PayTech in India

Well, thank you Krishnan

for being with us today. Sure, most welcome and it's

a pleasure to be here. Thanks. So in the previous

videos in this module, we have talked about

Fintech market in Kenya, where the level of

development in technology is relatively low so as the level of the

financial infrastructure. For this interview,

I like to talk about the very different developing

market in Fintech, talk about the Indian market, where similar to Kenya, the development for the financial infrastructure

is relatively low, but being traditionally

a IT country, that level of technology

is much higher. India also had a

huge Fintech boom and many people would say that they actually have leapfrogged many developing

countries particularly, in the payment sector with new developments like the

United Payment Interface. So for the learners who are not familiar with the Indian market, would you mind giving

us some background on the Fintech developments, particularly in the

payment sector in India and how this leapfrog

might have happened? Yeah. Sure. I mean, India is a very interesting

market digitally. The concept of leapfrogging, by itself, is not new. You are correct, India is one of the booming market

for Fintech today, especially in the payment sector. I can see a lot of usage of Fintech mobile-based payment in India that we don't see it here in developed markets in the US, I will give you some examples. But going back to your

leapfrogging point, this is not the first time. In the sense, if you look

at developing economies, especially like India, the

leapfrogging happened, for example, in the

telecom sector. They had no reason to go and

lay the copper wires and do a wired connection to get the telephones because they directly leapfrog

to mobile phones, because they relate and they didn't make sense to go the route a developed market went. Now, with the penetration of more than a billion cell

phone users in India, they certainly, again,

have leapfrogged in the payment systems. If you look at the number of transactions that's

going on with the P2P, or with mobile phones, or the P2 conjoined firms,

business firms online, also retail, physical stores, you can do direct and

instantaneous transfer of funds. That's quite amazing. They're totally leapfrogged

the plastic cards that we are used to in

the developed markets. Again, there is no big reason to bring on the next

of 300 million, 400 million through

plastic cards when you can directly get them hooked on

through your mobile phones. Great. Thanks. So

the way I see it, so in Kenya where we talk about the M-PESA being a very

good Fintech innovation, you really had the lack of

financial infrastructure being addressed by the application of very sound

business principles. So in India, the way

I see it is that the relative lack of financial infrastructure

is really complimented by the advancement in technology

and digitization, right? Yeah, absolutely. I mean, you're right. I mean, India has a

lot of tech talent, that's a big advantage, I think. There are three main

reasons why India has become so important and leapfrogging and becoming one of the hot market for Fintech payments and

Fintech in general. Number one, I would just

start with the scale, the scale and

opportunity in India, the billion people and the size of the

market are too huge. So scale means also

you need to move fast. For the Indian economy to grow, you certainly needed

something like, we can't depend

upon the old way of either connecting

phones by wires or by going through the credit card mechanism

ref doing payments, so that's not feasible

to work with that scale. I think, the second piece

is what you mentioned, I think, is the tech talent. The country itself has got a lot of confidence working

on tech projects across the globe and there are

prominent tech entrepreneurs who have deep knowledge

of the technology and how it can be applied and how solutions can be customized. I think then the third I

would also emphasize is the role of government because

the Indian government, it started placing

significant importance on digital technology

to first use that for identification like the earlier UPA

government launched the identification of other

bio-metric identification of individuals for a

billion people which is never seen the rate

that is ramped up. But Prime Minister Modi and the current

government actually made digital transactions

as a priority. So it's not just the financial

infrastructure quality, even if we had banks and

financial infrastructure as it was in any other country, but the government, if you look at how they set up, first of all, the other to identify bio-metric every

individual, number one, then they set up this National Payments

Corporation of India which is a non-profit entity setup with the help of the Federal Bank

which is the Bank of India. But we had the top 10 banks basically behind

this organization which is a non-profit entity. We just basically commissioned to create this massive

clearing house for retail payments and payments

on P2P and P2 business, online business,

offline business, and that does paid

off significantly because that organization, NPCI, came with this

platform for the UPI, the dimension where Unified

Payment Infrastructure, which basically made

this platform agnostic to devices and then

through an API mechanism, anybody can, with the UPI ID, you can actually connect to

this platform and then get the claimant's done

almost instantaneously. That, I think, it was a major

breakthrough in terms of making digital

transactions possible, mobile transaction

instantaneously. Not only that, and

then on top of that, you also need to see demand because this is a network effect, these are all ecosystem place. One particular company cannot generate, really make the change. You have to create the

platform and then you have to sync appropriate points of demand for usage of that

particular technology. So that's what has

happened in India. So it's the role of government, it is a tech talent, in fact, some of the tech entrepreneurs have been coming out of

the business experience in tech industry and

applying their tech as a solution for economy and

countrywide problems like Mr. Nandan Nilekani who has been very influential in

the other scheme and then also working further in terms of how to put

other into to use, because there are a lot

of key initiatives from the government which has

made this payment very easy, and then see the demand too, for people to connect. Then, also, inclusive

capitalism is very important in India

because millions of people were actually unbanked, I mean, hundreds of

millions of people. So the government, Prime

Minister's emphasis on creating this bank

accounts for people unbanked, mandating almost every bank to cover few hundreds of

millions of people, that just going to work very well to bring all these people in the bottom of the pyramid

or towards the bottom of pyramid into the formal

financial system. Then, with the penetration of mobile phones, billion people, and they'll make the interface to make payment work easier, then it just start

catching from there. Well, thank you for

offering your insight on these success factors. So I want to move

deeper on two of them. So let's first talk

about the government. So in addition to the Aadhaar and the [inaudible] initiative

which is about- The prime and associate. -the mobile for the

unbanked population, there's also a demonetization that happened in 2016, right? Do you think that has helped? Absolutely, in fact, it certainly has helped because

the demonetization, while the government

had different, I don't know, objectives

or demonetization. But the demonetization certainly brought the market

into shortage of cash. In fact, I'll give you a

very interesting example. At Michigan, we work

closely with one of the largest private sector bank called ICICI Bank in India. So ICICI Bank was always

known for being at the forefront of

bringing technology in the financial services sector, not just today but

even 20 years back. That's one of the

reasons I actually really like to study them because they do regressively

apply the new technology. So this bank, almost

more than 10 years back, just as an experiment, the actually kind of a particular village

in Gujarat State, they actually picked the

village and then want to do an experiment of how does it look if we completely

digitized the payments? Make it as digital

payment village? Like they don't do any

cash transactions, they're able to do all

transaction digitally. So the bank invested

and enabled this as an experiment to see what

happens, just to study. So they left it. This was about 10 years back and they forgot

about it and said, "This is an experiment." So when the

demonetization happened, countrywide there was a crisis, because the prime

minister on our state and then banks were shortage of cash, people were worried, there

were long lines behind every branch for people waiting for cash

because they had, and basically a lot

of chaos, right? They found that this village is fine because this village was not dependent on cash at all. So this came to that until the CEO of the bank and the senate really

wanted to initiate, "Wow, this is great. Let's go back and do

this for more villages." So the point is,

demonetization did certainly took the focus more into digital payment and people started

asking themselves, "Well, if I can just

do it without cash, I will." So it did help. You also raised a very

good point here about the relationship between technology and

financial incumbents. So here, if we look

at the Fintechs and innovators in the

developed market, a lot of them view existing

players like banks as enemies to be disrupted

or disintermediated. Yes. But in India, it's

actually the opposite where many of these

technology innovators actively partnered with banks to compliment their business

practices with new technology. Yes. So do you see that model has a role here

in the United States? No. I think it's a very

important point that you raise because this is an

ecosystem play. I mean, there has to

be something for both. In India, first of

all, the way NPCI, that is a clever

rate who set it up, because NPCI, behind it, it had all the 10 top banks. So that was a major

cleaning house with the top 10 banks behind it. So these startups which are actually the digital wallet

or the payment startups, they are connecting with that

platform, and obviously, they were not substituting

for the banks. Sometimes we're actually

building on the bank accounts and then we're just

enabling them to make payments on the digital. So it's an ecosystem play. It's a riding on a platform

that is available, not directly competing with them. In some place, you are

taking the transaction, but we're still working

on a common platform. So that is very important. In fact, Paytm kind of

wallet for largest, fastest growing digital

payments in India. Now, you see they've

grown so fast. Citibank, I just saw in some news item that Citibank

has actually partnered with them to co-brand a card with Paytm because they want that Citibank is

invested at cards, and then they get co-branded, they have millions

of customers and then it works in both ways. So it's just also for the

banks to go and partner with these startups to make

this work as an ecosystem. Number 2, I think it is also important for both

existing financial institution players and the

government to constantly seed the demand opportunities too for the network

externalities to further work. Because for example, the

Iceberg and the IndiaStack, which is basically a

bunch of tech solutions. It's nothing else but the

unique identification device, basically on all our

bio-metric as a platform. Then, on top of the

build a set of APIs, contextually for education

or health care, for retail, and for insurance, so

that people can then use that identification

and then connect it back to the UPI based payment. So what you're doing there is seeding a lot of demand

so that there is enough opportunity

for both to play and display the payment clearance

now is phenomenal rate. It's almost real time, and it now allows you

to do P2P efficiently, and then P2 Online vendor, and then P2 Offline vendor. I can see in a market like India, there are of course,

established big retail players. There are just millions of small Khurana

stores, retail play. It's common in economies

like India and China. The retail is not

only the big players. This is, I mean, in fact the phenomenon

unstructured retail. What they've done

now, the QR code, can actually enable P to

this physical retailer, it can easily make it's payment. If I'm just buying, I don't know what even small

groceries or snacks, that I can pay because

we have a QR code, I just take the QR code

and then I can pay. I can do the payment

on digitally. So that's very important. So before this to be coexistent, that's why I say ecosystem play, you could exceed

the demand and then make sure that they coexist. All right. So the difference

between that system, the QR system in India and the QR system

in China is that, in China the QR code is tied

to a particular developer. It's tied to either,

Alipay, [inaudible]. So before I use both, you can use two QR codes. So in India, you're

saying is that there's one QR code for all

these payment verticals. Yes. You will give the QR

code and indefinitely, practically and then with

QR code they can make the transactions and

that's very important. In fact, more recently, it's actually what they're doing, which is very innovative

concept in India, which is out to the public now. They are actually calling

this concept of what is called as the Digital

Data Aggregators. Let me tell you about

the new innovation. I mean, it's just

being announced now and they are now talking about a concept of

this Digital Aggregators. I mean, in this digitization

as we all study, known for passion of

[inaudible] transform business, or absolute consumers and especially the data

about consumers. So far, whether you look

at the developing markets, we have not seen

the digitization, the tons of data

that's available. I mean, this data about

consumers and the transactions, it's being put to

use by businesses. A lot of businesses are using it for improving advertisement, selling more to you as a

customer. You know what I mean? But we have not seen

this data being put to use for the benefit of the customer by the customer. So it's now the firm

that is using the data. So with this national

payment corporation, this is UPI platform, what they have is think

about it behind they have all the data about

the transactions, who's paying whom what,

and things like that. Now, that data is not

available directly to the consumer or it is available in

pieces to the business. Think about it. Let's assume I have a

small entrepreneur, small-medium business in India, small entrepreneur,

I'm selling something, I'm doing digital payments, I've got some few suppliers, I'm doing something and there are few customers having transaction, but now, I do it in digital. There is footprint available

in terms of what I'm doing, but the data is not

captured in a unified way. What they are talking about

is a digital aggregators. There's actually these

companies or these roles would be to suck the insights of

this particular business. What are the different

transactions? Then, convert that insights

into useful information for maybe helping me get a better loan because the set of transactions

actually gives you some analytics about the volume of a business, the

quality of my business. So even though I may not

have physical collateral, I have this information. On top of the

collateral that I have, this information can be added

to empower the consumers. The consumers in this

case is the business. So the business

could be in part to use their data for

their benefit to go and present that to a banking

institution to get loans, which was not possible before. Without the digital payments, I was doing transactions but all physical and

then it's all last. Now, we have an opportunity

to pull this all together as a central place and convert that into insights

to empower the consumer. That's a very

interesting concept. Because even here, we know

that Facebook has your data, my data, Google has

my data, your data, and they all use it for

benefit of their business. So we're not seeing

where they can use it for the benefit

of you and me. That is what this is all about. So a lot of our viewers are from the developing markets

where the lack of financial infrastructure

actually represent a big opportunity for both new and existing

Fintech players. So could you give some advice to our viewers who might

want to introduce markets with new

Fintech solutions. Yes. I think it's a good point. There are developing markets where there's the

infrastructure is not there. I mean, there is a

big opportunity, but I would be careful and select markets where you do see some involvement

of the government. That alignment is very important. As an example I gave you about India, one of the reasons now, the Fintech market in India

is attracting so much of startup money from South Bank and all these places because

that is very important. Fintech is an ecosystem player. You need the businesses,

you need the consumers, you need offline business, online business, all of

these things together, coming together to

benefit each other, and that has to be in some sense acknowledged and

supported by the government. So I would advise that, look at what the

infrastructure is or the opportunity spaces or the role of government is, how

committed they are. These are the forces that are very important

for you to be successful. Well, thank you,

Christian, for sharing your insight with our learners. Awesome. Thank you.