Effects of Demonetisation on Microfinance in India

microfinance

This is a guest post by Arunkumar Krishnakumar, who is deeply involved in the early stage Fintech scene in London but was raised in India. So he is highly qualified to write about this important and controversial topic.  

Muhammad Yunus, who was awarded the Nobel Peace Prize for founding the Grameen Bank and pioneering the concepts of Micro Finance, said:

“I did something that challenged the banking world. Conventional banks look for the rich; we look for the absolute poor”

The Micro Finance industry, despite being hailed as a saviour of the poor, has had a turbulent ride in many parts of the world. There have been various incidents in the emerging markets where farmers have committed suicide when they haven’t been able to pay off their debts. As a result, the industry was regulated in some parts of the world, and institutions offering Microfinance had to adopt different credit strategies. While the focus of many of these institutions have moved away from achieving volumes to offering affordable micro-credit, the global average rate of borrowing is about 30%.  Micro Finance in India has been no different and has had its ups and down. The recent Demonetisation (DEMON) drive in November 2016 looks like a setback to the primarily cash based Microfinance industry.

Microfinance in India:

In India, pioneer Micro Finance Institutions (MFI) operated as non-profit, non-governmental organisations with a strong social focus. They developed new credit techniques; instead of requiring collateral, they reduced risk through group guarantees, appraisals of household cash flow and small initial loans to test clients. In recent times, MFIs have transitioned from non-government organisations to nonbanking finance companies (NBFCs). As a result, once primarily donor-led, MFIs are now increasingly funded by banks and private and shareholder equity.

The Indian Micro Finance industry hit its peak in 2010, when SKS Microfinance, one of the industry leaders had its IPO. Muhammad Yunus, hailed as the father of the industry, criticised the move as the IPO was fundamentally conflicting with the principles of Micro Finance. The IPO offered at $350 million was 13 times over-subscribed. But due to reckless lending and strong-arm collection tactics that followed, strict controls were imposed on the business and loans written off which resulted in a slump. However, over the past few years, regulation of MFIs has been centralised in India and the industry growth stabilised. By 2016 the size of the industry in India was about $8.2 Billion serving over 40 Million customers. About 40% of this industry thrives in the four southern states of India.

In a country traditionally notorious for lack of women empowerment measures, MFI has been a shining light. About 70-80 per cent of the customers are women with a repayment rate of about 95 per cent against repayment rates of about 70 per cent for middle class men who form the primary borrowers for commercial banks.

DEMONetisation

In November 2016, the Indian government launched a huge DEMON drive when they banned 500 and 1000 Rupees notes. In a country where 69% of the population lived in rural areas and 90% of the transactions are cash based, the move was paralysing. For the Micro Finance industry this came as a blow too. Most of the borrowers of the MFIs are based in rural areas; they borrow in cash and repay in cash. Typically, MFIs that have had a repayment rate of 99% have had a fall of upto 12% in repayment rates. For many MFIs the non-performing assets (NPA) have risen by 7-10%.

For a discussion of the impact of DEMON in India please go to this thread on the Fintech Genome.

What does this mean for the MFIs? It might just be a short term blip, rather than a long term trend. However, these MFIs could be affected by the DEMON drive, and the resulting non-payments by their borrowers. While the borrowers will have some negative effect on their credit scores, it might be a bigger issue, if that affected the credit worthiness of the MFIs themselves.

What does this mean for the borrowers? Particularly farmers and SMEs that make up most of the customers are affected in a big way. The drying up of liquidity that the DEMON drive has caused has affected cash dependent rural communities in a big way. Especially in the southern states of India, the drought this year has made matters worse. In Karnataka, about 800 farmers committed suicide in the 12 past twelve months due to the drought and mounting debt, although what percentage of that is due to pressures from MFIs is unknown. In TamilNadu, my home state, farmers-suicide due to debt issues is almost a daily occurrence. There have been several cases where farmers have had to borrow from local lenders at higher rates, to pay off the MFIs, as MFIs tend to be stricter on their debt collection dates.

What can be done about all this? While these are certainly tragic incidents, there are various avenues the government and the MFIs have explored and continue to explore. One positive outcome of it all is that, the top 8 MFIs in India that hold about 40% of the market share, have now been provided the small finance bank licenses. Which would mean they can have their own cash out points and the DEMON drive is very likely to increase usage of their accounts. MFIs have also been lobbying with the Reserve Bank of India (RBI) to extend deadlines for the usage of the banned currency notes and farmers have had some special exemptions to this extent. RBI has also provided MFIs with a further 90 days extension before classifying loans as NPAs, if payments were due in November and December 2016. There have been some signs of recovery in certain parts of the country where repayments had fallen immediately after DEMON. However, most industry experts expect that there would be a further increase in NPAs before the industry recovers.

While the industry shows every sign of recovery, the livelihoods of drought stricken farmers are still up in the air.

PS: I am a big fan of Narendra Modi and his DEMONetisation measures. However, these were some of the unintended effects of such a huge initiative in a land of 1.3 Billion people. The human cost is clearly terrible, yet we have not seen the final chapter in DEMON. If it leads in the end to a more efficient digitized Micro Finance industry, it will have a positive impact on the poor in India and will be studied by other countries facing a similar mission.

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How the humble QR code may usher in the cashless society, starting in India

integraci-qr-scan

 

Clay Shirky, in Here Comes Everybody, writes

“Communications tools don’t get socially interesting until they get technologically boring.”

QR Codes are a good example. This post describes:

  • QR Codes 101 including who controls QR Codes and why QR Codes matter
  • Why India QR is a game-changer
  • QR Codes for Bitcoin payment
  • Fintech and the new government infrastructure investment

QR Codes 101

A Quick Response (QR) code is a machine-readable code made up of black and white squares read by the camera of a smartphone or other device reader.

QR Codes originated in Japan in 1994 to track vehicles during the manufacturing process. Now you see them everywhere – such as URLs in print ads, boarding passes, Bitcoin public keys. The key is the ubiquity of the smartphone camera that can read them. There are specialized QR Code readers (think of boarding pass readers at airports), but the key is the ubiquity of the smartphone camera that can read them.  The reader can be held by a consumer or an employee working retail. For example, that is how Swiss Railways check a ticket that you bought with your mobile phone.

Who controls QR Codes?

A Japanese company called Denso Wave invented the QR Code technology and owns some patents and trademarks, but has chosen to waive its rights to a key patent and offers a free license as long as users follow the standards.

Details are at QRCode.com

The mass adoption is creating an ecosystem of companies offering services such generating QR Codes, such as this company with pricing starting at EUR 5 pm.

Why QR Codes matter

They are simple and free and can go on any form factor, from mobile phone to paper or plastic. So while they are technically boring, their mass adoption makes them interesting.

QR Codes for Bitcoin Public Keys

If you want somebody to send Bitcoin to your account, just go to BitcoinQRCode.org and key in your Bitcoin public key address and then put that QRCode wherever you want like your website or business card.   Yes it really is that simple and simple can change the world.

Why India QR

News: On Feb 20 2016, the Reserve Bank of India (RBI) launched the IndiaQR (or in Hindi BharatQR), a common QR code jointly developed by all the four major card payment companies – National Payments Corporation of India that runs RuPay cards along with MasterCard, Visa and American Express. It will also have the capability of accepting payments on the Unified Payments Interface (UPI) platform.

MasterCard  is promoting the standard through ‘Masterpass QR’.

Customers make payments by scanning the QR code and entering the transaction amount. The amount gets transferred directly from the bank account without the need of a swiping machine.

This replaces credit card Point of Sale devices with anything that can generate QR Codes (which is a dirt cheap capability). That is an important benefot but the reason this is so disruptive is in one word – interoperability.

Before rail gauges were standardized, trains could only run on tracks from that train company.

Currently, QR Codes can be processed on closed systems, such as mVisa, for Visa cardholders, or via mobile wallets such as Paytm, as long as both parties have a Paytm account.

The key to interoperability is the standardisation promoted by the Indian government and codified in the  Unified Payments Interface. This enables Mobile wallet interoperability (read this post for why this is so critical).

Banks and Card networks are on board

On launch day they had 15 banks signed up for IndiaQR (household names if you live in India such as Axis Bank, Bank of Baroda, Bank of India, Citi Union Bank, DCB Bank Ltd, Karur Vysya Bank, HDFC Bank Ltd, ICICI Bank Ltd, IDBI Bank Ltd, Punjab National Bank, RBL Bank Ltd, State Bank of India, Union Bank of India, Vijaya Bank and Yes Bank). Visa, MasterCard and Repay (India specific credit card network) have been integrated and American Express is in the final stage

Paytm has said it plans to invest Rs 600 crore (about $90m) in the next 10 months to further enhance its QR code-based payments solution.

Another mobile wallet contender, MobiKwik, is also backing the standard

The new digital national infrastructure investment

This is an example of how governments can create digital national infrastructure. In ye olden days, infrastructure meant roads and railways and airports – think post war America. In that arena, India can at best play catch up. However in the digital arena, India can lead. The press release mentioned an “insignificant cost” for this QR initiative. It was really the role of government to create interoperable standards that matters. This another example of why we believe India is the country to watch in Fintech. 

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The dabbawalas in India point to future e-commerce and payments

dabbawala

If you spend any time in India, you will often be told that home-cooked food is far better than restaurant food. As the restaurant food is so delicious, this is hard to believe, but it is true.

In Mumbai, India, 200,000 workers get fresh home cooked food every day. In this relatively impoverished city, workers get better food that is totally customized to their individual needs than the most pampered workers in Silicon Valley and other wealth hubs.

Investors and entrepreneurs who have spent $billions on food and grocery ecommerce should take serious note of how this is done.

Policy makers might also pay attention as this is good for the environment and for jobs.

The future of e-commerce is mobile. The future of payments is also mobile. So these two worlds of e-commerce and payments are converging around mobile phones and Internet Of Things devices. We see this convergence in companies such as Uber, Amazon, Alibaba and Paytm.

 In short, it is time to take note of what Mumbai’s dabbawalas are doing.

Once again this illustrates our theme of First The Rest then the West – that countries formerly known as emerging aka the rest of the world are leapfrogging the West thanks to not being invested in legacy technologies, processes and models.

Dabbawala 101

A dabbawala (aka tiffin wallah) is a person in Mumbai, India, who collects hot food from the homes of workers in the late morning, delivers the lunches to the workplace and returns the empty boxes to the worker’s residence that afternoon. They are also used by meal suppliers in Mumbai, where they deliver cooked meals from central kitchens to the customers and back.

Dabbawala translates to lunch box delivery person. “Dabba” means a box (usually a cylindrical tin or aluminium container aka tiffin) while “wala” is a suffix, denoting a doer.

These tiffins have become fun gifts in the West. Some parents use them for their kids lunch box.

Hot VC sector

The food and grocery delivery space has been hot. For a good analysis in 2015, read this post on Techcrunch by a VC. VCs put in more than $1 billion in 2014 with a big acceleration in 2015. A few successful IPOs such as Just Eat and Grubhub/Seamless led to a rash of similar ventures.

There has been a cooling in 2016 as some ventures inevitably failed and VCs focused on a few late stage deals. However, the window is still wide open with the online penetration % in low single digits.

The first generation was simply an online ordering layer (replacing phone orders with online orders). The second generation of restaurant marketplaces includes behemoths such as Uber and Amazon that compete on logistics through a network of independent couriers. The logistics network creates a powerful moat and a correspondingly higher commission around 25%.

It is this second generation, competing on logistics, that should be studying the dabbawala network. Actually they probably already know about it and understand its disruptive power (and would prefer if it stays in Mumbai). It is the third generation that will use the ideas behind the dabbawala network to create a new wave of digital cooperative network.

Indian frugal innovation

The dabbawala network is a good example of what has been termed “jugaad” in India which translates to “frugal innovation”. This became fashionable to study in the West around 2011 when big companies and universities (such as Santa Clara and Stanford) strove to understand how to reduce the complexity of a process by removing nonessential features. This becomes critical in serving mass market consumers at razor-thin margins without reducing quality.

Also in rich countries

Switzerland could not be more different from India – a tiny country with a high GDP per person.  Yet we see a dabbawala network operating here.

The appeal of fresh, delicious, nutritious food cooked with love and care is universal.

Better for the environment

The packaging wastage around today’s e-commerce (big disposable cartons) upsets a lot of people. If this upsets wealthy people who are influential this can damage the bottom line of the e-commerce marketplace. The dabbawala tiffins are reused every day.

Pave the cow paths with proven digital innovation

The dabbawala network started in 1890 with 100 delivery people (it now has about 5,000). So this was hardly a tech startup. Yet one Silicon Valley mantra is to “pave the cow paths”. This means adding innovation to whatever is already working.

There are 5 tech innovations that are already proven which would add a digital layer to a dabbawala network to make it massively scalable:

– QR code to replace the unique ID stamped into the tiffin.The current system is well thought-through and would translate easily to a QR code.

dabbawalla-7

– ChatBot UI for service inquiries and exception handling. Lets say you want to change the the location to your friend’s office or cancel for a few days next week when you are travelling.

– Mobile payment at delivery time (with auto routing of payments to the cook and the delivery person).

– RFID sensors in the tiffin so that the whereabouts can be tracked automatically (your phone pings you to say that lunch is in the lobby and getting into the elevator).

– fully electric cheap cars and scooters for delivery (cannot rely on trains in many countries and many delivery people will object to pedal powered bycicles).

Delegate don’t micro manage

Ordering takeaway food online rather than by phone increases efficiency, but adds to the tyranny of choice. What shall I eat for lunch today that is a) delicious b) nutritious c) avoids any dietary or religious prohibitions? How much nicer to have somebody who really understands all those needs decide for you and occasionally surprise you within those constraints.

For a lovely movie about the romance of this, watch The Lunchbox.

Put in more MBA terms, it is surely better to delegate this task rather than to micro manage it.

Digital Cooperative Future

The dabbawala network grew in an era and culture where/when men worked for pay and women cooked at home. Today, those roles could be reversed or both could be working and the cooking is done by somebody else.

The Gig Economy is the new normal for a large % of the population. The only question is, do we have a power law society (with the lion’s share of the economic value of these networks going to the network operator) or a bell curve society where the broad mass of people get most of the benefits of these digital networks? The latter is the vision of a digital cooperative future. Many of the blockchain startups envisage a future like this, but the beauty of the dabbawala network is that it does not require any technological breakthrough.

Look at the dabbawala network in the context of recent digital innovation compared to Uber:

  • Each dabbawala is required to contribute a minimum capital in kind, in the form of two bicycles and a wooden crate for the tiffins. This is like an Uber driver owning their own car.
  • Each dabbawala is required to wear white cotton kurta-pyjamas, and the white Gandhi cap. Rich people will pay more if their Uber driver looks like a chauffeur and that branding also helps the network operator.

Here is the fundamental difference with sharing economy network. Each month there is a division of the earnings of each unit. This is a cooperative, not simply individuals using a common system and brand.

At a human level, this enables the connection that people make with their postman or Fedex or UPS driver (or going really far back, the guy delivering milk). The same person comes every day. For humans who like humans, this is more appealing than drone delivery.

Doorstep services is not just for food

This is why Uber got into food delivery. If you have a logistics network, you can use it for anything. This is simply a networked, free agent model of Fedex and UPS. Entrepreneurs in India have figured this out. For example, Anulom uses the Aaadhar unique ID and the dabbawala network for the paperwork around rental service agreements. This earned them a tweet from the Prime Minster, Narendra Modi.

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Mobile Wallet Sumo wrestlers face off in India

sumowrestling

We are mixing our cultural metaphors here. Yes, Sumo wrestling is from Japan and this post is about mobile payments reaching a tipping point in India. Yet the Sumo analogy fits when we are talking about the mobile payment giants of India such as Paytm, Chillr and Mobikwik. Without regulation, this would be a winner takes (almost) all market based on network effects. However, India has some Tech Smart Regulation called Unified Payments Interface that levels the playing field so that the whole economy benefits. 

Paytm – aggressive growth

There is a a fierce battle for market share in mobile payments in India. This is where the winners emerge and those winners use a mix of aggression and smarts enabled by plenty of capital. We start with Paytm because they were the first Fintech Unicorn in India to hit our radar screen; we expect to see more Fintech Unicorns emerge in India during 2017.

Paytm is a kludgy name that stands for Pay Through Mobile. Who cares about kludgy names if it is so successful? They claim 120 million users, up from 12 million only 2 years ago and having been founded only in 2010. Post demonetization, Paytm was processing more than 7 million transactions per day.

That is phenomenal growth by any standards.

This growth upsets people, including some global players. Paypal accuses Paytm of Trademark infringement. There is also a battle with Uber. Within India we see criticism from rival Mobikwik about what they describe as capital dumping via China.

All those critiques come with being a leader. However, it is possible that, like some people say about Uber, Paytm could be buying a dollar for 99 cents through incentives. This is the norm in market share battles and the prize is big enough, but entrepreneurs have to know when to pivot when capital starts demanding profits. I suspect Alibaba, a big shareholder, takes the long view as does the big Indian shareholder, Tata. However, growth through incentives is a bit like steroids for an athlete – dangerous if you come to rely upon them.

Paytm has become a Payment Bank. The way they present their mobile wallet it is like a current/checking account – you can Add Money, look at your Passbook and Redeem loyalty points.

Then you can pay bills for everyday items. This is where you see the original driver which is paying your mobile operator. You simply enter your number, the Operator, the Amount and whether it is Prepaid or Postpaid. You can choose Fast Forward to pay directly from your Paytm balance. Paying your mobile operator may not seem like a big deal, but this is a mobile leapfrogging story. Indians spend 45% of their incomes on mobile technologies and platforms (vs only 11% in America). because mobile is the main point-of-entry to the Internet (PC penetration is 5% vs 75% for mobile).

Then you can pay for your DTH Satellite TV and Electricity. In a uniquely Indian spin, you can use it to buy Gold.

However, then you see an e-commerce service. In the West we grew used to payments (Visa, Mastercard, Amex, Paypal etc) being different from ecommerce (Amazon, eBay, Uber etc). China and India do it differently. Alibaba is Amazon + Paypal. Paytm is Paypal + Amazon; the placing of the + makes very little difference but the combination is game-changing. It is no coincidence that Alibaba is a big investor in Paytm.

Just after phone recharging and utilities, Paytm offers a lot of services that are part of everyday life in India – movies, bus, flights, trains. Buying these does not entail any supply chain logistics.

To put that in context, that would be like Amazon selling your air flights or train tickets.

Below that you can see a conventional online shopping mall. This could be Amazon or Alibaba or Flipkart. The key is that Paytm is an online shopping mall offered by a payment company.

This would be like Visa or Paypal offering an online shopping mall. This is ecommerce merged with payments. This is likely to be the future of both ecommerce and payments. This may drive mega mergers in America, but it is more likely that the real innovation will come from China, India and Africa (a leapfrogging First the Rest then the West story).

Mobikwik

Mobikwik is another major contender with serious traction and plenty of capital. It looks like a bruising street fight between Paytm and Mobikwik. Literally, the action is on the street as both ventures win by signing up merchants. Merchants can accept more than one – this can be a Visa vs Mastercard story. Or the UPI standard could commoditize the whole Consumer To Merchant (C2M) business; when we use physical cash there is no transaction fee.

Mobikwik is also taking hard shots at Paytm for their ties to China via Alibaba.

“We must be sensitive to companies, especially those that have massive foreign investments,” said Singh. “They can come into the country, dump capital and gain access to data.”

Chillr

Chillr has a different strategy to Paytm and Mobikwik. They don’t go after the Consumer To Merchant (C2M) market (apart from the ubiquitous phone recharging), but stay focused on Consumer To Consumer (C2C) payments.

Their lead investor is Sequoia Capital. Their massive win was Whatsapp and the assumption of many has been that Whatsapp will monetize through C2C payments, so this will be interesting to watch.

Chillr are getting distribution through partnerships with Banks. All transactions on Chillr are initiated directly from the users’ bank accounts and authenticated by a secure PIN provided by their banks.

Examples of Bank partners include HDFC and Federal Bank.

OxigenWallet

OxigenWallet competes with Paytm and Mobikwik. Like Paytm, they have received in-principle approval from the Reserve Bank of India to operate under the Bharat Bill Payment System (BBPS), which will allow people to pay utility bills from anywhere at any time.

Oxigen expects BBPS to help more than double the company’s wallet user base to 50 million by December next year.

UPI Commoditizing the payment layer for the banked

The bad news about Mobile wallets is that if network effects rule – and they usually do – we might miss the credit card networks as we end up dealing with one or two behemoths that control cash, credit and e-commerce. The alternative scenario is that we all have mobile wallets that work with every other mobile wallet (just like physical wallets). That will be good for consumers, but it will force mobile wallet ventures to add value elsewhere.

There is a lot at stake in the geeky subject of mobile wallet interoperability.

So the Reserve Bank of India (RBI) was farsighted when they launched the Unified Payment Interface (UPI) in April 2016.

In the scenario where one or two behemoths rule, our wallets will be determined by our mobile phone operating system. Merchants will accept both Apple and Android/Google like they accept Visa & Mastercard today.

That scenario is unlikely in India, thanks to UPI. We believe that India leads the way on this Tech Smart Regulation front and other countries will follow.

Dominance by Apple and Android/Google is also unlikely because the other Global Big Techs – Facebook and Amazon in GAFA and BAT (Baidu Alibaba TenCent) – won’t sit still for dominance over something as critical as payments. Neither will Visa & MasterCard and the banks.

India does not want payments & ecommerce dominated by a few global players. India is sensitive to “digital colonialism”. They don’t want their digital life – which now has such a huge impact on the economy – controlled by companies based in America or China (i.e. GAFA and BAT).

There is as yet no GAFA or BAT equivalent acronym for India. We have had various incarnations of acronyms for the outsourcing giants such as SWITCH Satyam Wipro Infosys TCS HCL. However, the new Digital India behemoths are companies like Flipkart, Paytm, Snapdeal and Mobikwik. Somebody who is good with crossword puzzles will put them into an acronym.

The point of lumping Flipkart, Paytm, Snapdeal and Mobikwik into one category is that payments and ecommerce is converging, thanks to Alibaba.

How Alibaba changed the game

The lazy way to describe Alibaba was the “Amazon of China”. However, it would be more accurate to describe them as the Amazon + eBay + PayPal of China. It is not just that Jack Ma is hugely ambitious – he clearly is – but also that digitization erodes barriers between previously distinct categories. Payments and e-commerce are inextricably linked. Actually, to really describe Alibaba’s ambition, you would have to talk about the Amazon + eBay + PayPal of the world. In that game, India is the arena. The Indian government understands this and has been tech savvy and proactive.

This merging of payments and e-commerce has already played out in India.

An early mobile wallet pioneer was FreeCharge, which started out, like Paytm, enabling you to recharge any prepaid mobile phone, postpaid mobile, electricity bill payments, DTH and data card in India. Paytm moved into e-commerce and then Snapdeal Acquired FreeCharge in April 2015.

Moving upstream post UPI

If the payment layer is commoditised, which is what consumers want, mobile wallet ventures need to move upstream to become either banks or e-commerce portals or both.

Paytm has already become one of the 11 new licensed Payment Banks and a quick look at their site reveals an e-commerce portal.

UPI is about bank payments and millions Indians are still unbanked (233 million as per a PwC India report). Plus, cash is still king & queen. Yet India’s 150 million smartphone users is expected to grow to 500 million in the next few years.

Upasana Taku, co-founder of MobiKwik, which has 30 million wallet users cites Reserve Bank of India data showing mobile wallet growth to be four times more than mobile banking.

The on-ramp to financial services for the unbanked will clearly be mobile wallets. The future maybe less about adding a mobile layer to banking than adding a banking layer to mobile. India is where this will play out first.

UPI also makes mobile wallets work better, because it works quicker than the Immediate Payment Service (IMPS) that banks use for instant money transfers. UPI will make it faster to get cash to  merchants and to load cash into consumer wallets.

Who will be the Alibaba of India?

In China we talk of the Google of China, the Facebook of China, the Amazon of China and so on.

In India, the Google of India is Google, the Facebook of India is Facebook, the Amazon of India is – maybe Flipkart and maybe Amazon and maybe Alibaba.

Flipkart understood that Cash On Delivery (COD) was essential in India. You could not simply replicate Amazon in India. Flipkart grew huge by innovating on the logistics front.

However, what happens when that cash at the door is a guy with a mobile phone and a mobile wallet? That is where the race to get consumers to sign up for a mobile wallet is so key. The mobile wallet is the key to the e-commerce universe.

You can see why Alibaba invested in Paytm and why Mobikwik is playing the made in India card (i.e saying that Paytm is too close to China).

It is a sign of the changing times in the Asian Century that we ask who will be the Alibaba of India?

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Mobile Microinsurance in India

indian-farmer

Consider these numbers to see the scale of the opportunity for mobile Microinsurance. In a developed market like the UK, 80% have some kind of Insurance. That goes down to 10% in India and 2.5% in Africa. It is pretty clear where the blue ocean market is.

These millions of new insurance customers won’t buy the legacy insurance products. The new products will need to be a) mobile end to end (i.e. not a mobile front end that requires you to use a laptop/desktop to complete a process) and b) available in very small amounts for very low cost (“microinsurance”). Whether these new mobile Microinsurance products are delivered by Insurtech entrepreneurs or agile established carriers remains to be seen.

Like Microfinance, Microinsurance is key to the transition from subsistence farming to a middle class life. One uninsured disaster and families face financial ruin. An insured borrower is also a better credit risk, so the two markets are connected.

Insurance Comparison Sites 

Sometimes, the simplest innovation wins. In India we see a lot of comparison sites. This makes sense in market such as India, where lots of consumers are buying insurance for the first time. Compison sites also have a proven revenue model.

Examples include:

Policy Bazaar

My Insurance Club

Compare Policy

Policy Bachat

However, these comparison sites assume that the insurance product fits market needs and just need to be marketed, discovered & compared. The existing Insurance products meet the needs of those who are already in the urban middle class. This is a big growth market, but still small compared to the millions emerging from subsistence farming into the lower rungs of a middle class life (what we will call the “aspirant middle”). That market needs some innovation at the product level, not just at the marketing level. For that we need to look at Mobile Microinsurance. But first, the one product they need most – crop insurance.

Crop Insurance – the government approach

Crop insurance is what the aspirant middle needs most. One bad harvest leads to ruin. So, it is no surprise that the Indian Government is proactive on this front. In February 2016, they launched the Pradhan Mantri Fasal Bima Yojana (Prime Minister’s Crop Insurance Scheme). The premiums will be fixed, depending on the type of crop. The Indian Government clearly don’t want a repeat of rapacious loan terms from some of the Microfinance players.

Crop Insurance – the private sector approach

Crop Insurance could use some of that Blockchain & big data magic that we see brewing in startups. Something as simple as flood insurance is no longer simple, now that climate change forces a rethink on existing models. We have looked at big data ventures going after this market such as Meteo and Praedicat and then we looked at how blockchain is being used for catastrophe swaps.

So, there is plenty of innovation help for any insurance companies that want to offer crop insurance at those Government-fixed rates. It is likely that meeting those Government-fixed rates and turning a profit will need an entirely new generation of insurance, with innovation front to back. For that we turn to mobile microinsurance

An idea whose time has finally come

Mobile insurance is nothing new. It emerged in India way back in 1997, when telecom operators launched mobile based insurance (dubbed “mInsurance”). This has not been a great success story. Often an idea is simply ahead of the market reality. In this case, the market needed mass penetration of mobile – tick in the box for that today. It also needs new entrants, not just Telecom operators which have to date not been as successful as they could have been at leveraging their network and customer base and billing relationship into a big position at the application layer.

BIMA – Mobile Microinsurance but not in India

India has the ingredients to be a leader in Mobile Microinsurance, yet so far the action seems to be elsewhere. BIMA Mobile comes from Sweden, has an office in London and operates in many markets including nearby ones such as Pakistan, Sri Lanka and Bangladesh – but not yet India.

BIMA bridges the gap between Telecom operators and Insurance companies.

Given the scale of the market and the digital infrastructure being laid down by the Modi Government, one can expect to see BIMA come to India soon. Whether it will be new Carriers or old Carriers who the partner with remains to be seen.

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Indifi & the rise of the Indian SME lending matchmaker

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As someone who has been in the B2B lending game for just on a year, there is one thing that has become evident to me. It’s not the lending that’s hard, it’s the deciding whether to lend or not that creates the biggest headaches.

For those of you who are a bit longer in the credit assessment tooth than me, this wide-eyed observation will hardly come as a surprise. It’s why fintech startups are so keen to impress on the sophisticated investor the ‘dynamic credit assessment technology’, ‘data driven underwriting model’, and ‘automated decision making’ features of their businesses.

Assessing a SME online and in just a few minutes – the new attention span of would be borrowers thanks to companies like Iwoca and PayPal – compounds the challenge of lending to the small business sector even further. It’s possible to do but also complicated, potentially expensive and high risk. And with margins already slim, wouldn’t it be great to outsource that to someone who can do it better, and for less?

Indifi, one of the latest lending matchmakers to emerge out of the Indian subcontinent, seems to want to help lenders to do exactly that. And it was that promise that looks to have helped the company recently raise $10 million, with former ebay founder Pierre Omidyar a notable backer of the startup.

By partnering with supply chain businesses in the travel, ecommerce and hospitality sector, Indifi allows SMEs affiliated with those chains to apply for working capital loans of between 1 lakh rupees and 50 lakh rupees (~US$1500 to US$70,000).

To assess the business, Indifi accesses proprietary SME data from supply chain platforms, which it then uses to assess and match the business to one of its partner lenders. The startup’s recent tie up with hotel booking platform Djubo is an example of the model in action.

Companies like Indifi herald a new way for businesses to be ‘understood’ by would be lenders. Instead of being put through a rudimentary matching wizard online (like many online brokers are guilty of doing), Inidfi can use the right data to make the right lending decision, delivering insights about complex business models to lenders and reducing the risk all round. The ‘trust me, we know what a healthy hospitality business looks like’ is a strong draw card for a lender looking to diversify its lending book in a safe way, without building in-house knowledge.

Business models are changing far more rapidly than what they did ten, even five years ago. Banks are struggling to keep up while basic fintech lenders who take the one-size fits all approach will no doubt find themselves in a similar position soon.

My bet is that companies like Indifi, or ApplePie Capital, who offer franchise financing, will establish foot holds in quality, well understood niche markets. The learnings they establish here will help underpin expansion.

The only question left is the ethical one. Can a business with no direct exposure to a loan create problems in a lending ecosystem? One would hope the symbiotic nature of the partnerships created would mean the answer to this one is a no. But we are in new territory every month in the world of alternative finance, and anything could happen. And that is, after all, what makes the fintech sector so fascinating.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Why India is the country to watch in Fintech

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Sure, we are all watching China, but to win in dynamic markets you need to be both right and contrarian and it is accepted wisdom that China is the country to watch in Fintech. It is, but because fewer people see India as the country to watch, we decided to spend a week shining a light on Fintech in India. While many of our readers will be celebrating Christmas or Hannukha we reach out to those who did their celebrating at Diwali or Ramadan. 

What is happening in India does not only impact the fastest growing large economy in the world – that is a big deal – it also impacts how Fintech develops around the world.

India finally has all 5 Aces

20 years ago, after spending a few years living and working in India I wrote this article. (It is no longer available where it was originally published, so I reproduced it on my personal blog).

My thesis at that time (in 1997) was that India had only one ace – low cost labor – and faced Western Competitors with 5 aces:

1. A large domestic market

2. Access to intellectual capital

3. Reliable, low cost telecommunications

4. A culture that rewards innovation and risk taking

5. A well-developed venture capital industry

In short, India in 1997 had a tough road ahead.

10 years later – in 2007 – I reviewed these 5 aces in an article on ReadWrite and concluded that India was doing a lot better. At that time, the biggest problem was risk aversion because a well-paid job in an outsourcing company looked like a better option than doing a startup.

Yet, as is usual, things take longer than we think (but the eventual change is also bigger than anybody forecasts). For the last 10 years, India as an innovation hub was far more promise than reality. Yet now, as we slide into 2017, it looks like India as an innovation hub is in great shape and that Fintech is where that innovation will happen first.

How the Fintech India story developed on Daily Fintech

When the Fintech City Tour first went to India two years ago January 2015, I found some innovation but missed the big story.

Only a few days later, the big story appeared in India’s first Fintech Unicorn – Paytm.

In May I dug into why Paytm was getting so much traction in mobile payments.

In September, I looked at the mobile payments battle in India as it relates to Uber.

Later in September came the really big news about the 11 new banking licenses.

A few months ago, I looked into the critical plank in the Fintech revolution in India – Aardhaar, digital ID at scale.

For more on the infrastructure behind this Fintech revolution we turn to one of its architects – Nandan Nilekani.

Three reasons you should pay attention to Nandan Nilekani

1 He was a cofounder of Infosys in 1981. Their current market cap is over $30 billion and they did not take a dime of VC money to get there.

2 He led the Aadhaar initiative. This is biometrics based digital ID at massive scale – over 1 billion issued in 5.5 years, making it the fastest digital service growth in history. (Android hit 1 billion in 5.8 years; WhatsApp took 7 years.) Think of the impact on financial inclusion; this is transformative for millions of people.

3 He led the Finacle business at Infosys. This is the least well known part of his story. Finacle is a core banking software product; it was unusual at that time for an outsourcing business to get in the product game. Finacle is significant as part of this story because this background makes Nandan Nilekani so well qualified to understand the Fintech revolution in India today. (I had the good fortune to meet him about 20 years ago during my Misys core banking days).

You can hear Nandan Nilekani describe Fintech is India’s WhatsApp moment in this 30 min talk.

 

5 enablers for the Fintech revolution in India

– Aadhaar. Already described above. 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.

Demonetization is the Fintech moment for India

All this was already driving rapid change, but then the turbocharger kicked in a few weeks ago when the Modi government declared the 500 and 1,000 Rupee notes to be no longer legal tender. This action was labeled “demonetization”

Sopnendu Mohanty of the Monetary Authority of Singapore (MAS) called Demonetization the “Fintech moment for India” in an interview in The Hindu Business Line.

“The Indian fintech story is different. The Indian government has a massive problem with an opaque, cash-based economy that has dominated the country for decades. With the majority of its citizens lacking access to formal banking services, India had nothing to lose by encouraging out-of-the-box innovation that would seem insane to the U.S. financial services establishment.”

Demonetisation applied a turbocharger to the already rapid acceleration of mobile money in India. According to Hindustan Times, Paytm transactions exceed combined usage of credit and debit cards in India. Paytm is seizing the day with a new ad targeting demonetization that has ignited controversy (read, free media).

Thanks to Unified Payments Interface (UPI) delivering mobile wallet interoperability, this is not a winner takes all market. Paytm is doing very well but they have plenty of competitors and UPI creates a level playing field. UPI is an example of Tech Smart Regulation. In this post on PSD2, we defined the 3 levels of regulatory maturity:

  • # 1. Paper. Created in haste by politicians and lawyers after a crisis. Result = lawyers get rich. Examples: Sarbanes Oxley & Dodd Frank.
  • # 2. Great Idea. Using a disruptive tech without implementation help. Result = uncertainty. Example: SEC Mandate for XBRL.
  • # 3. Tech Smart Regulation. Using a disruptive tech with implementation help. Result: level playing field that drives innovation. Examples: PSD2 and UPI.

Demonetization certainly creates a lot of short term pain and damage to the economy and has drawn a lot of criticism. There is a lively debate on this thread on the Fintech Genome.   Prathamesh Godbole from Mumbai expressed the negative view on demonetization very well:

“A big chunk of business is done in cash largely because its frictionless, and not necessarily to avoid taxes. This has been hit quite badly. Uber, Ola and other startups with deep pockets still process most of their customer payments in cash. On average, cab drivers, shops and small business owners I’ve spoken to said their business has dropped by 40-50% with no rebound even after a month.

The measure may be well intentioned, but it’s been pushed prematurely. Based on govt numbers, it is going to take anywhere from another 5-10 months to restore the currency supply. Personally, I’ve not seen much change in attitudes towards digital payments- small businesses have started accepting cards/mobile payments but will drop it the moment card companies charge a transaction fee. For now, most card processors and wallet companies have waived off fees.”

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Disruptive change does not happen in a linear fashion. It happens in short explosive bursts after long periods when nothing seems to happen. Fintech in India is going through one of those short explosive bursts of change.

Durinh the rest of the week we stayed with India:

Wednesday = SME Lending

Thursday = Mobile Micro insurance

Friday = Mobile Wallets

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