India Fintech gets on front page as Walmart and Amazon compete over Flipkart and Amazon leads Acko round.

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China normally gets the headlines. India is that other big market that critics say is always potential not actual. This all changed when two behemoths – Walmart and Amazon competed over Flipkart. Here is one big difference between China and India. India is more open to foreign capital. That is why you see Amazon and Walmart battling over buying assets to get into the Indian market with an acquisition that will benefit foreign venture capital (Softbank reportedly gets $4 billion from the deal) and why Alibaba is already big in India. This massive exit puts Indian Fintech on the front page.

This post describes:

  • Why Walmart is willing to pay $16 billion for Flipkart
  • Why the Walmart v Amazon battle in India is all about payments.
  • The Fintech market in India excites the big foreign players, but also forces them to innovate.
  • Alibaba and Flipkart was “the dog that did not bark”.
  • The Amazon moves in India and why Acko is important.
  • How e-commerce with an Indian accent may play out.

Why Walmart is willing to pay $16 billion for Flipkart

India’s e-commerce market, only about $38bn in 2017, is forecast to grow to $200bn by 2027 (10 years from now).Today e-commerce is less than 4% of the retail market in India, but the phenomenal growth of mobile phones in India is rapidly changing that.

Flipkart gross revenues are around $7.5bn, with growth around 50%. Net sales, after discounts, returns and cancellation, were worth $4.6bn.

Why the Walmart v Amazon battle in India is all about payments

The Flipkart i-banker must have been having a ball. Every dealmaker wants competitive tension and there is plenty of competitive tension between Walmart and Amazon. It is interesting that Alibaba was not seen in the bidding war – but we are getting ahead of the story.

Walmart and Flipkart don’t seem like a Fintech story at first, but:

  • Walmart is already making moves that give many bankers agita. For more, see this post on Green Dot The Underbanked And Bankers Worst Nightmare -Walmart.
  • Ecommerce is all about payments. The same is true for sharing economy services such as Uber and AirBnB, which we view as payment systems with a domain specific wrapper. These services work for both parties (buyer and seller) because payment is so easy. For more on how this is playing out in India see this post on The Social Wrapper Comes Off As Uber Competes Head On In Payments In India.  Payments is different in India because credit card penetration is so low. Flipkart won by dealing with that simple reality by enabling cash on delivery. However the payments game in India is very dynamic and fast-changing; this excites the big foreign players but also forces them to innovate.

The Fintech market in India excites the big foreign players, but also forces them to innovate.

We have written many times about Fintech in India. Here are all the posts tagged India. In short, India is a huge, fast-growing market, without a lot of tech legacy (making India a poster child for our First the Rest then the West thesis, outlined first in this post). Although the Indian government is open to foreign capital, it has been savvy about creating a payments playing field that will be beneficial to India and that will force all players (both foreign and domestic) to innovate. To understand this, look at what is referred to as the India Stack, with 5 key enablers defined below: 

Aadhaar. It is hard to overstate the importance of this. Without this, all the other enablers would only impact the urban middle class. Aardhaar really brings the power of digital to 1 billion people. It is an incredible achievement combining vision, tech smarts and drive.

Mobile leapfrogging. There are 900 million mobile connections and Indians spend 45% of their incomes on mobile technologies and platforms (Americans only spend 11%), because mobile is the main point-of-entry to the Internet (PC penetration is 5% vs 75% for mobile).

– Immediate Payment Service (IMPS). This is a real-time inter-bank payment system through mobile phones that is a) net payment (unlike RTGS) and b) works 24/7. It was launched by the National Payments Corporation of India (non-profit, Government funded) in 2010.

– Payment Bank licenses. This enables entrepreneurs to deliver regulated payment services without becoming deposit taking banks.

– Unified Payments Interface. This enables Mobile wallet interoperability (read this post for why this is so critical).

This shows how positive change can come from the right mix of public policy, new technology and entrepreneurial drive. Nandan Nilekani, a public spirited co-founder of Infosys was a key person who helped make this happen.

TL:DR. The Indian Government is ensuring a level playing field and lots of competition. That is what gives them the confidence to be open to foreign capital and foreign operators. There is unlikely to be any monopolistic networks effects player in the Indian commerce/payments market, whether foreign or domestic. So all entrants are welcome because choice benefits the consumer. 

Alibaba and Flipkart was “the dog that did not bark”

The global retail behemoths are Walmart, Amazon and Alibaba. The latter has also been very active in India. Yet in the Flipkart, Walmart, Amazon drama, Alibaba has been the story of the dog that did not bark (Sherlock Holmes story, what was significant was what did NOT happen).

This headline shows what Alibaba is up to:

SoftBank, Alibaba to invest $445 million in India’s Paytm E-Commerce 

Paytm is the leading mobile payments platform that is moving into ecommerce. This illustrates the thesis that value creation is at the intersection of payments and ecommerce.

Note that Softbank (the behemoth $100 billion fund from Japan) reportedly made $4 billion from the Flipkart deal. They clearly know how to make money in India.

Without an inside seat, we cannot know whether Alibaba took a serious look at Flipkart. What is clear is that India will be the first country where all three retail behemoths (Walmart, Amazon and Alibaba) will battle it out for market share.

The other behemoth that did take a serious look at Flipkart was Amazon. Did they lose to Walmart? Many have learned not to bet against Jeff Bezos. So the Amazon moves in India are worth looking at.

The Amazon moves in India and why Acko is important

Did Jeff Bezos play rope a dope on Walmart? Did Amazon help bid up the price to only jump out at the last minute leaving Walmart over-paying? The Flipkart journey has not all been smooth sailing. In February 2016, Morgan Stanley marked down its stake to below the price of its last fundraising round. Flipkart was losing money – a loss of $1.3 Bn (INR 8,771 Cr) in year ending April 2017. Losing money is not a big issue for a well funded startup in a massive market unless the problem was keeping up with Amazon in a price war. Don’t try to win a price war against Amazon. 

The headline is Amazon backed out because they knew India’s antitrust regulator would be a problem; their combined sales would have added up to almost 90% of India’s e-commerce market. Amazon India head Amit Agarwal has put out this quote:

“We are very happy with our organic strategy and the way it has played out. Our strategy has been to find missionary entrepreneurs out there with a similar motivation. We have made investments in Shopper’s Stop, Qwikcilver and Acko. We invest where we find synergies but overall our organic strategy is working fine.” 

Walmart spending $16 billion for a 77% stake in Flipkart is bigger news than Amazon leading a $12m round in Acko.  This section explains why the Amazon/Acko deal is so important:

Alibaba is a big player in Insurance via Zhong An (the first Insurtech IPO). This is where the intersection of ecommerce and insurance matters in a market like China and India and which is hard to understand if you only know mature Western markets like America and Europe. Zhong An got their start in an obscure corner of the ecommerce business – Return Shipping Insurance. Return shipping insurance for ecommerce is not an opportunity in America where Amazon covers shipping insurance directly. In China it is unbundled, leaving room for Zhong An to enter as an independent insurer. That is a big deal because clothing (which has a lot of returns) is the largest part of the $900 billion Chinese e-commerce market. Given the low product cost, the cost of shipping in China is about 20% of average transaction value. If the Indian market is similar, which is likely, insurance maybe the key to commerce. Smart move Mr Bezos!

Another message coming from the Amazon camp is working the relationships locally. When we first looked at Acko late last year, one observation was that the Acko financing was a sign of Indian venture capital formation:

“Look who funded Acko. Yes you see an American VC (Accel), but much more significant is the funding from Infosys founders (Kris Gopalakrishnan and Narayan Murthy via his Catamaran Ventures vehicle) and other angels in India (such as Venk Krishnan, Subba Rao, Hemendra Kothari, Atul Nicer, and Rajeev Gupta). This is classic capital formation, taking money from an earlier wave (Outsourcing).”

By working with local capital and local entrepreneurs, Amazon is more likely to win in India in whatever direction the market takes. Amazon and Walmart know how the American retail market works. Alibaba knows how the China retail market works. Who knows how the Indian retail market works?

How e-commerce with an Indian accent may play out.

India has an amazing ability to absorb foreign things, take what is useful and spit out the rest to end with something uniquely Indian. Think of the mogul invasion leaving the Taj Mahal as a homage to romantic love that tourists pay a lot to see, or the British invasion leaving a language that positions the country well for a globalised world and more recently the morphing of Michael Jackson dance moves into Bollywood.

There are two Western retail models – Big Box stores and centralised ecommerce. Both require a very smooth, efficient infrastructure that India lacks. 

The Walmart Flipkart deal – if it closes –  will be a big win for foreign investors including Softbank from Japan, Tiger from America and Naspers from South Africa and one Indian entrepreneur, Sachin Bansal. It will put Indian ventures on the front page.

It ain’t over till the fat lady sings. One month after signing the deal, Walmart is getting some roadblocks to closing. Getting big deals done is hard in a democracy, particularly with protectionism on the rise. The objection comes from the Competition Commission of India (CCI) and centres on the damage that Walmart would do to the small retailers. As the Business Standard in India reports:

“Traders’ associations representing neighbourhood or mom and pop stores have been agitating aggressively too.”

These mom and pop stores are what we call a “decentralised Walmart”. They are the channel partners for Money On Mobile, who we introduced here. Disclosure: MoneyOnMobile is a client of Daily Fintech Advisers. I am not a financial adviser, please do your own diligence before investing.

This story is great for an Indiaphile such as myself. I first stated doing business there in 1994 and lived there as a tech entrepreneur in the late 1990s. The energy and innovation was always there, now it looks like it is paying off.

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Bernard Lunn is the CEO of Daily Fintech and provides advisory services to companies involved with Fintech (reach out to julia at daily fintech dot com to discuss our services).

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  1. “The Amazon Flipkart deal – if it closes – will be..” Should read Walmart Flipkart deal…

    To be really attractive, surley Flipkart would need to have as compelling a solution for payments as PayTM, assuming Flipkart CoD is a market entry strategy at best and signing up Users to mobile money payments demands a strong KYC component and demonstrated acquisition ability.

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