“Where there’s tea there’s hope.”
– Arthur Wing Pinero
UPI is the poster child for what fintech can achieve in India. It made headlines again last month for crossing $1 trillion transaction value in FY21-22. NPCI’s COO attributed this feat to the collective efforts of banks, fintechs and users.
But what is UPI’s recipe for success? In hindsight, it seems as simple as making a cup of tea. Take 313 banks as the familiar, ubiquitous, and all-important tea leaves. Let users pick their flavor from more than 65 apps – like picking ginger, tulsi, cinnamon or chamomile. Make sure no flavour is ‘dominant’ – not more than 30% of the whole. And finally, heap on two spoonsful of zero merchant-fees to make it extra sweet (albeit unsustainable). Now we have all the right ingredients. But, is it enough? As chef Thomas Keller once said “A recipe has no soul, you, as the cook, must bring soul to the recipe” . Which is why we have NPCI as the chef bringing all the ingredients together. And there you have it. Made to serve 1.1 billion.
Now that we’ve had our tea, let’s start with the four-course FinTales menu.
Appetizers: snackable updates about recent fintech developments.
Main-course: a meaty story about newly launched Digital Banking Units. And our conversation with Vipul Sharma, founder, and CEO, Chqbook, about building fintech products for small businesses.
Palate cleanser: a musical break.
Dessert: sweet news about mapping of payments infrastructure.
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Appetizers ?
? No card, no problem
RBI will soon enable cardless cash withdrawal at ATMs through UPI. It has done this to make cash withdrawal easier and less susceptible to fraud. Especially because card related frauds are rising. It has been reported that fraudsters attach cloning devices to ATMs to steal card data and gain unauthorised access to bank accounts. Cards are inherently prone to higher risk of fraud. Which is why enabling cardless withdrawal through UPI is a welcome relief.
? Crypto-exchanges left in a lurch
Recently, several crypto-exchanges had to disable UPI payments after the NPCI claimed it was not aware of any crypto-exchange using UPI. Even though there is no law prohibiting use of UPI by crypto-exchanges, NPCI’s statement seems to have spooked payment service providers. With payment aggregators and wallet providers distancing themselves from crypto-exchanges, there has been a huge drop in trading volumes. But this begs the question, can your bank or payment service provider pull the plug, anytime? Yes, yes it can.
?️ Easier international shopping? Count us in.
RBI believes it is time to ‘simplify and rationalise’ the guidelines for international e-commerce payments. It is planning to overhaul the existing Online Payment Gateway Service Provider (OPGSP) Guidelines. For starters, OPGSPs are now Online Export-Import Facilitators (OEIF). On the plus side, permitted transaction value for both imports and exports might rise. You can read the draft guidelines here. And share your comments with the RBI (by 24 April 2022) here.
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Main-course ?
? DBUs are banks’ evolutionary future
Brian Solis, a digital analyst popularised ‘Digital Darwinism’ – an era where society and technology evolve faster than businesses can adapt to. So, will banks – one of the oldest creatures of the financial services ecosystem – survive this era? They lack knack for disruptive technology and ability to design bespoke financial products. They are also burdened by their legacy infrastructure. To survive, banks must evolve.
RBI has, fortunately, charted a path for banks’ evolution by introducing the Digital Banking Unit (DBU) framework. DBUs are brick-and-mortar retail banking outlets like bank branches, but with digital infrastructure. DBUs, unlike neo-banks, will not solely focus on financial services distribution through online modes. They will adopt a hybrid approach. First, DBUs will provide banking services exclusively through paperless digital channels (remotely through apps, or at DBUs). For instance, DBUs will house automatic card issuance devices, facility to conduct digital and remote KYC etc. Second, DBUs will focus on improving availability of digital banking infrastructure. Third, DBUs will deliver banking services through self-serve or assisted self-serve digital modes (bank officials will assist customers in the second mode). This is RBI’s first attempt to create a banking segment with ‘digital-first’ approach.
RBI wants banks to avoid mixing DBUs with traditional banking. It requires DBUs to be housed separately from existing banking outlets. They can’t even have the same entry and exit points. It asks for a logical separation between the back-end infrastructure of traditional banking products and DBUs. RBI also wants bespoke management for DBUs. And each DBU will be headed by an experienced COO. RBI has, in the framework, also envisioned DBU’s further evolution. In addition to standard banking products, RBI wants DBUs to offer tailored and futuristic financial products. All in all, the DBUs seek to inherit the favourable traits of banks as well as fintechs. And may evolve into a strong specie in the financial services ecosystem.
DBUs are free to adopt outsourced model for their offerings. This will bring-in several benefits for neo-banks. Neo-banks are unregulated and don’t have any physical presence. They offer financial services through apps (in partnership with regulated entities). Banks can partner with neo-banks to set up DBUs. This will help neo-banks build better use-cases, utility, and adoption for their offerings. The DBUs are also a precursor to stand-alone neo-banking licenses. RBI is likely to use the DBU as a test case to develop the right regulatory approach for these licenses.
? The playbook for small business focused neo-banks
We spoke to Vipul Sharma last week. He is the founder and CEO of Chqbook, a neo-bank catering to small businesses. The interview throws light on a new target segment that some fintechs are starting to bet on – small businesses. These B2B fintechs don’t always follow the same playbook as their B2C counter-parts. You can watch the full interview here. And read on for highlights from our conversation.
The Kirana Economy
The small business segment is difficult to define, Vipul admits. It covers every local business we encounter in our daily life. Like our local grocer and chemist. It’s a fast-growing segment with 8 crore customers and 17% year-on-year growth. But despite its size and potential, it’s an underserved segment. He calls it the ‘missing middle’ with salaried employees and corporates on one side. And the working-class poor on the other. According to him, white collar employees and big companies are already well served by traditional banks. On the other hand, farmers and blue-collar workers receive support from the government through schemes like Jan Dhan and direct benefit transfers. But self-employed small business owners have nowhere to go for their financial needs. That’s the gap in the fintech market Vipul wants to go after.
As someone who has worked in the banking industry, Vipul believes that banks can lend to small businesses. But they lack the incentive to do so. He explains that banks can earn profits and grow by just focusing on salaried employees and corporates. And giving loans to small businesses is cumbersome for banks. Because quite often, these businesses don’t have formal financial records. If small business owners can’t get loans from banks, they’ve little incentive to even keep their money with banks. This is where Vipul believes fintechs can create a win-win situation. Fintechs can reduce financing costs for small businesses and earn revenue by bringing them into the formal credit system. “Small business owners can repay loans. They also have a high drive to make their business successful. It’s not like they’re in a job that they can quit if they don’t like the job or aren’t performing well. They don’t have that luxury. So, they work very hard. When we offer them loans at 24% interest per annum, they’re happy because it allows them to be more profitable and grow faster,” he adds – rooting for his entrepreneurial customers.
The Secret Sauce
But how do you build a fintech product for a segment this large and diverse? Vipul thinks it must start with understanding your customers and their needs. “Our app is available in 7 languages. It makes a difference in how people perceive your product and whether they see you as someone who is listening to them. We’re catering to a community which is largely not on social media like LinkedIn or Twitter. But they’re helping and feeding the people on LinkedIn and Twitter”. But it’s not just about rolling out a product feature. The devil lies in how the feature is implemented. Take the example of language translation for fintech apps. Vipul goes on to explain that Chqbook doesn’t use artificial intelligence (AI) for translations. “We don’t use AI for translations. We use hard coded language packs that we make ourselves. Because AI hasn’t cracked language changes in financial services. If you ask for an account statement, what is it called in Hindi, Telugu, Marathi, or Gujarati? AI may not give you the right results. So, we do the heavy-duty exercise of translating content and getting it vetted. We spend more time on product than just UI/UX”, he elaborates.
The Big Picture
Vipul is optimistic about the future of Indian fintech. With rise in per capita income, he hopes that Indian fintechs will witness a golden era. “This is the fintech ecosystem when per capita income is so less. The minute it goes to $4000 (in 2 years) and then $6000, you’ll have an inflection point. Then people will not mind paying Rs.10 for convenience. The ecosystem will be bigger than any other country on the planet”, he predicts. For now, Vipul advises that fintechs should be more revenue-focused. He cites the example of rolling out lending and insurance at Chqbook first because these are revenue generating products. “Indians love free stuff. People will use your free product, but if you start charging for it, they’ll delete the app. So, if customers are willing to pay you, it’s a validation that you’ve built something useful”, he concludes.
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Palate cleanser ?
The news of UPI crossing $1 trillion in annual transaction value is music to our ears. But India in Pixels has made music out of UPI transactions quite literally. Even PM Modi was impressed by the effort. Check out the track here.
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Dessert ?
? Putting pins (and PoS) on the map!
Let’s say you are an ice cream seller who wants to sell ice cream in all parts of the country. First, you will figure out where ice cream is already available. Then, you could put those exact locations on a map. You can use this map to sell ice cream in places bereft of ice cream. Clear? Okay.
Now, imagine the RBI is the ice cream seller and payment acceptance infrastructure, the ice cream. How will the RBI collect all this data? It won’t. Under the recently announced framework on geo-tagging, banks and payment system operators will collect it. And share it with the RBI. The RBI plans to collate geo-tagging data under two broad categories: Points of Sale (PoS) terminals (like mobile and desktop PoS) and paper-based/soft QR Codes (like UPI QR).
Geo-tagging of critical infrastructure isn’t new. The Indian government has been experimenting with geo-tagging warehouses and cold storages to help farmers locate them. If done successfully, this data will help RBI avoid blind spots. Plus, just like accurate data helps with personalised advertising, geo-tagging data can help the RBI create localised solutions (for expanding the reach of digital payments). For example, geo-tags will help RBI see that a certain village in Bihar lags in adoption of digital payments. And address it with greater precision. But collecting this data is a mammoth task. Just take a stroll outside to count every QR code you see and you’ll realise why. Yet, we’re excited. We hope this takes ice-cream…err…digital payments everywhere.
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That’s it from us.
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See you in May.
