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.
Tuesday, April 20, 2010
Friday, March 19, 2010
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)
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)
Saturday, February 13, 2010
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.
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.
Sunday, January 31, 2010
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?
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?
Saturday, January 9, 2010
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.
- 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.
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!
- 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.
Wednesday, December 23, 2009
Indian credit card industry looks black
I have been looking at the profitability of online card payments in India, specifically from a card issuer's perspective. This post is following up on a related post (Oct 09). A couple of trends triggered this post:
What are the implications of the above trend/development as we step into 2010?
Though the above post has focused on the online payments space, the dynamics of the F2F / payments at stores are similar leading to the same conclusion.
This is to wish all a wonderful holiday season and a great 2010
- 2FA (Two-factor authentication), mandated by the RBI, deployed since Aug 09 seems to be a success. The timing of this deployment is helping increase the size of the ecommerce pie in the nascent Indian market, at just the right time. Early indicators are that both merchants and issuers are seeing reduced fraud.
- Stung by the credit defaults during the [temporary] recession of 2008-09, card issuers are offering credit backed by a card holder's asset (e.g., a fixed deposit / CD)
What are the implications of the above trend/development as we step into 2010?
- Aggressively pursue new markets [in India] to get credit cards into more hands?
- Migrate to EMV [finally]?
- Any other suggestions?
Though the above post has focused on the online payments space, the dynamics of the F2F / payments at stores are similar leading to the same conclusion.
This is to wish all a wonderful holiday season and a great 2010
Friday, December 4, 2009
Engines powering disruptive innovations in Payments industry
As I get to look at the payment card economics for online retailers in the US and elsewhere in the world, a couple of things jump out
What stumps me is the basis for higher online fraud rates in the US. In the online world, payment cards are all magstripe cards (you can't use chip-n-PIN cards onine). Therefore, the US being a straggler in adoption of smartcard-based payment cards does not hold. US prides itself on having a lot of intelligence in the payment network to detect fraud. In spite of this, the US has $4 billion in online fraud.
Are the above indicators part of the landscape which can't be changed, or are the above indicators indicative of staid incumbents with little incentive to change status quo? If it is the latter, we must be able to see evidence on innovations from challengers.
PayPal has been a disruptive innovator. Though the MDR charged by PayPal is about the same as what the rest of the industry charges, PayPal's merchants have immunity from chargebacks (a 1% saving to merchants). The fraud levels (transaction losses) experienced by PayPal is about 30bps (100bps = 1%). A 1% premium MDR charged by PayPal while experiencing only 30bps of losses is a good business model. So here we have a disruptive innovator offering a true win-win offering. The online retailer saves 1% in chargeback costs, which is about 20% increase in net margins. PayPal gets a 1% premium MDR while managing losses at 30bps (resulting in 70bps larger margins).
PayPal has been and expected to grow at about 18-20% CAGR while the incumbents are growing at half the rate (around 9%), which is proof of the relevance of the disruptive innovation of PayPal.
This posted started off evaluating the [possible] uniqueness of the US online payments industry, but is ending up looking at how a challenger is disruptively innovating at the cost of staid incumbents. Please look forward to a follow-up post which examines why PayPal is an anomaly in the world of payments systems.
- Merchant Discount Rates (MDR) are higher in the US (about 1%)
- Fraud rates are higher in the US (about 1%)
What stumps me is the basis for higher online fraud rates in the US. In the online world, payment cards are all magstripe cards (you can't use chip-n-PIN cards onine). Therefore, the US being a straggler in adoption of smartcard-based payment cards does not hold. US prides itself on having a lot of intelligence in the payment network to detect fraud. In spite of this, the US has $4 billion in online fraud.
Are the above indicators part of the landscape which can't be changed, or are the above indicators indicative of staid incumbents with little incentive to change status quo? If it is the latter, we must be able to see evidence on innovations from challengers.
PayPal has been a disruptive innovator. Though the MDR charged by PayPal is about the same as what the rest of the industry charges, PayPal's merchants have immunity from chargebacks (a 1% saving to merchants). The fraud levels (transaction losses) experienced by PayPal is about 30bps (100bps = 1%). A 1% premium MDR charged by PayPal while experiencing only 30bps of losses is a good business model. So here we have a disruptive innovator offering a true win-win offering. The online retailer saves 1% in chargeback costs, which is about 20% increase in net margins. PayPal gets a 1% premium MDR while managing losses at 30bps (resulting in 70bps larger margins).
PayPal has been and expected to grow at about 18-20% CAGR while the incumbents are growing at half the rate (around 9%), which is proof of the relevance of the disruptive innovation of PayPal.
This posted started off evaluating the [possible] uniqueness of the US online payments industry, but is ending up looking at how a challenger is disruptively innovating at the cost of staid incumbents. Please look forward to a follow-up post which examines why PayPal is an anomaly in the world of payments systems.
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