Card Payments in Turkey: Trends in contactless and mobile payments

This is the last part of a two-part series about card payments in Turkey.  The first part of the series provided a market overview.  This post looks at trends in contactless and mobile payments.

When it comes to contactless space, Turkey is the second country in Turkey after the UK. Number of contactless credit cards have almost reach % 6 of the total number and it seems that the growth will continue. Garanti Bank leads the market here and there are unconfirmed plans that they will migrate all the card portfolio into contactless cards.

Card payments in Turkey: Market Overview

Turkey is a trend-setter in the card payments space.  Understanding what is happening in Turkey could help us understand our own markets.  

Mr Burak Ilgicioglu is the guest writer, and provides an overview of the market and trends there.  Burak has been working on card payment systems since 1994. He has worked for 4 different banks and 2 different payment processors and still working for a bank as the card payment systems analysis manager in Turkey.  He is married with 2 kids. His main areas of interest are smart cards, contactless systems, Visa & MasterCard systems, networks and regulations. He is the creator of the blog focused on contactless systems : http://contactless-world.com

Visa India

Have you heard of Visa India?  I came across a news article today referring to such a company.  When you visit the Visa site and select India, you go to Visa South Asia section.

I am not trying to make a big deal of this innocuous article.  Given the background about NPCI, quite a few folks whom I interact with suggest that a Visa India (similar to Visa Europe) is a reasonable market response. 

Interview with Prof Das re: Cashless Payment System in India

The response and discussions triggered by Cashless Payment System in India - A roadmap has been marvelous.  Discussions among payments professionals [in India] have invariably gravitated to debating either suggestions in the report or the broad press coverage the report received.  For sure, the report has helped bring the spotlight to the niche area of electronic payments and its role in an emerging market.

While Prof Das, the author of the report, has been understandably busy, he took some time off to talk with Mr Manju Murthy.  Please find below the excerpts of the conversation:

MM: Why did you feel there was need for this report?

Review of report: Cashless Payment System in India

This post reviews Cashless Payment System in India - A roadmap authored by Prof Ashish Das, IIT Mumbai and Ms Rakhi Agarwal.  This report is a well researched and comprehensive report which is a must read for payments professionals, those who focus on India and others as well.  The report is unbiased and credible as the authors objective has been to identify factors to deliver an effective and efficient retail payment tender for India.  As a professional addressing opportunities in India, I have been waiting for this report for a while now.  The 104-page report did not disappoint.  While I normally do not have much patience (or attention span) for long documents, this report was an easy and quick read.  I encourage you all to read this report.

The summary of the findings are:

Mobile POS for Micro-merchants

I have been intrigued by the trend to accept mag stripe cards while on the go.  Mobile POS terminals have been used by large organizations for a while now (e.g., rental car drop-off).  However, acquirers did not find it cost-effective to offer similar services to micro-merchants (baby-sitter, handyman...) [US Market size/TAM of 26M].  The total transaction volume handled by these micro-merchants did not justify addressing this unmet need.  Payment received via cards by micro-merchants monthly can vary widely, starting from as little as nothing to thousands of dollars.  While most micro-merchants would like to keep their fixed costs to a minimum, those that wanted to have the facility to accept cards had very few service providers selling them this service [at a premium].

Note: This post evaluates the opportunities in the US market only.

Who cares about US mobile payments

The latest mobile payment announcement (Mercury NewCo) is note worthy.  AT&T and Verizon among them have over 170M subscribers, and would deploy 60M handsets annually (assuming an average of 3-year plans).  Assuming half of the handsets on offer support mobile payments, and a third of those subscribers activate their mobile payment service, we can expect about 10M new mobile payment cardholders each year.

It may not come as a surprise that nearly half a dozen banks offer MasterCard PayPass cards, and 10 issuers offer Visa PayWave cards. These banks have already deployed over 60+M contactless cards over the past 5 years.  There is a 1 in 3 chance that US readers of this blog have a contactless card in their wallet.

You might wonder why I jumped from mobile payments to contactless payments.  Elsewhere in the world, these two payments are synonymous.  I would tap my phone to pay for products/services.  Consequently, I am assuming that this latest announcement is going to be along similar lines.

Benefits of closed-loop payment networks

I was surprised to note the continual downward trend of fraud figures reported by PayPal (see graph [includes some interpolation]), including their recent figures of 0.18%, which is about 1/3rd less than comparable figures with Visa/MC.  This is one of the obvious value-adds of closed-loop payment schemes.  PayPal is an example of a [dominantly] closed-loop scheme, in which the merchant and the consumer use PayPal for payment, thereby making it easier for the scheme provider to detect fraud.

Setting up a new scheme: Learning from CUP

Traversing down the roadmap of bringing a payments scheme to life is interesting.  Once a scheme is launched, most of us think that all the features of the scheme come to life in relatively short order.  As an entire industry is affected by a new scheme coming to life, getting a good feel for timeline is critical to success of many products/ventures that are dependent on the scheme of the land.

Features of a typical scheme include:

• Domestic
• ATM
• Retail (Debit, Credit)
• Online
• Other payment networks (Postal system, Rural, Cooperatives...)
• Connectivity / bilateral agreements with other schemes (primarily 'international'), primarily around card acceptance
• Connectivity / bilateral agreements with international banks (primarily 'international') primarily around card acceptance

Broadening electronic payments coverage in India

Electronic payments industry requires the government to motivate laying the rails (aka necessary infrastructure).  It is heartening to note that government in India is using RBI's bully pulpit to get there.  Public Sector banks in India have signed up to bank the unbanked over the next 5 years.  I am sure the skeptical readers have been hearing about such good intentions for many years without any perceptible change in ground realities.  I think that this time it is going to be [marginally] different

• Back to back governments of the same party is providing adequate time to focus on and deploy infrastructure
• Political parties in India have figured out how to benefit from government sops being distributed electronically.

 Having said that, it will take time (5+ years) and effort to see electronic disbursements and financial inclusion (FI) make a difference in the lives of the poor, and change behavior (reduce use of physical cash).

Reserve Bank of India (RBI is the Indian Banking/Payments regulator) Deputy Governor Dr KC Chakrabarthy, among other RBI officials and Bank management shared their Financial Inclusion plans at the 23rd SKOCH Summit on Financial Deepening in Mumbai:

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King of grand vision and bold strokes

Reliance (RIL) led by Mr Mukesh Ambani re-enters the telecom market in India by acquiring Infotel (source) for about $1B.  Infotel, in the recently concluded auctions, won the pan-India Wireless Broadband license.  Why would a blog about payments and commerce care about this development?

Overview of RIL: As you might be aware, RIL is a major player in India's growing retail space.  RIL has been aggressive in experimenting with different formats of stores, business models, locations...  RIL, under the leadership of the older Ambani, has used a wide canvas and made bold and audacious strokes.  When RIL started Reliance Infocomm (since renamed to Reliance Communication), they were amongst the first telco to have Java on all their handsets.  RIL has been generating a lot of cash (cash surplus of $25B over the next 4 years [Source]) from its petrochemical business and needs new projects to deploy this cash.

RIL and Commerce: RIL's vision in communication is to make broadband-based TV, Internet and Phone affordable and ubiquitous (as they did with mobile phones/service in 2003 [Source]).  They plan on having

It is all about inexpensive convenience

In India, banks are making a serious and sincere attempt at serving the unbanked / underbanked.  However, progress has been slow and restricted to the margins.  G2C not withstanding, domestic remittance is one of the litmus tests of whether formal channels (banks & post office) are relevant in the lives of rural Indians.  Elsewhere in the emerging/developing world, remittances have been the killer app to start the process of digitization of cash in rural settings.

A survey conducted by IFMR, indicated the following as the top reasons (not in any particular order) that drive choice of channel for [domestic] remittances:

• Lines / queues to send / receive money
• Time taken [by service provider] to deliver the money
• Price (fees/commission charged)
• Proximity of deposit and withdrawal points
• Business hours of deposit and withdrawal points (should be open during hours when they are free)
• Minimal paperwork as a significant percentage of migrant workers are marginally literate

Bridging the gap in Branchless Banking

This post is the final part in the series on branchless banking, and will provide an overview of the innovations (or gaps that need to be filled) necessary for branchless banking to be viable.  The introduction of this series set up the context.  The first part of this series provides statistics about the industry as is today, which is essentially in a fixed-cost and money-loosing phase.

The following structural changes are recommended to help the industry move from an early-adopter opportunity to a sustainable market which has the green shoots of sustainability and stability:

•  Use of Commercial Off The Shelf (COTS) hardware as a POS device.  This would preferably be a device which the agent already uses, for e.g., a mobile phone.  
• This will reduce the cost of entry for an agent
• Standardized devices will have higher uptime and lower maintenance costs
• Such devices will be interoperable with other service providers' infrastructure
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State of Branchless Banking in India

This post builds on the previous post which setup the context of this series, and will provide an overview of branchless banking as they exist today.  The next post in the series will discuss bridging gaps that exist and will provide recommendations for service providers.

Below are some of the key performance measures of branchless banking in India (based on many sources including CGAP articles from G Chen and K Krishnaswamy et al):

• Account Opening Fees paid by banks for No-Frill accounts, a major revenue stream, does not exist.  Presently, No-Frill accounts are a loss-making proposition.  Consequently, I don't see banks pushing for new no-frill accounts in their current avatar
• Custom hardware devices are provided, as POS terminals, by service providers (e.g., FINO, ALW, Eko) to their agents (e.g., merchants), in lieu of a deposit (typically INR 5000 / $115)
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Analysis of Branchless Banking in India

It is easy to agree that branchless banking is a preferred way to serve rural India.  However, I have been trying to get my business mind to arrive at the same conclusion by looking at the numbers.  I would like to go thru' such an exercise here at the risk of getting beaten up.

I am starting this exercise by leveraging the wonderful work done by CGAP, notably these two publications:
    ○ BC Banking Channels in India - G Chen
    ○ Building Viable Agent Networks in India

Visa getting into acquiring business

SBI is teaming up with Visa International and Elavon (Source) to jump start SBI's acquiring business.  It is a critical win for Visa.  In light of SBI being the 800# gorilla in the India, their choice of Visa is intriguing.  Is this the beginnings of Visa's aspirations in the acquiring space?  When Visa decided to acquire CyberSource, Visa was expected to be measured in its interaction with the merchant community so as to not offend its partners, the acquiring banks and processors.  With Visa's intentions of taking CyberSource international, and its move into acquiring business in emerging markets, we might seeing elements of Visa's strategy for the coming decade (at least in emerging markets).  With SBI's interests in mobile payments (primarily driven by financial inclusion and branchless banking initiatives), Visa's JV with SBI becomes even more significant.

What does this mean for NPCI's aspirations and the IndiaPay initiative?

Look forward to your comments on the implications of the SBI-Visa JV.

Visa's acquisition of CyberSource: Potential for growth but not quite a home run

Since going public, Visa's expansion plans had to be well calibrated to not upset a lucrative business while trying to take advantage of upcoming trends.  Visa's M&A considerations ere driven by the following factors:

Ecommerce segment is more lucrative: Prima facie it makes sense.  The interchange rates charged for  credit card payments is around 1.8%.  However, ecommerce merchants pay around 2.5%+$0.30.  This provides payment gateway providers, such as CyberSource revenues of around 70 bps.  This kind of revenue is huge, considering that the financial risk as a payment gateway service provider is minimal.  The percentage revenue to a payment gateway provider in only second to that of an issuer.

Mobile Payments are coming:  They will change the dynamics of merchant acquiring, not in as far as displacing incumbents, but as they are expected to take a significant share of future growth.  This holds true for both developed and emerging economies.

Brick-n-Mortar still rules: While ecommerce and mobile payments have folks gushing, transaction volumes from these sources account for less than 20%.  The bulk of the revenues come from brick-n-mortar stores which Visa wouldn't want to impact.

Visa's decision to acquire CyberSource met these criteria.  Having said that, it is not clear how much of the upside from ecommerce CyberSource can deliver to Visa.  It is interesting to note that CyberSource's revenue per dollar processed is only 22 bps (Revenues of $265M from TPV of $120.4B).  This is pretty small compared to expectations of over 50 bps.  However, CyberSource's TPV per merchant is also a whopping $400K/merchant/year ($120.4B from 300K merchants).  The high number is consistent with CyberSource's clientele of both high-volume retailers and SMB online merchants.  Compare this against PayPal's TPV of over $10,000 per merchant per year ($20.1B/quarter from 8M merchants).

Consequently, the opportunity then for Visa is to increase both revenues per transaction, and revenues per dollar processed.  Additionally, the mobile payments world will be dominated by lower value transactions and smaller/micro merchants which requires the payments service provider to have low acquisition, fixed and variable costs.  Both Visa and CyberSource are both used to medium and large retailers.  To effectively compete and take advantage of mobile payments, the new entity has to fill the above holes, either thru' internal capability or thru' yet another acquisition.

While the acquisition looks like a base hit, it will require a lot of chutzpah from Visa's management to convert it into a triple, which Visa really needs if it is going to be something more than a payment scheme (which its shareholders demand) and to take on PayPal in any meaningful manner.

Electronic Cash in India: A conversation with S Fareedi

I spoke with Mr Seemab Fareedi, Senior Manager, Smart cards division, Sodexo India to understand the opportunity for electronic cash instruments for micro/small payments in urban India.  India is a fast growing market holding promise for a lot of industries.  I wanted to find out from Seemab whether the broad based optimism holds for electronic cash as well.  Below are the excerpts of the conversation:

Manju: How much of a problem is cash handling for small merchants in quick serve restaurants (QSRs)?
Seemab: Merchants like to handle cash.  This is as much cultural as it reflects the high interest rates that merchants have to pay for short-term loans for informal sources.  Additionally, labor is cheap to both handle cash with customers as well as to process cash at the back end.

Manju: How practical / attractive is cash displacement (use electronic cash [payment cards] instead of physical cash) in QSRs?
Seemab: The cost of handling physical cash is not as high as it is in the west (primarily due to low labor costs).  Additionally, the special place that cash holds in the culture of small merchants far outweighs the benefits of electronic cash

Manju: How attractive is the business of acquiring transactions from QSRs?
Seemab: The MSC is pretty low in India (1.25%-1.5%).  When combined with low ticket values in QSRs of $1-$6, QSRs are not very attractive / viable to payment processors.

Editorial Note: While the interview was around QSRs, the points made are as applicable to other similar use cases, including paper/magazine stands, coffee shops...

Manju: Prepaid telecom service plans revolutionized the telecom industry in India with over 95% of all consumers using prepaid plans.  Does this success usher in similar innovation trend in the payment industry?
Seemab: Indian regulators have been very proactive in regulating the prepaid industry.  They are very specific in what a service provider can and cannot do based on the role they play in the payments value chain.  Additionally, they expect sizable balance sheets from service providers.  While this is good for consumers, it virtually eliminates startups from innovating in this space.  It is debatable whether consumers would have been the beneficiaries if startups were allowed to bring innovative products to the market (though some of them would have failed).  In addition to this, telecom operators in India are yet to gain that level of trust which a bank enjoys for handling money and subsequently payments. However there are few instances where telecom operators and banks have team-up and synergized to create very promising payment instruments like m-wallets or SMS-enabled payments.  We need to wait and see whether it is really successful.

Manju: How attractive are prepaid cards for consumers?
Seemab: While prepaid cards, like other payment cards, are attractive to consumers, the chore of loading funds into the prepaid wallet is inconvenient.  As internet penetration is still not universal, consumers have to use physical kiosks to load value which significantly reduces the utility of prepaid instruments. Indian population is fairly under-banked and it can be a hindrance & could impede the prepaid proposition here.  Sometime back India had around 403 million mobile users. About 46% of them, or 187 million, did not have bank accounts.

Manju: Mass Transit services are being deployed in a massive scale across large cities in India. Does this trend impact the perception of electronic cash?
Seemab: Mass transit has the capability to change behavior, both consumers and merchants.  Innovations coupled with transit wallets is the silver lining in the cloud.  Only time will tell how regulations will affect/impact this opportunity.

Manju: Seemab, thanks for your forthright comments and perspectives on the Indian market.  I am sure that the readers will benefit from your experience.

Note: The views expressed here by Mr Seemab Fareedi are purely personal and does not reflect company's stand or viewpoint.

Look forward to your comments, questions and observations about the above perspective and insights.

Citi shows being roadkill is only natural

Citi has shut down its mobile P2P payments program (source).  Let us analyze the rationale behind their decision, and what this means to the rest of us in this and related spaces.

A lot of us in the 'payments innovation' space look down on the conservative bankers who are vary of payment innovations.  These bankers are even more vary of startups promising disruptive innovations that will change the landscape.  The data from the Citi P2P trials are both eye opening and stark.  We in the industry expect each passing year to be the break out year in mobile payments.  This year we are pinning our hopes on the iPhone.  But not much changes with each passing year, except mortality rates.

The numbers from the Citi trials paint a very sobering picture.  Less than 10% of the users used their phones for mobile banking (a pre-cursor to mobile payments), and a dismal 1% used their phone for P2P payments (source).

iPhone users will claim that the low numbers are because of the user experience.  If the users were given a intuitive user interface (and a vibrant market place built on iTunes Store), the adoption rate would be higher.  I don't doubt that claim.  However, would this change the outcome?

A startup would look at Citi's decision and conclude that a market of 3 million early adopters is very viable.  However, would such a market size/adoption rate be viable for other players (their partners) in the ecosystem (e.g., merchants)?

PayPal is an obvious success that each of us would like to reference to support our claim.  About 50% of online users have a PayPal account and about 50% of the top online retailers accept PayPal (US perspective).  PayPal is built on an ubiquitous platform (magstripe credit card platform).  In spite of such overwhelming numbers / market adoption, PayPal has under 10% of the online markets (based on Total Payment Volume).  The bottom line in payments is not the market share with issuers, merchants or consumers/cardholders.  It is the transaction volume, as it is this number that really brings in the revenues.

If you view the market stats released by Citi in this light, you will quickly realize why Citi arrived at the decision that it did, iPhone at best will only be niche offering, why bankers are conservative, why investors discount related business plans significantly.

The biggest banks and payment schemes have been rolling the dice and have been getting snake eyes.  I sometimes wonder whether those of us in the payments innovation space are just plain suckers for punishment.

I am sure you disagree with such a pessimistic post.  Would love to hear about your success stories and how you are doing things differently.

To conclude on a positive note, there are successes emerging in the payments space.  Social Networking, Gaming, Micropayments (around content licensing/consumption) is where you can find some of the green shoots.  These niches are worth hundreds of millions of users (target market), with a much smaller percentage being active users.  My Apple friends would see themselves in this category :-) (PayPal's iPhone app as an example)

Payments Innovations: India 2010

Innovating in payments systems is hazardous anywhere in the world.  In India, the risks can be significantly heightened.  PayPal stopping P2P operations in India brought this hazard out in spades.  This established juggernaut had to apply the brakes as it is not a licensed payment systems operator in India.  This may not have been a major issue in most other countries (ask for forgiveness), but not in India.

After the financial meltdown of 2007-2008, it is abundantly clear that the regulator / government is where the buck stops.  Therefore, a proactive regulatory environment is expected and understandable.  RBI being a no-nonsense enforcer is an additional wrinkle in India.  This manifests itself in India as the bank being the only entity allowed in the payments space [in dealing with user accounts].  The RBI has been prodding banks to innovate by making noises about allowing non-banks, but nobody is taking 'RBI's threats' seriously.

In APAC (e.g, Philippines) and Africa, payment innovation has been taking place adjacent to the banking system.  CGAP states that an additional growth of 1% to the GDP contributed by financial inclusion (aka payments innovation).  Compared to the leaders, India has been a laggard in financial inclusion.  Does this mean that India is losing out because of its conservative regulatory oversight?  Alternatively, innovators need to be a little light on the gas pedal to manage burn consistent with market development (easier said than done) which gives innovators a better chance of success.  Would this throw cold water on VCs interest in this space?  If so, which is the right funding source for startups where gestation periods are long, regulatory risks are high and funding requirements are non-trivial?

Too many questions, but a lot of time to ponder as the Indian market is focused on the long term.

Happy Chinese New Year.

Growing up in the land of the rich

Retailers and payment schemes (Visa, Mastercard...) jousting on the interchange rates and impact it has on the economy has been interesting.  Rates paid by retailers vary tremendously (based on many different factors which I shall not get into here).  To drive a stake in the ground, the rates are around 1.8% in the US for credit cards.  In a world where margins are thin, 1.8% seem like a king's ransom.

With this perspective, let us look at rates paid by online retailers to process online payments.  Using PayPal as a benchmark, PayPal charged merchants an aggregate fee of 3.54% in Q4'09, nearly twice as much what merchants pay in the physical world.  Additionally, PayPal's transaction processing expense rate and losses added up to only 1.36% [in Q4'09], resulting in a margin of a whopping 62%.

Fortunately for PayPal, their competition charge as much, but do not have the great business model of being able to keep most of the money.  In a traditional (Brick-n-Mortar) model, the fees paid by merchants are split between at least four parties, the acquirer, the processor, the issuer and the network/scheme, with most of the fees heading to the issuer (around 80%).  In the online world, there is yet another mouth to feed, the payment gateway (e.g., Authroize.net).  Thanks to the disruptive innovation of PayPal, they successfully created a model where there is only party at the table, PayPal.  In an increasing number of transactions, PayPal is the Payment Gateway, Acquirer, Network and the Issuer (and in these cases it costs them a few pennies to process a payment transaction).  Through this innovation, they get to charge what the competition charges (high rates), while being able to keep most of it.

Isn't it wonderful to participate in a sub-optimal world of online payments.  PayPal's large margins are funding their red-hot growth that is many times larger than the industry average.  With each passing year, PayPal will continue to grow (both top line and bottom line) at the cost of the other players, with competition only being able to watch PayPal demolish them.  The existing business model of Visa/MasterCard has tied the hands of the traditional players and forcing them to play in a playing field that is lopsided and favoring PayPal.

And, if you think that above situation is an unfair advantage for PayPal, wait for them to play their next card, Mobile Payments.  The above structural disadvantages are holding back the traditional players in mobile payments, as nobody wants to add yet another player who demands a cut (the telecom operator).  Guess what, the efficiencies and the margins that PayPal has can easily accommodate the player whom the competition is pushing out.


How do you think Visa and MasterCard, the public companies will respond to protect their turf and deliver shareholder value?

Higher transaction limit breathes life into a comatose market?

 Over the holidays, RBI (the Federal Regulator in India) raised mobile transaction limits to Rs50,000 per transaction (source).  A gripe by the mobile payments industry has been that the prevailing limit of Rs5000 per transaction was not sufficient, for e.g., to pay for an air ticket. What is the impact of RBI raising the limit for mobile payments in India?  I'll look at this question in the context of urban India.



A quick survey of the possible demographic segments that the new regulation would appeal to:
a. The 80% of urban India who carry cell phones were held back because of the low transaction limits
b. The upwardly mobile tech savvy Indian (early adopters) did not have access to mobile payments
c. Those who are already paying for their sundry expenses using their mobiles phones, but couldn't pay for their airline tickets though
d. None of the above

As you might have realized, this is a rhetorical question.  Mobile payments in India has been a big yawn.  Mobile payment service providers in India are struggling, or are re-inventing themselves to stay alive / relevant (related post).

In India, the dominant perception (Cash Culture) is that cash is a preferred way of living, leaving no trail behind, being anonymous and not attracting attention of the government.  This holds true for purchases related to both durable goods and consumables.  Let's look at the traditional factors driving mobile payments, cash handling costs / cash displacement) in such an Indian context.

• Merchant's perspective: Other than in exceptional cases, merchants prefer cash as they control / manipulate what is reported as sales, primarily for tax purposes (euphemism for tax avoidance)
• Consumer's perspective: Do not want to leave a trail of purchases [for tax authorities to follow]
• Significant part of India's retail economy lives in a parallel black market, some say as much as half of the economy!
  

Who would use mpayments in India
- Consumers who have and use credit cards and bank accounts, and merchants who accept them
- Organized retail
- Those interested in reducing customer service costs via self service channels

When you look at mpayments from the above perspective, there is a significant overlap between payment card users and mpayments target market. While this insight is not a revelation, in the context of India which has very few active card users (20-30 million active card users), the increase in transaction limits will do very little to the mpayment industry in India.  The change in the transaction limits has not raised the mobile payments market size which continues to be 20-30 million card holders (not the 500 million mobile phone users).

The above undercurent does not bode well for the industry.  If mobile payments changed the market size from 20 million to 500 million you get people's attention.  If the pie is only going to grow marginally bigger, there is little incentive for the various ecosystem enablers to invest resources and do the heavy lifting to deploy mobile payment technology. 

Look forward to dissenting or concurring opinions.  Have a wonderful 2010.