity", a digital payment form factor for the average consumer doesn't serve any useful purpose beyond (say) facilitating online purchases (where prepayment is mandatory), etc. But there is no real value that makes it more valuable or safer than cash. In fact, given where the compliance regime in India (around PCI-DSS standards for emerging payment form factors) stands today, digital payments are arguably less secure that traditional payment form factors.

Ateesh Tankha

Very nice article Arundhati. But I think more than proliferation, it's very much about usage. Indian mobile wallet/ mobile payment adoption rates are second only to China (at about 29% penetration of the adult population with smartphones). However, the annual payment volume per user is less than Rs.1000. The growth of non-cash payments across the world has always been linked to access to credit. Until India fixes the banking system in this regard, these numbers won't have a significant impact at all.

Ateesh Tankha

Srikanth, As you have asked a number of questions, let me try to answer them one by one. 1. In regards to a tortoise’s lifetime, the imagery was meant to suggest that even if you get hundreds of thousands to sign up for your service at a time on account of a handsome sign-up/ first use incentive, you’ve got a short period of time to get them engaged with your value-prop before its dropped from their consideration set. Else, you would need to fuel a second purchase with another incentive, etc. 2. It doesn’t matter about bank transfers inwards. My point is that if you have any kind of wallet funded through debit or credit cards, then you are going to end up paying out a host of fees (including interchange) which you need to make up through the MDR that you charge for an outgoing transaction. If these are mostly P2P or subsidised C2B transactions, then you will always be underwater. 3. The government has announced that it has already planned for and is itching to mandate QR code acceptance across the length and breadth of India. My point is that the infrastructure to do this is not uniform and that I hope they’ve thought it through more clearly than they did the case for demonetisation. 4. The source is MSMED Act, 2006 (MSME Samaadhan, dealing with monitoring of delayed payments). It clearly states within 45 days of service being rendered. Since bills are usually presented within 14 days of this, I have taken 30 days post bill presentment. As an MSME myself, I know how difficult it is to enforce this at larger companies. In fact many large Steel, Industrial Gases and FMCG companies have already told me that to ensure compliance would be a huge undertaking. They have even asked if there could a service program built to manage reminders, timely payment processing, transaction matching, etc. 5. There are two types of wallets: staged wallets in which you have back-to-back and prepaid funding mechanisms and passthrough wallets (in which the wallets can tokenise and facilitate the transactions but not necessarily be funded). The former are units of stored value, not the latter. But my point was that you can use UPI rails, facilitate what is essentially a cash transaction in the first place and provide value so that you charge for something beyond just the processing of the transaction itself (in the Cash and Carry segment). 6. What I was essentially trying to say was that the networks started as bankcard associations and began to set rules so that members could operate on a level playing field. They only ever played 2 roles: as an ombudsman for the network; and as a recognisable brand at POS and online. Despite setting the rules (for interchange and chargebacks, for instance) and providing some support in data normalisation and fraud detection, they never took the risk of money transfer and only ever played the role of a messenger service. For this service they receive fees. If Paytm and other wallets can create an alternative (recognised and widely accepted brand) nothing precludes them from earning a small fee along the same lines. 7. There is no killer assumption. I know its not easy. That’s why I said they may need to form a consortium and make a case for the same. I see no reason why the RBI should think that wallets and UPI are OK for P2P and C2B but not OK for certain B2B sectors like logistics where cash is a pain-point. And I don’t know where you read or inferred that banks’ cash management divisions are going to die. It’s just that they won’t go down the value chain to small B2B outfits because it’s not operationally efficient for them to do so. Lastly, I wanted to share a story (probably apocryphal) from 1843, when the British were building the first railway line from Bombay to Thane. A crowd had gathered to watch the proceedings. One man was thoroughly unconvinced. As the train continued to puff steam prior to the station master blowing his whistle, he began to chant: ‘Won’t start! Won’t start!” He was even successful in getting a section of the crowd to join him in his naysaying. Then the station master blew his whistle and the train lurched forward. As the train pulled out of the station, the man, true at least to his credo of nay, began to shout: ‘Won’t stop! Won’t stop!” Stay true! Thank you for your comments.

Ateesh Tankha

Agree Suraj. This will help to increase convenience of use. Thanks for the comment.

Ateesh Tankha

Hi Kumar, I have nowhere said that B2B merchants depend on cash. They usually don't. But B2B transactions cover a lot of areas including vendor payments, Cash and Carry (wholesaler to retailer) and intra-vertical payments - as in logistics. In many of these areas, cash has been the norm forever. This will not be an easy task. But the wallets may find that (if they get it right) it may easier and more valuable to users of cash to load up a pre-paid instrument or use a pass-through wallet on UPI rails, if there are sufficient value-added services like control, ease of use, security, etc. to get them to adopt. Since many of these same users have learnt to use C2B wallets for other transactions, there may be less resistance if the wallet experience is created right. Thank you for your comment.

Ateesh Tankha

Sudarshan, thanks for the comment. You are right in the sense that I have no right to teach these payment unicorns their business model. However, I have sufficient experience to know that payment processing by itself cannot pay. Not unless you have a digital marketplace (at which Paytm has failed) or have a predictable and sustainable set of transactions on which you can earn a small fee. Though Citi Merchant Services was profitable, many of its transactions came from smaller B2B transactions. The C2B transactions were simply a facilitator for the larger credit card business. For the wallets, not being Amazon and precluded from being a real issuer or lender comes with its own problems. All I have suggested is that wallets may be better served by focusing on areas where cash management can be painful or where timely and accurate payments may be seen as a valuable service. I have nowhere, however, offered a silver bullet. Thanks again.

Ateesh Tankha

Janaki, you are very right. Without enough use cases, the wallet's utility would diminish. While you are correct about providing value and utility beyond just the money transfer, my contention is that a wallet utility (not necessarily as it is today) could provide enough services surrounding the transaction that UPI, by itself, would not be willing to provide to make it attractive for vendor payments, Cash and Carry, and for cash-heavy industries where cash management is a trying and opaque process. In essence, I am saying that they may even use transaction processing as a loss leader (low or no fees) and charge for related/ ancillary services. Separately, I still think that tying up with a few key issuers to originate loans and using these issuers to underwrite those loans at POS is a real opportunity given these wallets' merchant acceptance penetration. Thank you for your comment.

Ateesh Tankha