Upside down pricing in payment services

Some Indian banks charge for services that are cheap to execute, and offer for free expensive services 

Last week I enddd up spending some time waiting at a teller counter at a bank. This was due to some mess up with a cheque I had received. During my time at the teller counter I had the opportunity to observe other people at the same counter. 

There were a few people depositing cash into their business accounts. A few others were depositing cheques. What caught my attention, however, was this guy from a nearby business who came to deposit a large number of cheques. 

He had an entire book of challan leaves (banks regularly issue those to business customers), to each of which was stapled a cheque. As I watched, the teller would put a seal on a cheque, its corresponding challan and another seal on the counter foil. This process was repeated for each challan in the book. 

And this process was only to accept the cheques. Later on there would’ve been further effort on behalf of the bank to cash the cheque and actually execute the fund transfer. And then add in the effort of writing out all those cheques, writing out all those challans (they’re hard to print) and then take them to the bank. 

It was a rather laborious process all round, on behalf of all parties involved. Yet, banks mostly execute this function for free for most customers. 

On the other hand, they charge for account to account transfers, and the amount isn’t particularly small. Like this morning I was moving money from one account  to another, a process that took me a minute and that wouldn’t have cost the bank any human minutes. And icici bank decided to charge me for it. 

It seems like banks have their pricing and the valuation of their own effort all wrong. For electronic payments the cost is direct – what the banks have to pay the payments systems and any per use software costs. And this makes it easier to value and charge for such services. 

The effort in transacting through cheques, on the other hand, is not directly measurable (though by no means an impossible exercise). There are back offices that do the job whose cost is easy to measure, but several employees who also do other things spend time processing cheques. And this difficulty in measurement means that most banks just don’t charge for cheques. 

Around 2000 when foreign banks expanded their branch networks in india there was an attempt to charge customers for walking into the branch – customers were encouraged to do their business at ATMs or over the phone, instead. This was in recognition of the costs of customer walkins into branches.  

Banks would do well now to do something similar for cheques as well – despite the cheque truncation system (CTS), the effort involved in organising payments through cheques is massive for the bank. 

There is only one upside to cheques – and this is a downside for customers. Cheques result in money going into limbo. The payer doesn’t know when the funds will leave his account and can’t use the funds. The recipient can’t use it either until he has got it. So for the duration that the amount is “in transit” (and this duration can vary significantly) banks can happily use these funds without them being called. 

It’s possible that the benefit to the banks from this float more than compensates for the pain of processing cheques. If not, cheques have no business existing any more! 

50% Stake Sale

It’s finally happening. My mother has decided for good that I’m unable to manage all of myself, and hence I should divest 50% in myself. “The better half”, she says. She has been utterly disgusted due to my utter failure, and lack of effort, in conducting this divestiture by myself, and has now decided to take matters into her own hands.

Her second sister, along with her husband, has been appointed the lead investment banker for this deal. My mother’s eldest sister is going to be the chief scout in order to scout for possible counterparties to the deal. It is preferred, and desirable, that there be a single buyer for this entire 50%, and the current understanding is that if we are not able to tie up any good single investor, we will rather postpone the sale rather than going in for an IPO and selling the stake in bits and pieces to retail investors.

Thinking about it, I wonder if it is technically correct to call this a stake sale, since I don’t plan to take any dowry. Maybe if you take all costs into consideration, and not just the monetary ones, and if you assume payment to be a continuous thing rather than like a lumpsum (theseĀ  investment bankers, they can arrange just about anything), it won’t be inaccurate to call this process a stake sale.

Usually, in these circumstances, most of the work is done by the bankers, but it seems that in this case that I, as the person divesting the stake, will need to put in considerable effort. The effort that I was too lazy to put when I was supposed to be trying to do the deal myself, without any asssistance from any bankers. Actually this is something that a lot of companies that indulge in M&A transactions forget about.

Think about your own incentives and the banker’s incentive. For the banker, this is just a deal. All they are caring for is to find a buyer for your sale, and a seller for anyone who wishes to buy stake. Once the deal is through and the cheques and documents signed, they ask you to sign on a set of fairly heavy cheques, and walk away; job done. It is you, as the company who is selling the stake, who has to deal with the new investor for maybe the rest of your life – transaction costs in these kind of deals are high, and it is preferable it be done exactly once.

One thing I realize is that the effort required here is of a different nature to the one that you need to put when in the market without bankers’ support. In the latter case, you need to engage in an elaborate ritual of tikitaka, slowly moving towards the goal, and then unleashing a shot at the right moment. It is a well-respected and common algorithm, and any attempts to side-step it, and use short-cuts, usually end in disasters.

In the banked world, though, one thing is clear – you are sitting in that conference room together in order to strike a long-term deal, and not for a random networking meeting. All parties in the conference room are aware that the reason they are all sitting there, together, is so that they can work out a long-term deal. And thus, explicitly mentioning the deal, and explicitly working towards it, are not frowned upon – like it sometimes is in the outside market. You don’t need an y tiki-taka here. Tiki-taka is also seen as a waste of time. You better follow a direct approach and just put the ball in the box and then have a striker shoot it.

And remember that in such brokered deals, there is usually no goalkeeper.

PS: I need photos of myself for the offer document. I realize that I dont’ have too many of those. I’m not too narcissistic in my photography exploits, and I dont’ bother to collect pics that others have taken of me, and hence the shortage. Last night, my mother looked through my facebook pictures and pronounced each of them as “useless”. So, if you have good pictures of me, plis to be sending me. If you dont know my email ID, just leave a comment here and I’ll give you my email ID.