Demonetisation is a lost opportunity for digital payment providers

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The move made by Modi to Demonetise 86% of the notes in circulation might be a move that was triggered with various interests in mind. The one thing that it has undoubtedly made many Indians do it use digital payments. I was speaking the other day to one of the managers at National Payments Corporation of India (NPCI) and he was telling me that the numbers of transactions have spiked many folds!

For those who do not know NPCI is a quasi government body that creates the standards such as IMPS and UPI using which many of the online transaction networks function.

Yes digital payments and transactions are spiking to new levels.

This was quite possibly the best opportunity to transition the vast majority of Indians who are currently dependent on cash transactions for the most part to digital payments. Are we really doing what is necessary?

 

Let me share an incident that happened:

I had to travel to Mumbai the day after the demonetisation scheme was announced. When you land at the international airport in Mumbai for some reason they change a toll only in cash. I did not have any, so the Uber driver paid for it. We did not find a single ATM on the way which could dispense cash and hence upon reaching my destination I asked my driver if he has PayTM so I could transfer him the money. He had the app installed but did not have an account. I asked him to create an account. He looked at me uncertainly. He proceeded only to get stuck at the point where the app asked for him to put in a password. He did not wish to set a password in English, he was afraid he would forget it. PayTM does not offer the choice of any other language. So after much goading he set a password and I was able to transfer him the money.

Seems like a minor oversight; but affects Millions if not a Billion people in this country.

 

Arguably e-wallets have a critical role to play in this context since there are a lot of small and micro payments for which using the card (credit or debit) does not make a lot of sense. Besides there are a lot of small businesses and stores that do not possess the infrastructure necessary to (PoS Machines) to process payments using cards. In such cases it is very easy for the merchant to get up and going & start processing payments.

If this was the opportunity straight out of a dream, all of the wallets have blissfully squandered it away.

The most significant error in judgement that was made when all of the VC firms came rushing in to setup shop in India was to assume that India was going to be next China. India is nothing like China, with over a 100 languages, poor digital infrastructure and still poorer adoption of digital payment services; India was and still is nothing like China.

As of 2012, the best estimates put a population of 125 Million English Speakers in India. For the sake of argument let us assume that this number has grown to 200 Million today. That still leaves aside 1.07 Billion people, who do not know the language.

How many applications do you use which have a non-english version?

This was probably one time when almost every Indian has had the need to rely on digital solutions in order to make sure their lives were not hindered greatly. Under such circumstances, it is a priority to ensure that all of the solutions are able to cater to the needs to all Indians, English speaking or not.

It seems rather sad that someone like Vijay Shekhar Sharma who himself came from a Hindi medium school did not see this need. The only wallet website that at least makes an attempt is Mobiqwik, which translates ONE page on the site to Hindi. All of the other wallet or payment applications continue to be exclusively English.

As English literate technology savvy Indians take advantage of technology and make things easy for themselves, a vast majority of people in this country cannot access these services because of language barriers.

I would have expected these wallet companies to translate their apps to 30 languages over the course of a week (at least on Android) and send teams of people out with missionary zeal to convert as many merchants as possible to wallet users. For the merchants everyday is a lost opportunity and hence they would have embraced and also taken the time to educate their customers of the product to make transactions possible.

But that is not how it played out. There companies continue to target an English speaking audience and make a whole host of payment processing solutions possible for English literate customers alone.

We in the “Startup” universe need to start looking at this entire nation. To start looking beyond what is “low hanging fruit” and can be targeted through Google AdWords alone. We need to start building solutions for the people of this nation, in all of their diversity and limitations.

You can build a billion dollar enterprise by making a million people pay $1000 or by making a billion people pay $1. There has been a preposterous degree of focus on the former. While the possibility of the former going from paying $1000 to $2000 is limited; the possibility of $1 going to $10 in incredibly high.

What kind of company do you want to build?

 

Demonetisation – Why has no rich man committed suicide?

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Before we get into the details of Demonetisation and the how and what of it, I think some basic understanding of economics is very important. Economics is a vast subject based on the study of the relationship between man and money. Humans behave in a rather irrational manner and economics tries to put structure to this behaviour. In my personal opinion economics is as vague as psychology.

Nevertheless…

 

Demand and Supply are fairly easy things to understand. There is a certain level of demand for every product. When the supply is greater than demand, prices go down and vice versa.

The Indian Rupee was pegged at Rs. 66.9 to a dollar when the demonetisation was announced, it is currently doing about Rs. 68.1. The move to demonetise meant that a lot of people wanted to move their black money to gold. This caused a sharp rise in demand for black market gold which is imported using US Dollars. Therefore the demand for Dollar rose and the price went up!

 

Inflation is the rate at which prices rise. This is measured across a basket of products in the economy. The price rise for different products tend to be different based on the rise of input costs. When fuel prices go up, the price of almost everything goes up, since most goods need to be transported.

Inflation also makes your money less valuable tomorrow than it was today.

When I came to Bangalore in 2005, I could get a Dosa for Rs. 15 at any of the shop. Today, the same Dosa costs about Rs. 30.

If Vivek in 2005 had promised to pay Rs. 15 to Vivek in 2016; Vivek would not be able to afford a Dosa in 2016.

Prices do not rise at this rate normally. Inflation in developed economies tend to hold at around 1% – 2%.

The last decade was unique for India. India has forever subsidised fuel across the country and the government has paid for it. This used to be a huge line item in the budget. In 2010, Manmohan Singh decided to lift oil subsidies on petroleum products gradually. So the artificially lowered oil prices began to rise. Petrol prices at the pump were brought in line with the international market rates. This is why you see Petrol prices change every other week now, in line with international market fluctuation.

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In the aftermath of the recession of 2008 oil prices across the world began to rise precipitously. The government was certain that it would not be able to foot the oil bill for long. Hence the move to lift subsidies was made. As a result, we wallowed with inflation that bordered 10% for half a decade. It was necessary pain that we had to go through.

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Money – The Holy Trinity

Money and its circulation in any economy is greatly controlled by three institutions.

The Central Bank – Controls the issue of money as well as the monetary policy of the country. They are the people who set the base interest rates for lending as well as a bunch of dull sounding ratios. All of these numbers have a huge impact on the economy because they govern what banks can do with the money they have as deposits.

Interest Rates – The interest rate is a very important tool because this not only governs the rate at which the bank is lending to you and I, or to other businesses but also amongst themselves. Borrowing happens when you can get value that is much greater than that money that you will have to give up as interest. The lower the interest rates the more borrowing will take place.

People invariably borrow to buy high priced stuff or to invest in business. This results in increase in consumption and hence the GDP. Unfortunately due to the demand-supply thing that we talked about earlier; increased consumption means higher demand and hence higher prices. Eventually, higher inflation.

The Banks – Banks as institutions were created to act as capital exchanges. There are those who have money and there are those who need money. Banks aggregate the money and make it available in the form of loans to individuals and businesses. They are essentially in the business of debt.

The Stock Exchange – Stock exchanges are places where price discovery takes place for equity. The equity is always liquid as long as a buyer can be found. The market is supposed to factor in all of the information available and determine the rate of risk and hence the price. (At least in principle, I think it just factors in all of the emotions around a company and prices that in) Unlike debt, equity is a game of high risk and hence potentially higher returns.

So if we had a risk-return spectrum; banks are at one end of it and equity markets are at the other end. But in between there are 50 shades of grey. Finance people being finance people, keep inventing financial instruments. One such examples is Bonds which is debt, but with rates that change based on the market conditions. The deeper you dig, the more complex they become.

 

Currency – Currency is a state subject and each central bank can determine how much of it and in what form it gets introduced into the economy. The notes that we carry around are essentially promissory notes issues by the central bank, in our case the RBI; promising to provide the bearer the equivalent in Indian rupees. All bills of exchange or money as we like to call it are the same – promises.

Economy – The way an economy works is money keeps getting rolled around and exchanged. Let us say I have Rs. 100. I went and bought 4 kernels of popcorn at PVR (because that is how expensive it is!). PVR took that money and bought 400 kernels of popcorn and paid the company that supplies it Rs. 100. This company further buys corn from the village aggregator at Rs. 50 and he pays the farmer Rs. 10 to source.

At this point if these were the only transactions that took place in India, the GDP for India would Rs. 260. Same money, cycled over.

The money in circulation is subset of the GDP

 

Brings us to Demonetisation – The Indian government basically said, those old promissory notes that I gave have been copied to no ends. Terrorists are using it and some people are also holding on to it unaccounted for so we will take all of that back and issue now promissory notes. Cool!

All good till now.

 

So I have been looking at the news and reading a shit load, for and against, demotisation and this is what I am seeing based on the evidence available.

This all begins when Modi got elected to power. Manmohan Singh had already appointed Raghuram Rajan as the RBI Governor and since the position is tenure based, Modi has to deal with him.

Modi got elected to power on the promise of growth and prosperity for the nation. It is imperative that he is able to show great growth in order to win the next elections.

Raghuram Rajan (RR) took over the governorship when the Rupee was crashing like a hard rock in water. If you see the decimal point on the graph below, that is the day before he took office. As is evident, he did a marvelous job controlling the currency movement.

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His point of view was that, the falling currency is symptom and not the problem. The problem was the banking system and the way in which the nexus between the rich and political class has resulted in some of the biggest banks in India (all of which happen to be government run) giving away a lot of bad loans. This has resulted in there being a lot of supply of money in the economy and hence a depressed value. All of this needed cleaning up in order for the economic engine to work again.

He began by increasing the interest rates in order to curb inflation. Inflation tends to make the currency less valuable and since we buy a shit load of oil from abroad, the budget would go out of control if the currency is not curbed. He further mandated that all of the banks clean up their balance sheets and that instead of issuing more debt, they get the non-performing assets to perform or clear them from the books. In other words banks had to call back the loans that they had issued to industrialists which were not being paid back or take a loss on account of their inability to do so.

 

Mallya was singled out and chased, he was an easy target. Many others were not subjected to the same scrutiny.

 

With the increase in interest rates money supply in the economy dried up and the inflation which was floating around 10% came down to 5%. There was not only less money going out as debt, banks were calling back debt which meant that even less money was available in the economy for investment.

Part of the reason, the inflation came down was the higher interest rates but also last year oil prices went from USD 120 to USD 30 in the space of a few months. In case the prices were to go up due to any geo-political reason, the inflation could shoot up again.

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The government had been fighting a losing battle with RR for a couple of years to lower the interest rates. He thought it was essential to keep the inflation in check and take more time to clean up the banking system before releasing the interest rates. This would also give time for geo-political factors to settle down.

 

This did not auger well for the promise made by Modi. No investment, no growth!

 

Hence Raghuram Rajan was Fired! He was not willing to co-operate and the government wanted to make a move on interest rates to push growth. He went back to Chicago to resume his teaching position and Trump got elected! Talk about jumping from the frying pan into the fire!

 

Back to India.

In the meantime International Rating Agencies had cut ratings of the banking sector in India to ‘Negative’.

Fitch in particular said

Though the government is committed to inject $7 bn of capital in public-sector banks by FY19, out of a budgeted investment of $11 bn, but Fitch says the government or other related entities are likely to have to inject more funds because it estimates the banking system needs around $90 bn of capital while many public-sector banks are likely to find it difficult to access new capital from other sources.

USD 90 Billion is about 6,00,000 Crores; where do you find money like that!!??

On the first two days of demonetisation SBI collected Rs. 53,000 Crores.

Presto! In the next few days, bad loans were wiped off the sheets!

 

So the questions that struck me was:

Why are none of the rich people who might have a lot of black money (cash) committing suicide?

Demonetisation was announced and you may have read about a lot of rules regarding the amount of money an individual can deposit, inking, etc. Have you heard of any limits for companies?

The PVR popcorn, I referred to cost Rs. 250 a tub. On a normal day, they would collect tens of Lacs in just concession stand sales. You cannot possible tell them 2.5 Lacs and then done! So a lot of black money that rich people have, might actually be getting funnelled into company accounts AND they will have until end of March to spend it as well in order to avoid taxes!

I have had the opportunity to visit 5 cities across India is the last week, with not a single penny in my wallet! I see so many people standing outside the banks and do you know who I see? The salaried individuals who are standing in queue to deposit money into their accounts. Their hard earned money, that they hope not to lose.

In the meantime, the small darshini’s that sell Dosa and Coffee seem to be empty. All of the small retail business have lost a huge percentage of their income. I have been putting up a lot of posts on facebook about what a breeze it is drive around Bangalore since the Demonetisation took place. Truth be told, fewer taxis are being hired, fewer autos are getting rented and fewer e-commerce orders are being placed (60% of all orders are Cash-on-Delivery).

The unorganised sector cannot work at all since they depend on daily wages and all of it is in cash. Construction has all but grinded to a complete halt.

People do not react well to uncertainty. They tend of want to know that they will have certain things that they can depend on. Consumption declines the moment you introduce uncertainty and that is what is keeping the malls and retail stores empty. The way and manner in which this entire episode has been handled, we all can agree that it would take a while before we are able to get back that confidence.

The idea was to remonetise the banks and clean up the balance sheets and that may have been achieved. At the same time a by product has been the tremendous slowing down of the Indian economy. If I am right and a huge amount of black money is being funnelled into current accounts, the investment of this money during the first quarter of 2017 might make up for the slowdown. Only time will tell.

In all likelihood, I think that the GDP would contract this year. The last time this happened was in the 1970’s and we were at war with Pakistan.

Speed, Trust and Belief

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The other day I was driving out of town. It took me about 45 minutes to do 15 Kms inside of Bangalore at 4 AM. There was no traffic on the road. Once I got out of the city though, I was able to drive a lot faster and covered the next 200 Kms in about 2 hours.

For those who are intimately aware of Bangalore, the roads in the city are not great. It is not that I could not have driven faster in the city, it is just that I did not trust the roads enough. As soon as I would speed up, a pothole or some undulation would appear forcing me to brake. More fundamentally, not knowing where these surprises were going to pop up meant I did not trust the road ahead. As a consequence of this I did not cross 60 Km/hr while driving within the city.

People do not like uncertainty.

To the contrary once I got onto the highway, I kept getting faster and faster. As I started driving on the highway, I was cautious for a period of time. As I noticed that the road was more predictable and no surprises were in the offing, I forgot the bad experiences within the city and sped up. I trusted the road that lay ahead of me; This trust in the highway allowed me to speed up and stick to it.

Your ability to go fast is directly proportional to your trust/belief in what you are doing.

When you are driving if you do not trust the next piece of road to be safe you will not be able to commit to speed; If you are running a business and you do not believe in what the company is doing, you would not be able to grow fast.

When you run a company trust manifests itself in the form of belief.

If you are put in a situation where you are left selling your product to someone who is ‘sitting on the wall’; your ability to sell will depend on how strongly you believe in your product. If you really think that this product is worth every penny and that it is going to make a positive change to the customer, you will sell it to the best of your ability. And most often your will succeed at it as well.

What did Steve Jobs bring to Apple? Not knowledge, not technology, he brought belief.

Your  ability to achieve what other call the impossible is greatly accentuated by your belief. This is the reason, in certain cultures, people walk on fire; they believe that they will not be harmed.

Starting a startup is hard. It is like walking on fire.

Do you believe the activities that you are pursuing with your startup is going to change peoples lives positively?

Zoomo – The beauty of PR

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Have you ever heard how the PR folks are excellent spin doctors, this is precisely the story of Zoomo. The PR guys made martyrs out of a suicidal group.

In India, they wanted to create a platform for used car sales. Selling used cars is probably a staple business in most countries. You have to have really poor business acumen to not be able to sell used cars. Hell, if Olx can have used underwear being sold on their website, used cars should be a cinch.

Instead, the protagonists here failed to find sufficient traction and returned the money to the VC fund. Good for the fund. Bad for entrepreneurship.

The fundamental tenet of entrepreneurship is to keep trying. No company would have ever pivoted, had they given up and returned the money because ‘data did not support them’.

These guys built something, expected it to be a walk in the park, which it was not. They gave up.

This kind of entrepreneurship should not be idolized.

They gave up!

Don’t. Keep trying.

Transportation is being disrupted

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Shots fired – Transportation is about to be disrupted and millions are about to loose their jobs.

I have maintained for a long time that the next big wave from the perspective of making money is going to be transportation. Or as I more broadly like to call it #MovingAtoms (things and people; on earth and beyond). I had spoken about the same during my TEDx talk as well.

Startups are businesses that possess an asymmetry between business growth and human resources.

The reason for the same in simple. When you buy a product and want large numbers of it, economies of scale kicks in making the price go down. Human resource, is finite and as you seek more of a kind of skilled resource, the cost of hiring the resource goes up. To make matters worse, they unionise and create more problems and use their negotiating power to undermine margins.

Most startups that have been active in the movement segment have suffered from the lack thereof. A food delivery startup is forced to recruit large numbers of delivery boys as the business scales. This makes the business financially unviable as cost goes up. Cab hailing companies have found a way around this problem by treating drivers as contractors. It would only be fair to argue that although this has helped the companies scale up quickly it has not been free of its own set of challenges.

In order to truly create a startup you need to automate the most critical task in the operations of the business

Travis Kalanick is painfully aware of the same and hence self-driving vehicles.

Legal Troubles

The legal issues that Uber has been facing across the world are unlike any that any other company has ever faced. Why?

Do you know any company that went from zero to having a MILLION people working for them in 7 years flat??

Uber operates in 76 countries and in a total of 473 cities across the world. This is the kind of scale that no business has ever been able to achieve in such a short period of time in business history. This has disruption written all over it already. The map below shows the geographical spread of Uber.

Startups Club Post

Unfortunately for Uber, transportation is a segment that employs and serves a lot of people. These people have not been very happy with a new kid showing up and dictating the rules. Not only that, taxi services are highly regulated across most of the western countries. People who were at the top of this industry had lobbied for years and held that position. They suddenly found themselves losing their grip.

They were bound to mark their territories and fight for it.

At its heart Uber is nothing more than a ‘Demand-Supply’ platform. It connects the demand for transportation with the supply of cabs that are available in the city. They try to maintain a minimum quality of service on the supply side.

Angry people protest and sue in the civilized world. Hence, Uber has been protested against and has been sued. A lot. It has been sued so much that there is Wikipedia page on the number of countries and the number of issues that they have been sued over. Uber has cases running in 30 different countries and they have multiple issues to deal with in countries like India, Australia and USA. Everyone wishes to draw the boundaries inside which Uber must operate and the company has been openly defiant about obeying.

Why?

Because Travis Kalanick knows that these issues are temporary and in the long run, Uber will be a perfect startup. A business that scale asymmetrically with relation to manpower.

Technically, Uber can be called a startup even today; but the sheer volume of drivers working with the company has resulted in a myriad set of issues that the company must deal with. Although these drivers are contractors and not employees, their volumes mean that they can demand to be treated as such.

Self-Driving

Uber knew that in order to be able to automate their operations, they need to be able to get rid of the drivers who are the heart of the operations today. In order to do that, the move towards self-driving cars was imperative.

A little more than a year ago, Uber announced a strategic partnership with Carnegie Mellon University. The company lured away most of the researchers from CMU to head the self-driving car initiative. Some went on to describe the deal as an agreement between the fox and the henhouse.

Uber made two very interesting announcements yesterday which prompted me to write this piece. The acquisition of a company called Otto, engaged in making self-driving trucks. Not only that, they appointed the CEO of the company head of Self-driving vehicles at Uber.

Uber also announced that they are going to start providing service through self-driving cars! The service will be piloted in Pittsburgh and they will provide Volvo SUVs to cater to the customers. Uber has signed a $300 Million deal with Volvo for these cars.

Obviously self-driving technology has not reached perfection and hence one engineer will be always present in the car. The car will also hand over control to the human when crossing bridges since those are hard for the software for now.

So what now?

On the surface it seems like Uber is going for the kill and planning to leave no stone unturned as far as bringing self-driving technology to the real world is concerned.  The undercurrents though are even more interesting.

Cab rides are but one part of what Uber is going after. They are actually going after all kinds of movement. One of the key points in the Bloomberg article which broke the story and also what has been a part of the vision statement released at the 5 year anniversary of Uber is the reduction of parking requirements. These cars will not stop at all.

They are not just going after cab rides; they are going after everything.

  • Transporting people
  • Transporting products
  • Transporting food
  • Transporting goods (autonomous trucks)
  • Inter-city buses!?

Uber wants to dominate all kinds of movement. So what?

Change

We are at the precipice of a huge change. Autonomous mobility is coming and it will change the way businesses work; once again. The paradigm of how things and people get from place to place is going to change altogether. The degree of change that is going to be introduced will be comparable to the introduction of smartphones.

While Uber wants to dominate all of the segments of #movingAtoms as I like to call it, this change introduces opportunities.

If Uber is going to have autonomous vehicles on its app, I am certain all of these vehicles are not going to be under the ownership of Uber. There will be a huge fleet management business which will arise, who will buy these cars and deploy them on Uber.

There are also going to be a lot of other companies including Ford, GM, Mercedes, BMW and the likes who would like to bring their own platforms. The platforms will be necessitated by the fact that individual buyers are going to vanish quickly in a world of autonomous vehicles. The pride of owning a car will no longer exist.

Aggregation of these platforms will become an interesting play.

The same kind of play would be interesting from an inter-city trip perspective as well as from the perspective of goods movement.

It is one thing to source demand for cabs and its another thing sourcing demand for trucks. You could buy entire truck load or you could choose to buy a portion of it. Uber will get into this space but since they do not have a platform which is currently undertaking this, any startup which is able to build a viable product in space would be a prime acquisition target.

The way I see it, transportation is going to undergo a paradigm shift in how it functions. I think in the future the transport industry will resemble the film distribution space that we have today. Uber will be akin to the movie producers and fleet owners will be like the theaters that finally play the movie. The revenue share will be similar as well.

Can you think of business models you might be able to build on top of this?

What will happen to all of the drivers who currently drive for Uber?

Speed is exaggerated

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There is an excessive amount of focus on speed, when it comes to building startups. One of the advices that is often provided to startups is to get out of the blocks really fast.

The #FailFast philosophy has probably pushed more startups towards failure than towards success.

If you were building a house, would you want the foundation to be laid really fast? Or might you prefer that time is taken to ensure that the foundation is really solid?

A business is a marathon, not a sprint.

You can get out of the blocks fast; but then, what is going to keep the customers coming back to you? Continuously making yourself better is critical; that is what keeps them coming back. Customers will stay with you when you delight them, keep offering them something better and better to look forward to.

You get paid for showing up and making the product/experience better everyday.

A fast start is like a spark, continuous improvement and delivery is the fire.

Keep the fire burning.

Optimism

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Disappointment and Optimism are two sides of the same coin. Disappointment is a result of expectation not being met and expectations are a result of positivity.

Children cry often because they are optimistic. They have a sense of loss when they don’t get something. As we grow older this unbounded optimism dies; we just call it becoming an adult.

There are tons of books out there talking about positivity and the need to be positive for good things to happen. While that may be true, being positive comes with its share of being disappointed.

Most of us give up. The first failure; the first loss; the first heartbreak. Each of these takes a little bit of positivity out of us. The challenge as you are growing up is not to.