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41. Dynamic & Complex…& Messy

Payments are interesting, dynamic and complex and if you know how they work then you will realise that it is equally messy. Multiple entities with so many dependencies, it is normal that one or other thing keep going out of control… payments truly follow the second law of thermodynamics where degree of randomness (disorder) keep increasing. On top, macro level changes from regulators, government and courts impact this fragile ecosystem….

Few events that shaped payment landscape

1. NPCI and its products

NPCI (National Payments Corporation of India) is an umbrella organisation for all retail payments in India. It was set up with the guidance and support of the Reserve Bank of India (RBI) and Indian Banks Association (IBA)”

NPCI has launched many payment products and each one contributed towards growth of digital payments.

NPCI is an amazing organisation that we all Indians should be proud of… It has truly altered payment landscape of India… but in this long journey, did NPCI has become too big to fail or single point of failure?

Not me… that is what RBI thinks >>> Read here

2. Rate Control

MDR/TDR is the revenue for the entities involved in payment processing and everyone gets some share in that… works well for everyone, Right?

But time to time RBI and Government of India (GOI) have dictated the pricing of debit cards and UPI.

DC and UPI rate revisions

Why control the rates?

MDR is cost to the merchant (if merchant is absorbing) or to consumer (in surcharge model). And RBI/Government assumption is that lowering/capping the rate will boost usage of online payments. Thoughtful… but ‘there are no free lunches’… then who is paying the bill?

From Jan’18 till Dec’19, GOI has reimbursed acquiring banks @0.25% for transaction below Rs.2000. The reimbursed amount was split among acquirer, issuer and card schemes. This rules raises few questions: (a) What did GOI achieved by extending this concession to merchants who have ONLY online payments (e.g. Gaming)? (b) Was it necessary to use public funds to fatten private banks and card schemes?

In Jan’20, GOI declared no fees on RuPay, UPI and UPI QR. Also, made it mandatory for companies who have turnover more than Rs.50 Crore. (with Income Tax clause: 269SU). But this time, GOI is not reimbursing. This move also raises few questions: (a) How bank or FinTech companies can do investments (tech or business) when the revenue model is next to nothing? (b) What if a 50Cr+ company has to implement when don’t even have genuine use case for receiving payments through these modes?

Anyway… let’s move to more logical things

3. Mandatory OTP

Today, we are used to entering PIN in POS machine or OTP/password during online payment but it was not the case before 2012. RBI made the 2nd Factor Authentication mandatory on 31st July 2012. The idea was to make card payments secure so users can use the cards confidently.

Impact: Issuers needs to implement 2FA services (use ACS provider) and replace the cards that are in circulation (as service code changed). As it was 2012, so the impact of the change was not big (compared to if it is done today)

Curious case of Uber:

When Uber started in India (2014) they had two unique payment features:

(a) No OTP required for card transaction (b) No Cash

Part (a) Uber was using outside India PG and skipping 2FA (OTP) to provide seamless user experience. RBI told Uber to adhere to 2FA (plus other FEMA guidelines). I am sure Uber’s lawyers might have put forth some grand arguments against RBI but here in India, Uber may be running the cabs but RBI owns the road (metaphorically). Without much choice, Uber stopped whichever PG they were using and moved to PayTM wallet.

Part (b) Cash… Uber has to include this unique India specific payment mode as Uber might have realised that they won’t grow in India because Cash was, is and will continue to be the king

4. Who is killing the ‘wallet’

I already covered about prepaid cards… how prepaid cards declined and wallets came to power… after wave of mobile wallets (PayTM, mobikwik, Freecharge etc.), Telco companies launched their wallets (Vodafone M-Pesa, Airtel Money, Idea Money, Tata mRupee, Jio Money etc.). Few years later, PayTM is the market leader, Mobikwik is struggling, Freecharge changed few owners and wants to morph into financial services company, and Ola Money became Ola Money post-paid (wallet + credit product)

Fate of carrier wallets was no different… few died (Idea money, mRUPEE), few surviving as their patrons have huge pockets (Airtel, Jio). My heart weeps silently for Vodafone M-pesa, the company that built an amazing financial inclusion story in Kenya, has to shut down its business in India.

Irrespective of the business model, the biggest blow to these wallets came from RBI when the regulator made the KYC mandatory. Logic is simple, when prepaid cards follow the KYC then why not mobile wallets.

On one hand mandatory KYC and other side rising popularity of UPI, so of course wallet story started crumbling… although full KYC is not rolled out as RBI keep extending the deadline but I think wallets are on the path of no return.

5. Demonetisation

Demonetisation was one of the biggest events of modern India… on 8th Nov 2016 at 8.15PM, the Government of India (GOI) nullified Rs.500 and Rs.1000 currency notes (effectively more than 80% of currency notes that were in circulation). Without any discrimination, demonetisation affected everyone but may at different levels.

Idea of demonetisation was to…. Not sure… But I guess nothing much changed… corruption is still happening (of course, with new currency notes), there is more cash in circulation than it was before but surely the digital payments got big boost

Two important things happened (apart from, 1st time ever I stood in bank queue for 3 hours):

PayTM — the juggernaut: Demonetisation created amazing opportunity for online payments and PayTM was the one who could make the most of it. Within weeks, one could see PayTM QR codes everywhere. PayTM proved that it is the juggernaut who can execute such mammoth scale programs efficiently and swiftly.

Rise of UPI (BHIM): UPI came to prominence especially because of its seamless P2P (person to person) transfer feature. NPCI’s BHIM set the tone for how PSP Apps should be built and later others (PhonePe, Google Pay etc) improved upon that.

6. Order … Order

Time to time courts have passed judgements that affected payment ecosystem and merchants… few of those cases

a. NACH e-Sign

NACH e-Sign ‘was’ online recurring payment solution where user can register mandate on bank account by validating Aadhar OTP. When The Supreme Court scrapped the Section 57 of Aadhar Act, which allowed the state and corporate to use Aadhar to establish identity of customer, the NPCI had no option but to discontinue the NACH using e-Sign.

Anyway not much impact as this was a new solution with less adoption and anyway solution was not elegant so… no hard feelings. On a separate note, the Supreme Court order impacted other sectors (e.g. MF, Telco, wallets etc.) adversely as they wanted to use Aadhar OTP for KYC… and ouch! that was painful !!!

b. Skill based gaming:

As per various court rulings Rummy and Fantasy sports are classified as skill based gaming and exempted from Public Gambling Act of 1867. So it is legal to play these only games with money except in Telangana, Assam, Orissa, Nagaland (license required), Kerala (poker is not allowed)

c. Bitcoin:

Year 2017 and all of a sudden, people around me became expert in Crypto Currencies. I bet none had clue but they liked throwing words like blockchain, Crypto, distributed ledger and supply chain management blah…blah… People started investing in Crypto Currencies till one day RBI said ‘Stop it’… so all banks pulled out and these companies become illegal (kind of).

Fast forward to 2020, Supreme Court gave verdict that Crypto trading is ‘fine’ (As they are commodities and one can trade commodities). I assume lot of companies will be back in this business, many around me will start throwing those jargons again and many more will start investing to earn easy money…. Although the Court has given ‘go ahead’ but banks may decline to work with these merchants due to high risk or compliance reasons, and the Court can’t force bank to provide the service. Let’s see what banks will do now…

“When you start thinking you can create something out of nothing, it’s very difficult to resist” — Lee Hsien Loong (PM, Singapore) (told in different context but applicable here as well)

7. Acquisitions

Consolidation happens in all industries and payment/FinTech sector is no different… some of these acquisitions defined the competitive landscape…

a. Ingenico (world’s leading POS OEM) acquired EBS (e-Billing System) in 2013 and then acquired TechProcess Payment Services (erstwhile Bill Junction) in 2017 and finally got acquired by Worldline

b. Nasper’s PayU keeps acquiring one or other company either in India or outside… Citrus Pay, Red dot Payment (Singapore), Paysense (credit platform) and Wibmo (enStage) (leading ACS provider, company that generates & validates card OTP). As they say in corporate world… PayU is growing inorganically or in layman terms PayU is on shopping spree

c. Snapdeal bought Freecharge at huge $400M deal and only to sell it to Axis bank at $60M… what a strategy and what a loss!!!

d. First, Flipkart acquired FX Mart (PPI licensed wallet company) then acquired PhonePe (early stage UPI based PSP with zero customers) and then moved FX mart under PhonePe and thus created PhonePe container

<will keep updating this space >

Are we done here?? No… not yet… such things keep happening… new products, new guidelines and new rules… and that is why payments are dynamic… but when bank itself goes down then it become messy….

And that is what happened on 5th March 2020 when YES BANK was placed under moratorium. Yes Bank has been cutting the corners for quite some time and finally, Government/RBI decided to take action… and that triggered panic among customers, shareholders lost money and created chaos in FinTech industry… How?

Yes Bank has APIs for pay-out or disbursement (IMPS, NEFT), UPI stack (for collection as well disbursement) and card acquiring piece. And when the bank was put under moratorium, many merchants and payment companies who were using Yes Bank services faced issues with processing and settlements. The impact was so huge that big payment companies PhonePe and BharaPe went offline for a day or two… here is the detailed article that covers Yes Bank crisis in detail >>> Ken Article (its free)

It was huge a crisis and an unprecedented one… eventually, Yes Bank will come online, accounts will be unfrozen and processing of transaction & disbursements will resume… But did the ‘decision makers’ learn the important lesson about having single point of failure? How will they hedge the risk and safeguard merchants?

Final thought

“Never let a good crisis go to waste” — Winston Churchill

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