Card acceptance infrastructure in India: A perspective

I have been scouting Bangalore for innovations in the payments industry. Bangalore is as good a place as any in India to deploy new offerings. The economy is vibrant, consumers willing to try new things, retail space is hyper-competitive with enough investments coming in...

Let me first take a step back and frame the merchant payments space (to help provide context). Retail payments are characterized by:

• It is customary to see a retailer have card acceptance devices from multiple acquirers. Depending on the card provided by the consumer for payment, the retailer decides to run the card thru' the acceptance device that provides him the most favorable terms (which typically results in an 'On-Us' transaction)
• Though there are third-party acquirers (e.g., Venture Infotek), leading card issuers are also acquirers (e.g., ICICI, Citi, HDFC...)
  
• Smaller retailers will charge a fee of about 2% (surcharge) for purchases paid using payment cards. Some of these retailers may also share their POS terminal. They will run the card transaction thru' the neighboring retailer's terminal!
  
• Benefits of India's cash economy (by some estimates, about 50% of India's economy) handily overcomes cash-handling costs borne by the merchant
  
• As multiple acceptance devices are the norm at retailers, deploying new payment products is not as much of a challenge as you do not have to displace incumbents.
• Over 70% of sales are cash-based (based on my informal spot surveys; will update this blog when I am better figures and support links)
  

Quite a few of the high-end retailers accept chip-n-PIN (EMV) cards, though very few card issuers in India have deployed chip-n-PIN cards. This is primarily to cater to tourists and visiting Indian diaspora (high-end high-margin clientele). Indian card issuers seem to have bought time till 2011, by which time they are expected to have rolled out EMV cards. I am keeping my fingers crossed regarding this target date.

It was a pleasant surprise to see PayPass readers at retailers. However, the excitement was tempered after finding out that the deployments were part of a trial. I hope that commercial deployments follow (both by card issuers and acquirers).

[Updated Aug 20 '09] First Data is continuing to push into India, first with their relationship with Kotak Mahindra (link), and next with their association with Yes Bank (link). First Data also offers a payment gateway (Merchant Solutons), in association with Standard Chartered Bank.

While I started off the post talking about Bangalore, I would like it to end talking about Delhi. As you might be aware, Delhi is having a coming-out party of sorts next year. It is hosting the Commonwealth Games 2010. Watch out for unveiling of new payment products next year around this event.

If you are interested in following trends in the Indian Payments industry, this is the conference for you (Digital Payment Conference, Mumbai, Aug 21 2009)

Apple of the smart card industry

In the early part of the decade, different categories of mobile devices emerged. These include, internet device, gaming device, music player, phone, camera, digital reader... There was a lot of debate then about the right direction to proceed. Can a single multi-purpose device adequately meet the diverse and specialized requirements of a category or a specialized device that does one thing well the way to go? Would a consumer prefer to carry a single device or multiple devices that does each thing well?

Companies in the CE space, such as Sony, went on to address this need by delivering a device for each of these categories. Sony has a gaming device (PSP), phone, music player (Walkman), camera (Cyber Shot), eBook Reader...

As each category matured, the requirements for each category stabilized enabling aggregating these categories into one device. iPhone is the current leader of a device that has managed to be many things to many people. Apple's success, though difficult to emulate, has been built on genius(!), vertical integration, active value-add ecosystem and a large group of vocal evangelists.

Samsung, Nintendo and Sony are quickly following suite to come up with their own variants.

Can Apple's success in converging CE devices be repeated in the smart card industry?

Over the years, multi-app multi-party smart cards have been discussed and promoted by the industry. For a variety of reasons, this model has not taken off. Each of us carry multiple smart cards in our wallets/purses. Not very different from a world where we carried multiple CE devices, that is, until Apple came along.

If so:

• Who is the Apple in the smart cards industry to pull this off? Is it fair to say, similar to the Apple experience, a telco will not be able to pull this off? Would this be somebody outside the industry?
• What is that critical out-of-the-box offering/configuration that will enable success this time around? Many have argued that payments should not be the first service as this requires to heavy a lift. Loyalty, though alluring, has been disappointing to-date. Transit has proven itself to be a killer-app in enabling behavioral change, but has seen limited success in anchoring a multi-tenancy service.
  
• Is Barclays One Pulse card the seed of the new world? Would a One Pulse in the mobile be the beginnings of the new world?
• Will we a successful model emerge from a new geo, such as, Turkey?
  

I am consciously not looking at the Far East market to provide the template which can be successfully replicated elsewhere (at the risk of being proved wrong). My interest is in understanding success factors affecting multi-tenancy smart cards in open / large markets. Successes till-date have been in areas where a large player, with a dominant position, has been able to pull the entire market along. In the US and Western Europe, a more collaborative approach might be necessary.

Look forward to hearing from you.

Best Buy suspends NFC reader deployment

A recent issue of RFID Journal discussed contactless payment terminal deployments in North America. The article discussed Best Buy suspending its national deployment of contactless terminal over its disagreement with Visa on how debit cards were processed.

To help understand the issue, let me elaborate with an example. You buy a LCD TV for $500 at Best Buy and choose to pay with your debit card. If you used your magstripe debit card, you would swipe the card, enter your PIN and head home to enjoy your TV. Best Buy would pay about $1 as fees for accepting the card.

Let's look at the scenario where Best Buy has deployed a contactless reader and you whip out your fancy contactless debit card to pay for the LCD TV. You authorize $500 to be debited from your account by providing your PIN and you leave happy. Best Buy would pay about $11 as fees, an extra 1000% for the mistake of deploying contactless readers.

Now you know why Best Buy pulled out these readers. The question is, why did they not pull the readers out earlier. Last I heard, their losses were in 7 digits due to the way contactless PIN Debit transactions were processed by Visa Interlink.

It might be worthwhile to discuss another dimension of deployment of contactless readers here. Visa and MasterCard have positioned contactless payments as an option when speed and convenience are of the essence [for transactions less than $25]. You are at a Coffee Shop. You 'wave' your card to pay the $3 for your caffeine fix and run. No need to sign, no PIN necessary, no receipt. Makes sense. However, for users to get used to waving their cards at readers, these readers need to every where. Otherwise, its one more decision point (and aggravation) for the user to figure out whether they swipe, wave or insert their card. Consequently, Best Buy, Home Depot and other retailers deploying contactless readers are getting us to the critical mass where you can 'wave' whereever we pay. Interchange rules that are currently geared towards speed and convenience need to modified to accommodate ubiquity as well. One hopes that this change will come soon so that Best Buy can go back to having nationwide deployment of contactless readers. I have to say that I enjoyed waving my card at Best Buy readers. Sigh!

[Updated 07Jan2010]: Wanted to inform readers that Best Buys has stopped accepting Visa contactless cards (source).

What do you think?

JP Morgan's analysis of PayPal - A must read

I came across a very good analysis of PayPal by JP Morgan (link). The PayPal blog also talks about it. If you are interested in payments systems, this is a must read.

China overtakes the US in the Year of the Rabbit?

We recently crossed an interesting technology adoption milestone (Yahoo tech news). China has more internet users than the US population. China have over 338 million PC users. I thought that this would be an opportunity to aggregate related statistics about China. With the PC subsidy for rural China (Source: Gartner) expected to increase PC adoption, would China surpass the US in annual PC sales in 2011 (Year of the Rabbit)? A corollary to this question: If China does pass the US in PC sales, does this mean anything? China has passed the US in mobile phone sales, and the world continues to turn...

I will continue to updated the stats I collect. If you have related stats that you would like to see here, please send them to me and I will include it.

Platform is the future. What is the platform, though?

Google recently announced that they would launch Chrome, the OS. Then followed analysis of whether this was the right thing for GOOG to do or not (related post from thecatalystcode). It might be helpful to take a step back to see the undercurrents behind GOOG's decision.

This post attempts to shed light on the strategies being pursued by Google, Apple, Nokia and Microsoft to subsume as much value for the ecosystem.

Thin is in: Google is focusing on getting the market to go thin, use the cloud and cloud-based resources. In so doing, it can use its ad-support freemium business model to skew the advantage in its favor. It gets the end-users hooked on free and thin, by being the purveyor of thick. The thickest client that exists on most of our machines is the browser. Therefore, Chrome, the Browser.

These days, browsers have subsumed so much of the value of the software layer, it is getting easier to commoditize the OS. However, for the browser to be in charge of its own destiny, having control of the OS is desirable. So we have Android and Chrome the OS.

Google in charge of the browser and OS, in an ad-supported freemium world, takes in most of the value and chokes off oxygen (aka revenues) from most everybody else. In such a world, it is a slow bleed to lower ASPs and commoditization. Ask anybody in the value chain who sits below or above Google, and they will attest to this.

App Store is the platform / Thick is it: Apple's strategy is to enable the app developers to leverage investments in cutting-edge hardware, design and usability. Innovation by the third-party developers / value-added service providers helps increase the relevance of iPhone to the end-users. In so doing, Apple can command a larger ASP, have a direct channel with end-users and commoditize the MNO (e.g., AT&T). Additionally, thick client is part of Apple's platform strategy as iPhone native apps help keep the iPhone differentiation front and center in the minds of end users. A corollary to the above strategy of Apple: Hardware is not a commodity. Use the platform to extract premium for the hardware. Apple's vertical integration of the stack comes in handy, as well.

Nokia: They have as good a vertical story as any in the mobile space. They control the hardware (Nokia the OEM), the OS (Symbian), Browser (based on open source WebKit)... They have an App store as well (Ovi). In many parts of the world, Nokia has a direct market presence (unlike the US, where the telco offers the phones to consumers). However, they find themselves in unfamiliar territory. Downloadable apps and value-added services was the domain of their partner, the MNO. Though Nokia has a vibrant 3rd party developer community (Forum Nokia), consumers getting to a mobile app was largely dictated by the MNO's on-deck decision. Though it was possible for side-loading an app and folks like Handango have been active in the 3rd party mobile apps marketplace, loading mobile apps after you got the phone was an exception. Please note that this behavior has very little to do with SMS, 2G, 3G..., or with the purchasing capacity.

Why is the App download problem important to Nokia? Up until the iPhone came along, all of us were happy with our phones the way they were. In a post-iPhone world, the local relevance and the global connection seems diminished if the phone does not have an easy way to get apps and utilities, however trivial they may be.

What is Microsoft's strategy?. As they do not have hardware, the Apple App strategy has limited value for MSFT. As App stores have become a business imperative, MSFT has its version. The ad-supported freemium model is one which they have been trying to crack for a while now. They have the cash flow to ensure they have runway space while they attempt to take off. For sure they are the incumbent, even in a Google's Thin is In strategy. Will Bing get them down this path is a billion dollar question. MSFT's strategy on mobile devices seem to be weak and their PC story is flailing. Only time will tell, whether MSFT's irons in the fire will result in anything meaningful to change their trajectory and destiny.

Do you think that hardware can be commoditized, and that platform is the key to migrating value?

Inserted 26th July 2009: I took a related survey recently (please let me know the name of the site as I do not recall the name) which complements this post:

What is the future of mobile?
Google is right Web apps will win against native 22%
Google is wrong App Stores will still be big 39%
Apple will win Native apps will trump web apps 20%
I dont care : 17%

Total Votes: 4213

Influencer or the King

It is a paradigm change. It's hype with little relevance. It's the future. It's US-centric obsolete technology that the rest of the world has gone past...

The above are some of the comments associated with the iPhone. Which of the above are true? All of them? None of them?

Does the iPhone represent a minority viewpoint (US / IT press) or is it a trend of things to come?

iPhone has been a game-changer with innovations including:

• Native applications that are custom built to take advantage of the platform capabilities (Gartenberg's comments, analyst with Interpret)
• Smartphone platform (App store and iPhone SDK) being an integral enabler of the smartphone value
• Device that lends itself into app download and mobile browsing. Though iPhone has about 10% of the smartphone marketshare, it commands a disproportionate 32% of mobile internet market share (Source: Admob). Nokia has 40% market share of mobile devices and a similar share of the mobile internet market.
  
• Did Apple open the pandora's box with their App Store. Though we've had 1.5 billion downloads to-date, Juniper predicts that the industry would reach an annual 20 billion app downloads per year by 2014! (Source: Juniper Research and Mobile Innovation)
  

On the other hand, iPhone is a footnote in many international markets for some of these reasons:

• Would an audience used to cutting-edge hardware, such as, 12 Megapixel camera, settle for the 3 Megapixels that iPhone offers?
• Would the global market place used to variety of smart phones to select from settle for a model-of-the-year offering from iPhone?
• Can the tail wag the dog? Can US consumers with only 8% of smart phone market share or iPhone with 10% global market share challenge the market leader Nokia
  

Apple and iPhone are today's shiny toys. The question is whether they will continue to change the nature of the smart phone market place while lingering in the back, or will they mount an attack and displace the leader Nokia?

What are your thoughts?