The advantage of recurring payments

One of the best things about payments in the UK is the ubiquity of the direct debit system. From gym memberships to contact lenses to television licenses, all sorts of subscriptions are sold on a direct debit based model.

The mechanism is simple – the merchant, with the consent of the customer, sets up a direct debit system with the customer’s account such that a specified amount is debited periodically. This direct debit system can be cancelled at the customer’s discretion, resulting in automatic annulment of the subscription.

This is a great business model because it allows businesses to acquire customers for a repeated transaction, without the latter having to commit for too long a period.

The key feature of the direct debit system is the customer opt out. That the account will be continued by default means that it takes explicit action by the user to terminate the subscription, which helps the business acquire customers with the cost amortised over several time periods. The any time opt-out feature (which the user can do at her bank’s website or app, without consent of the merchant) means that the commitment at any time for the customer is for one period only, making the product an easier sell.

In the absence of the recurring payment based model, the business will either have to offer short term “subscriptions”, which implies a customer acquisition cost at each period, or long term contracts, which takes a higher upfront commitment from the customer making it a much harder sell.

In that sense, a recurring payment model offers a nice middle ground, resulting in value being unlocked for both the business and the customer, resulting in enhanced welfare all around.

In that sense, the lack of a recurring payments system is a key shortcoming of the payments scene in India. While it was possible to do this earlier, current rules by the Reserve Bank of India require authorisation by the customer (in the form of two factor authentication) for every transaction, making them opt-in rather than opt-out (the opt-out feature is key to amortise customer acquisition cost).

The updated version of the unified payments interface (UPI 2.0) was supposed to offer this recurring feature, but media reports say that the update is being rolled out without this feature. That is surely an opportunity missed for India’s businesses to grow.

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! 

Explaining UPI

I just paid my cook his salary for November. Given the cash crunch, I paid him through a bank transfer, using IMPS. Earlier today, my wife had asked him for his account details (last month I’d paid him on his wife’s account).

An hour back he sent me his account details (including account number and IFSC) via WhatsApp. I had to wait till I got home and got access to my laptop (Citibank app doesn’t let you add payees on mobile banking).

I get home, log in to Citibank Online. Add payee, which includes typing his bank account number twice. Get SMS asking me to confirm payee addition. I authorise payee. And after all this I am able to finally do the transfer – and I expect him to have got his money already.

For a long time I was wondering what the big deal with UPI was, given that IMPS is already fast enough. Having finally tried UPI earlier this week (it’s finally coming to iOS, but only available on ICICI now. And the implementation so far sucks, since you need to pull out your debit card for two factor authentication – defeating the point of UPI. I’m told it’s better on Android), I realise how much easier and safer the transaction would’ve been.

Firstly, the cook needn’t have sent me his account number. All I would need was his virtual payment address. I would then open my UPI app (in my case, iMobile) and click on “send money”. And then I’d add his virtual ID there, following which his name would appear. Two or three more clicks, and entering my PIN code, the transfer would be done.

No bank account number. Not even a mobile number or an email ID. Just a random string of characters would allow me to transfer money to him! And later I could give him my UPI ID, and next month onwards he could simply send me a request via UPI for his salary. And two clicks later it would be done!

Mint has reported that there are massive delays in merchants installing point of sale devices in response to the cash ban. Banks should instead seek to acquire merchants to accept money via UPI. It’s simple, it’s quick and it protects privacy.

In fact, if the bank sales staff now have bandwidth, it can be argued that all the planets have aligned for UPI to take off for merchant payments – people have less cash, point of sale devices are not available, and both merchants and shoppers have shown openness to cashless payments, and there is a push from the government.

If only the banks can bite…

Using my cook as an ATM

This happened ten days before high value notes were withdrawn, and suggests nothing about my cook’s political opinions or views. 

On 30th October 2016, I paid my cook his salary for October. As it was the usual practice, I paid him in cash. He asked me if I could do an online transfer instead.

It was the first day of Diwali, and he needed to send money to his wife in Bihar. And it being Diwali, all banks were closed, and there was no way he could send money to her. So he asked me if I could do that. And if I were anyway transferring money to his wife’s account, could I send her a bit more, he asked – he would compensate me for the extra amount in cash.

And so like that I used my cook as an ATM. He gave me his wife’s account details (it was such an obscure branch that I’d to google it to find the IFSC code – wasn’t in citibank’s lookup list). I added her as a “payee” and immediately IMPSd the amount to her. And my cook gave me the extra funds I’d transferred in cash.

Later on, I told him to install his bank’s app on his newly acquired fancy phone (with a Reliance Jio sim). I’m not sure he’s done that but considering how resourceful he is, it wouldn’t be long before he does that. And more of the Bihari cooks network in Bangalore do likewise.

Nandan Nilekani, in his championing of the UPI, likes to talk about how “anybody can be an ATM” with the new technology. This was an exemplary example of that.

The only fly in the ointment was that I didn’t need cash that day – after all I’d been to the ATM earlier that morning just so that I could get cash to pay my cook – so I ended up with a lot of cash that I didn’t need. Thankfully I was able to spend it productively before the ceased to be legal tender.

Following the withdrawal of high currency notes, I told my cook I would pay his subsequent salaries by bank transfer. He gladly agreed.

Why PayTM is winning the payments “battle” in India

For the last one year or so, ever since I started using IMPS at scale, and read up the UPI protocol, I’ve been bullish about Indian banks winning the so-called “payments battle”. If and when the adoption of electronic payments in India takes off, I’ve been expecting banks to cash in ahead of the “prepaid payments instruments” operators.

The events of the last one week, however, have made me revise this prediction. While the disruption of the cash economy by withdrawal of 85% of all notes in circulation has no doubt given a major boost to the electronic payments industry, only some are in a position to do anything about this.

The major problem for banks in the last one week has been that they’ve been tasked with the unenviable task of exchanging the now invalid currency, taking deposits and issuing new currency. With stringent know-your-customer (KYC) norms, the process hasn’t been an easy one, and banks have been working overtime (along with customers working overtime standing in line) to make sure hard currency is in the market again.

While by all accounts banks have been undertaking this task rather well, the problem has been that they’ve had little bandwidth to do anything else. This was a wonderful opportunity for banks, for example, to acquire small merchants to accept payments using UPI. It was an opportune time to push the adoption of credit card payment terminals to merchants who so far didn’t possess them. Banks could’ve also used the opportunity to open savings accounts for the hitherto unbanked, so they had a place to park their cash.

As it stands, the demands of cash management have been so overwhelming that the above are literally last priorities for the bank. Leave alone expand their networks, banks are even unable to service the existing point of sale machines on their network, as one distraught shopkeeper mentioned to me on Saturday.

This is where the opportunity for the likes of PayTM lies. Freed of the responsibilities of branch banking and currency exchange, they’ve been far better placed to acquire customers and merchants and improve their volume of sales. Of course, their big problem is that they’re not interoperable – I can’t pay using Mobikwik wallet to a merchant who can accept using PayTM. Nevertheless, they’ve had the sales and operational bandwidth to press on with their network expansion, and by the time the banks can get back to focussing on this, it might be too late.

And among the Prepaid Payment Instrument (PPI) operators again, PayTM is better poised to exploit the opportunity than its peers, mainly thanks to recall. Thanks to the Uber deal, they have a foothold in the premium market unlike the likes of Freecharge which are only in the low-end mobile recharge market. And PayTM has also had cash to burn to create recall – with deals such as sponsorship of Indian cricket matches.

It’s no surprise that soon after the announcement of withdrawal of large currency was made, PayTM took out full page ads in all major newspapers. They correctly guessed that this was an opportunity they could not afford to miss.

PS: PayTM has a payments bank license, so once they start those operations, they’ll become interoperable with the banking system, with IMPS and UPI and all that.

Intermediation and the battle for data

The Financial Times reports ($) that thanks to the rise of AliPay and WeChat’s payment system, China’s banks are losing significantly in terms of access to customer data. This is on top of the $20Billion or so they’re losing directly in terms of fees because of these intermediaries.

But when a consumer uses Alipay or WeChat for payment, banks do not receive data on the merchant’s name and location. Instead, the bank record simply shows the recipient as Alipay or WeChat.

The loss of data poses a challenge to Chinese banks at a time when their traditional lending business is under pressure from interest-rate deregulation, rising defaults, and the need to curb loan growth following the credit binge. Big data are seen as vital to lenders’ ability to expand into new business lines.

I had written about this earlier on my blog about how intermediaries such as Swiggy or Grofers, by offering a layer between the restaurant/shop and consumer, now have access to the consumer’s data which earlier resided with the retailer.

What is interesting is that before businesses realised the value of customer data, they had plenty of access to such data and were doing little to leverage and capitalise on it. And now that people are realising the value of data, new intermediaries that are coming in are capturing the data instead.

From this perspective, the Universal Payment Interface (UPI) that launched last week is a key step for Indian banks to hold on to customer data which they could have otherwise lost to payment wallet companies.

Already, some online payments are listed on my credit card statement in the name of the payment gateway rather than in the name of the merchant, denying the credit card issuers data on the customer’s spending patterns. If the UPI can truly take off as a successor to credit cards (rather than wallets), banks can continue to harness customer data.

Banks starting to eat FinTech’s lunch?

I’ve long maintained that the “winner” in the “battle” for payments will be the conventional banking system, rather than one of the new “wallet” or “payment service providers”. This view is driven by the advances being made by the National Payments Corporation of India (NPCI) which is owned by a consortium of banks.

First there was the Immediate Payment System (IMPS) which allows you to make instant inter-bank transfers. While technology is great, evangelism and product management on the banks’ part has been lacking, thanks to which it has failed to take off. In the meantime NPCI has come up with an even superior protocol called Universal Payment Interface (UPI), which should launch commercially later this year.

There is hope that banks do a better job of managing this (there are positive signs of that), and if they do that, a lot of the payment systems providers might have to either partner with banks (the BookMyShow wallet is already powered by RBL (the artist formerly known as Ratnakar Bank Limited) ).

In the meantime, banks have started encroaching on FinTech territory elsewhere. One of the big promises of FinTech (and one I’ve participated in, consulting with two companies in the space) has been to ease the loans process, by cutting through the tedious procedures banks have to offer, and making it a much more hassle-free process for borrowers.

A risk in this business, of course, has been that if banks set their eye on this business, they can eat up the upstarts by doing the same thing cheaper – banks, after all, have access to far cheaper capital, and what is required is a procedural overhaul. The promise in the FinTech business is that banks are large slow-moving creatures, and it will take time for them to change their processes.

Two recent pieces of news, however, suggest that large banks may be coming at FinTech far sooner than we expected. And both these pieces of news have to do with India’s largest lender State Bank of India (SBI).

One popular method for FinTech to grow has been to finance sellers on e-commerce platforms, using non-traditional data such as rating on the platforms, sales through the platform, etc. And SBI entered this in January this year, forming a partnership with Snapdeal (one of India’s largest e-commerce stores).

Snapdeal, India’s largest online marketplace, today announced an exclusive partnership with State Bank of India to further strengthen its ecosystem for its sellers. With this association, Snapdeal sellers will be able to get approval on loans from financers solely on the basis of a unique credit scoring model. There will be no requirement of any financial statements and collaterals.

Sellers on the marketplace can apply for loans online and get immediate sanction, thereby enabling “loans at the click of a button”. This innovative product moves away from traditional lending based on financial statements like balance sheet and income tax returns. Instead, it uses proprietary platform data and surrogate information from public domain to assess the seller’s credit worthiness for sanctioning of loan.

Another popular method to expand FinTech has been to lend to customers of e-commerce stores. And in a newly announced partnership, SBI is there again, this time financing purchases on the Flipkart platform.

State Bank of India, the country’s largest bank, announced a series of digital initiatives on Friday, including a first of its kind partnership with e-commerce giant Flipkart, to offer bank customers a pre-approved EMI facility to purchase products on the retailer’s website.

The bank, which celebrates its 61st anniversary (State Bank Day) on July 1, said the objective was to provide finance to credit worthy individuals, and not just credit card holders. The EMI facility will be available in tenures of six, nine and 12 months.

Just last evening, I was telling someone that there’s no hurry to get into FinTech since it will take a decade for the industry to mature, so it’s not a problem if one enters late. However, looking at the above moves by SBI, it seems the banks are coming faster!