Unified Payment Interface (UPI) – India side story. Arguably a Unique Payment System ever attempted anywhere in the world.

What is UPI

It is an interbank payment system in India where money can be transferred from a bank account to any other account held with any bank in the network instantaneously. Round the clock every day of the year.  UPI facilitates both Credit Push as well as Debit Pull transactions. Never mind the Bankers’ gobbledygook.  It only means one can initiate a payment transaction and even receive a payment request on one’s mobile phone. Over 100 banks in India are expected to participate in UPI bringing in hundreds of millions of customers seamlessly into a common nationwide payment system.

How it Works

Banks can play three distinct roles in this payment system. At the heart is a role where a bank, acting as a Payment System Provider (PSP), offers a mobile application which can be downloaded and used by customers of any other participating banks. The basic but the most crucial is a role where every bank in the network has to allow its customers to link their accounts with any of the PSP banks’ mobile applications. This is called an Issuer role. Issuing bank will receive encrypted MPIN and accept debit request in the linked accounts. The third role is of a market maker where a bank acting as an Acquiring bank facilitates merchants to collect payments. A bank has to join the network as an Issuer. Roles of a bank as a PSP or an Acquirer are optional.    

Let’s assume a customer named Suresh who has an account with “MyBank”. But MyBank is only an Issuer. So Suresh downloads a mobile application provided by an ”OtherBank”. Once Suresh links his MyBank account on the OtherBank mobile app, he creates a handle for himself. If Suresh is lucky he can call his handle Suresh@OtherBank. Now using this handle Suresh@MyBank can send, receive and even collect money to & from AnyCustomer@AnyBank. Voila. Now you have hundreds of millions of customers making payments to each other. They can be customers sending money orders to other customers or making payments to merchants. They can even be merchants making or receiving payments to other merchants.

Pardon the Spiel

If you are not a banker and have still survived the first three paras then let me not further test  your patience.  I hope you will pardon the spiel. But I had to narrate the plot before I could begin to tell the story.

But we have Cards

A lot of people have brushed off UPI saying, there are already cards! Why on Earth do you need a UPI or whatever”?.  One needs to scratch the surface just a bit to look for an answer. It is easy but not obvious. Take a look at the cards in India.  The latest data from RBI shows that there are 24 million Credit Cards and 660 million Debit Cards for a population of 1.3 billion in India.  Of these, Credit Cards clock in 2.7 merchant payments per credit card per month and Debit Cards chip in with 1.8 merchant payments per debit card per year. This is not a proof reading error. But this data means a) there aren’t enough Credit Cards and b) not enough customers are making payments to the merchants using their Debit Cards. Contrast this with almost a billion mobile phones.

I have seen in almost all developed countries Mobile Payments equal payments made by the linked cards. So you have mobile phones where credit card information is stored to make payments using Near Frequency Communication (NFC) or a Quick Response (QR) code. But when you don’t have enough cards or enough people who use cards to pay, this ain’t no good in India.   

And we have Mobile Wallets too

Now I am going to stick my neck out and say Wallets is a different story altogether. They are hep, they are trendy, they are cool too. They are also a great way to promote brand for a Merchant. But there are too many of them. Spare a thought for the customer. What does she do if every high street store and every e commerce merchant offers a mobile Wallet each?  And Wallets tend to work in silos. Rare are the chances that a customer can use balance in the wallet issued by Merchant A to shop at the Merchant B.  Wallets don’t earn you interest on the balances either.

What guarantee, UPI will work?

Nope. I can’t offer one. But as they say, the proof of the pudding is in eating. The banks and their customers are about to start eating theirs, here in India. For starters it is safe. The unique ID or finger print of the mobile handset and the handle chosen by a customer together form a strong factor of authentication.  Besides, every transaction is authorised by the customer using an MPIN. This eliminates the apprehension of the customers in India of card data getting stolen or the card getting cloned. Second, customers can pay in real time with just a click and an MPIN whether they are paying to a friend a thousand miles away or shopping at a high street store. This is because UPI will allow them to make payments remotely from anywhere or even over the counter. Third, customers won’t need to take money out from their bank accounts to keep lying idle in multiple wallets. Fourth, all they need is a smart phone and a bank account. In a nutshell the ingredients are right and the recipe is perfect. Chances are so will be the Pudding.

UPI has been conceived by Nandan Nilekani, the IT Czar of India. The Proof of Concept was launched under auspices of the Reserve Bank of India. UPI will be operated by the National Payments Corporation of India (NPCI).  

(All the opinions in this article are personal)

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Blokchain – It’s time we got rid of the Meddling Middlemen

Blockchain has taken a while to unravel its mysteries and full potential despite bitcoins having captured imagination of the general public a while ago. There have been enough and more discussions about what a blockchain is. What is more interesting is what it does rather than what it is! Here is a recap for those who have so far managed to insulate themselves from the rattling noise this blockchain.

The oft repeated definition of the blockchain says it is a distributed ledger. And like a traditional ledger it allows to maintain records of opening balances, closing balances, debits and credits.  But unlike a traditional ledger which requires a single and “trusted third party” to make those entries, blockchain  provides for multiple stakeholders or “nodes” to validate a transaction. Thereby democratizing and making transparent the entire process of record keeping. There are four most important characteristics of a blockchain which have potential to make it the most transformational method of record keeping.  Let’s now see why the ledgers will never be the same again. 

First is the Consensus. Blockchain requires that a transaction or an event be accepted as a valid record only if all – or the majority - of  the participants in that transaction have confirmed legitimacy of that transaction. Mandating the consensus achieves two benefits. The validated transaction can’t be repudiated nor can a transaction be inserted later into the chain surreptitiously. Only a transaction so validated is allowed to be entered as a record into the ledger or the blockchain.

Second is the Irreversibility. A transaction can’t be reversed once it is accepted as a valid record. And this record remains in the blockchain for posterity. Whenever it is warranted that a transaction be reversed then the blockchain mandates creation of another transaction in the reverse order. Thus recording both the event and its “antievent”. All such transactions are then added into a block. Blockchain can define a rule to allow a block of transactions to be created either after lapse of fixed time or completion of a fixed number of transactions. Once such a block is formed then a hash value of this block is created and added to all subsequent transactions. This ensures that once created a block can’t be tampered with. All these blocks are then added to a chain making the records in the ledger irreversible.      

Third is the Provenance. This means a blockchain records not only the title but the entire history of the title as it passes hands over a period of time. Blockchain ensures that a person can’t transfer a title in an asset unless he owns it or transfer a value unless he has the balance more or equal to that value.  

Fourth and the most important is the Transparency. Depending upon the rules defined upfront, a blockchain makes available to the stakeholders of a transaction holding necessary rights, auditors or investigating agencies the history of recorded transactions.

Let’s see how a blockchain will simplify say property registration transactions. Blockchain will be useful for both sale of new as well as resale of pre owned properties. One can create a workflow involving a node each for Property Registrar’s office; local Municipalities; Advocates handling the sale and purchase of properties; Real estate consultants; Builders and Developers; Architects and Civil Engineers,  Building Contractors and even Income Tax Department etc.  Rights of each of these entities can also be predefined. The blokchain then will obtain consensus of all or predefined majority of the nodes before allowing a transaction to be added into the chain. It is apparent that each transaction of sale of property has met all the four qualifying criteria of the Blokchain : Consensus, Irreversibility, Provenance and Transparency.

It must be obvious by now to even a casual reader that these tenets make a blockchain a perfect way of handling a slew of transactions especially in matters of public interest. Blokchain will have several useful applications in payments, banking and any type of asset transfers. A few examples where a blockchain appears to be the most apt way of keeping records are, land / property registration, cross border remittances, handling of Letters of Credit, vehicle registrations, inventory and supply chain management so on and so forth. Using blockchains in carrying out such transactions will automatically eliminate need for a separate third party to maintain a ledger and as a corollary its ability to tamper with records. It is about time the meddling middlemen retired and gave power back to the people.       

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Humans are not Wildebeest - why stampedes don't work outside Serengeti

For the last millions of years the wildebeest have been migrating every year from Serengeti in the south to Masai Mara in the north in search of new grass.  Primarily it’s their genes that drive the wildebeest as well as hundreds of thousands of zebras, gazelles and assorted other herbivores to set on the round trip to Mara.  This annual ritual not only guarantees food to the herds but also safety in their sheer numbers. Straying out is a sure recipe for death for the outliers either by starving or becoming one for the carnivores.  So it makes immense sense to a Wildebeest to join the stampede.

More often we humans  don’t exhibit traits any different from  the Wildebeest  in our natural instinct to follow the herd.  Farmers of a particular topography tend to grow the same crop year after year. Students flock to the most popular course in the campus and entrepreneurs set up the businesses which attract most subsidies and investments. And you bet sure it pays. In the short run that is. For the fact that the basic economics principle of the Demand and the Supply dictates that in the long run the glut  result in falling demand and thereby diminish the incentives to the entire herd.

Why would a stampede guarantee uninterrupted survival to a species for  millions of years but diminishing returns to the other?  What makes humans so different that the natural law of the animal kingdom fails to protect the most advanced species on the planet?  How come a mere economic principle defies the fundamental law of the nature?  

This seeming paradox has a simple answer. Humans are greedy.  It is not a case here to debate whether greed is good – as Gordon Gekko declares in the movie Wall Street  - or evil but simply to investigate if it indeed plays any role in stampedes actually being unprofitable in the long run to us Homo Sapiens.

And for that investigation we will have to take a detour. A rather long detour through some two and a half million years of evolution of the Mankind.  I am not an anthropologist. Neither am I a sociologist. I would still like to venture into this unfamiliar territory to ferret out an answer that is not just plausible but convincing and logical. History has witnessed a very skewed evolution of humans over the past two and a half million years.

Let's take a look at the archaeological and the historical progress of mankind. 

Archaeological / Historical Period*	Year from	Year to	Time elapsed              (in yrs)	Percent (%)	If the last 2.5 mn years were just one day                      (in seconds)
Stone Age	2,500,000 BC	3300 BC	2,496,700	99.8680	86,286
Metal Age	3300 BC	600 BC	2700	0.1080	93
Historical Age	600 BC	1400 CE	2000	0.0800	69
Renaissance	1400 CE	1800 CE	400	0.0160	14
Industrial Age	1800 CE	1975 CE	175	0.0070	6
Digital Age	1975 CE	Present	41	0.0016	1

(* the Archaeological / Historical ages represented here may not be accurate or precise but are mentioned only to elucidate the argument being put forth in this article. Similarly mention of  Digital Age and its beginning in 1975 is arbitrary )

The above table is self explanatory and it will be obvious to the reader that if we were to imagine that the total time it took for us humans to evolve from being just apes (or whatever else we were) to 2016 were one day then the mankind has rapidly progressed from the Metal Age to the present only over the last 184 seconds or just about 3 minutes. What is more amazing is the fact that the real explosive evolution to the modern times has happened only in the past 7 seconds since beginning of the Industrial Age.      

How come a species meanders for 99.86% of its evolution at a languid pace and suddenly shakes off its stupor and rolls at a break neck speed in a fraction of that period. I can’t think of a better explanation than the greed of humans. Greed to possess more meat, more cattle, more gold, more land, more comforts. Somehow there must have been a dramatic genetic mutation that made Man use metals, bronze and later iron, to augment his abilities and the rest is history.  Somewhere along that greed must have evolved into an urge to possess finer, non material aspects such as curiosity, knowledge, creativity and of course in modern times energy.  The greed has helped us rush from the Metal Ages to the period of Renaissance to the Industrial Age and to the current Digital Age.   It  has also shrunk the time humans are taking to propel themselves into more advanced forms of civilizations one after the other.    

As every coin has a flip side, sure does the greed too.  The human evolution is not as smooth as the above table would make us believe.  And more relevant to our discussion, it hasn’t been without hiccups either. Greed has its faults and it certainly extracts its price. Mindless greed has caused  flops at the best of the times and disasters at the worst.

Charles Mackay in his classic book ‘Extraordinary Popular Delusions and the Madness of Crowds’ has  chronicled several follies committed by the peoples of Europe in  17^th and 18^th centuries. These were  the result of the hysterical societies which seemed gripped by mass hypnosis. They simply seem to have suspended reason and joined the bandwagon because everybody else was doing so.  So the 17^th century saw Europe engulfed in Tulip Mania which at one point shot the prices of Tulip bulbs to hundreds of thousands of pounds at the current value. Needless to say that the market for the Tulip bulbs eventually crashed sending  several into bankruptcy. But we don’t need to go that far back to discover the perils of such hysterical bandwagons. Dot com bust around turn of the century and Subprime debacle of the last decade are proof enough that human greed has no expiry date. This also explains otherwise confounding phenomenon of  entrepreneurs  herding around wallets, hyper local, on demand businesses  in India in spite of obvious downturn of fortunes due to overcrowding. 

So while wildebeest will continue their stampede into the future forever, our species will have to keep inventing newer ways to satisfy its greed. 

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Internet Banking? Mobile Banking? Sorry, please say it again, do you mean Digital Banking?

Long ago there was a time when people could access the internet only through their bulky personal computers. You may say ‘long ago’ sounds a bit dramatic because it must have been barely 10 year ago that the PC was the only means for all of us to access the net. But like Ice Age, Stone Age and Iron Age we are living in a Digital Age. And the time in this Digital Age is calculated by the Moor’s Law. Way back in 1965, Gordon Moor had predicted that the computing power will double every two years. So by the standards of Moor’s Law, the primary means of accessing the net through PCs is a relic of 5 digital generations ago. That is long ago indeed.       

I never cease to be amused when people – bankers for god’s sake – use the terms Internet and Mobile Banking. Somehow what is unsaid or implied is that the former is accessed through desktops, the good old Personal Computers or laptops if you will. On the other hand the latter suggests carrying out banking using a mobile app or over SMS or even in some developing countries over USSD.  

But what happens when you do your banking transaction using a tablet, a pad or a smart phone? You simply type mybank.com on your mobile browser and start transacting. So is it now internet banking or mobile banking? As a fact of the matter there are even two separate regulatory guidelines for Internet and Mobile Banking in India.

Staggering 80% of the total internet users in India access the net using mobile phones. Though there is no reliable data available, it will be safe to assume equal proportion of the customers must be carrying out their banking transactions using their mobile phones. More over with the advance technology available today, most of the websites anyway detect if a browser making request for a webpage is coming from a ‘desktop’ or a mobile phone or a tablet and render a page suitable for the screen size of the device making such request.

With the launch of Unified Payment Interface (UPI) in India most of the e commerce transactions will – in reality – be m commerce transactions as a customer will be required to authorize the payment using an MPIN after receiving a payment request on the mobile phone. So as and when  UPI becomes the preferred mode of payment, the end point of all e commerce transactions will actually be a mobile phone  irrespective of whether the goods were purchased on a merchant’s website, in the mobile application or at a shop.   

As for security of an online banking transaction carried out through a particular device say a desktop or a mobile phone there is no more or less vulnerability due to using one or the other.

I don’t want to speculate here whether PCs will be extinct or not but one does not need to be a visionary to realize that most of the incremental access of the net will be through mobile phones or handheld devices. And as a corollary most of the incremental “internet Banking” transactions will be done using mobile phones.

So Banks, Customers and even Regulators need to start using a more generic term Digital Banking for all online transactions regardless of which device is used for carrying out such transactions. There is also a need for a unified Digital Banking regulation in India instead of the banks having to refer to two  separate guidelines.  

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KYC - it's a common sense actually

KYC : It is not whether you should or should not  Know Your Customer but it is How! And I will let you Keep Your Counsel

KYC is just a fancy acronym for Knowing Your Customer. It is coined mainly by the US legislation such as Bank Secrecy Act, 1970 and later reinforced by the Patriot Act, 2001. Effective KYC ensures that the customers of banks and Financial Institutions do not remain anonymous or worse fictitious. It is a major and a very effective tool to prevent money laundering and terrorist financing. Central banks and the Financial Institutions (FIs) around the world have adopted the KYC policies vigorously in the aftermath of 9/11. 

I was conducting a seminar with the constables and officers of a Cyber Security Cell of Mumbai Police recently.  After my lecture a constable asked me whether it is sufficient to collect all the correct proofs and not use common sense at all. Puzzled I asked him to elaborate. He narrated the case of a fraud his cell was investigating. A person opened an account with a bank at its Dadar branch in central Mumbai with a residence proof of Vasai. Vasai is a sleepy suburb of the Mumbai Metropolitan Region about 55 km away from Dadar. This gentleman had received money into his account through a cyber crime, withdrawn it and simply disappeared. The constable wondered why would a branch manager not ask the customer before opening an account 55 kilometer away from where the customer resided when there were at least a dozen branches of that bank between Vasai and Dadar.

And this one takes the cake. A friend of mine had rented his place to a bank to run its ATM. He had also taken a mortgage from that bank for which he was paying his installments regularly. One day the branch manager of a branch where he maintains the account asked him submit a copy of his PAN card*. When my friend protested that he had already submitted it thrice already, when he opened the bank account, took the mortgage and rented his own place the bank to run its ATM. The branch manager apologetically said he was sorry he was just following the KYC guidelines.

Now I must ask the obvious question. Is collecting a copy of the PAN card 4^th time when an FI has 3 copies of the same card already in its record or opening an account of a customer residing 12 branches away, same as knowing your customer? I will keep my own counsel on this one.   

* PAN  is a  Permanent Account Number and it is allotted by the Income Tax Department of the Ministry of Finance in India.

(All views are personal)

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Start-up story in India : Bubbles are not formed in the placid water.

An Economic Times headline screamed a few month ago, “Is the bubble bursting for India's online start-ups?” It listed several examples where the poster boys of the Startup bandwagon such as Zomato, TinyOwl, Food Panda, Housing.com seemed to tumble.  There is also growing debate whether the valuations of the stalwarts like Flipkart, Snapdeal and Oyo are unrealistically inflated.  But the purpose of this post is not to argue for or against the business models of the start ups or their valuations. Enough and more experts have been commenting on that already. I want to dig deeper and explore this phenomenon of Indian Start ups.   

  

Nehru in his classic treatise The Discovery of India says As the First millennium of the CE approached its end, all the rich heritage of India’s Culture, Arts, Science, Literature, Philosophy, Trade and even War craft appears to be  the afternoon of a civilization. Her heart seemed to petrify and gradually this petrification and decay spread to the limbs............... The sense of curiosity and the spirit of mental adventure gave place to a hard and formal logic and a sterile dialectic...................India was drying up and losing her creative genius and vitality. ........................

If a similar discovery is undertaken by another great thinker after a few centuries, he would certainly mark turning of the 21^st century as the Economic Renaissance in India. Especially the last decade or so has seen emergence of a new breed of entrepreneurs. They are not scions of rich business families but have come from urban, middle class families. They are young, well educated, highly ambitious and even brash. With almost 10,000 start ups, India is ranked almost 3^rd (after the USA and UK) in terms of the total number of active start ups.  And despite doomsday predictions the start ups are here to stay and grow.

Why I bet that this particular period than any other in the past for it to be marked as an epoch of the Indian Economic Renaissance? There are several reasons for that.  Something fundamentally is changing at the core of the Indian society. This is not just an incremental or a superficial change but a tectonic shift in the ethos of the peoples of this country. And it seems to me that in its wake this change has triggered an irreversible fission chain reaction.

So what is changing?

First and foremost it’s the attitude. In the 21^st century India people think it’s alright to fail but you tried. There is no social stigma attached, either to the failure or to the failed.  In fact we now willingly agree what is universally accepted that only the brave may fail because they try. While USA has over 85,000 start ups with population of barely 300 million, India with her population of 1.2 billion people, can easily provide enough business and growth opportunities for a few hundred thousand more start-ups.  

Second the employment seekers are becoming the employment creators. For almost two hundred years the ultimate middle class fantasy has been to ensure that their children get a degree and then get a job. And better still a job with the government. Because a job fed the whole family and the government job assured that for rest of your life.  Only those who failed at getting a coveted degree or a job would consider starting a business enterprise so long as they could not land a job. Any job.  With so many new start ups mushrooming practically every day, one hopes that very soon the government will not be the largest job provider.  Though start ups are estimated to have created 100,000 direct jobs so far and are expected to reach around 250,000 to 300,000 by 2020, what is more  exciting is the indirect employment they are creating.  For example, the Teamlease Employment Outlook Report says that the e-commerce sector has created a large  number of jobs in two categories: taxi drivers, and delivery personnel, hired in large numbers by online shopping websites and apps.

Third is the change in the consumer behaviour. IRCTC can safely take the credit for hooking on the train travelers early on to buy train tickets on line. We have come a long way now from buying train tickets online to even vegetables, grocery and medicine. This change is addictive and infectious. It is also spreading albeit slowly but surely to  the  tier 2 and 3 cities.  Consumers are warming up to the fact that buying stuff online is not only convenient but also safe and reliable.

Fourth, the start up economy is driving an economy of start ups within itself where such a symbiotic dependence is sustaining both. For example, we see spawning  of so many newer start ups to cater to the peripheral needs of earlier start ups. They are engaged in the areas of supply chain management, logistics, data analytics, artificial intelligence, digital marketing, payments so on an so forth.  This support system will ensure survival of both sets of the start-ups    

Aren’t bubbles still better than the sloth? They are result of the churn and turbulence in the environment which did not stir for a thousand years. Nehru lamented that the Indian society had lost its values about enterprise, the restlessness, the curiosity, the madness of explorers by end of the first millennium CE. These start ups are a sure sign that India is getting its mojo back.

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Hitech and a bit of obfuscation are two sides of the same BITCOIN

BITCOIN : The last BIT on it is yet to be heard..............

What is Money? An economist would define it as a Monetary Base added to the broadest money supply,  M3.  A lawyer would argue it as a Legal Tender. An entrepreneur would say it’s a means to realize his dreams. A pauper would regret he never had it.  A spiritual guru would scorn it as Maya, a mere illusion. But if somebody were to ask this to us, the dyed in the wool bankers, we would solemnly declare it as the TRUST.   

In India, the Governor of the Reserve Bank of India promises to give the bearer the sum equal to the denomination of the currency note. While rest of the world trusts the US Dollars, the Dollar Bill of the US of A  says “In God We Trust”.  So the next question would be, ‘Who is trusting Whom’? In times ancient and in times modern, the ruled trusted the ruler in matters of Money.  Be it a monarch, a dictator  or a head of an elected government, the hoi polloi always put their faith in the “money” issued by the ruler.   

If that is so then it will lead us to the third logical question ‘how does money look like’?. Money can come in any form. Currency notes, coins, deposit receipts and so and so forth. Deposit Receipts being the balances kept in the Commercial Banks. Though the commercial banks, don’t print the money themselves, they hold it as trustees. And in them put the depositors, their money and their trust. From historical to  contemporary times, the Banks played the role of the Trusted Third Parties. 

This brings us to the fourth question, can money exist which is neither issued by a government and nor held with the Trusted Third Parties’? If the answer to this question is yes then would you wonder if you could automatically trust such money ? That’s the million dollar, err BITCOIN question.

The BITCOINS, can’t be kept in a wallet nor can these ever be seen. These are amorphous bytes stored in a countless computers around the world. In spite of the BITCOINS being around for a past few years, ironically nobody knows who invented these? We saw earlier that the rulers always took pride in the money they issued. Rather money was the symbol of their power. As for BITCOINS their creator or creators feel safer in remaining anonymous. This is notwithstanding the claims made so far by a Japanese and an Australian to be inventor of the BITCOIN.     

These BITCOINS are not stored – even digitally – with any Trusted Third Party. There is no central record or a common ledger which gives an account of the total bytes created or circulated. BITCOINS are generated, paid and stored as bytes using a beautiful and a novel concept called BLOCKCHAIN*. This BLOCKCHAIN allows all the members to view and validate every single transaction taking place in the network, around the globe in real time. So every time a sender “S” pays some BITCOINS to a receiver “R” the entire network ‘sees’ this transaction. It is up to the network to determine the authenticity of this transaction using the complex algorithms on very powerful computers. When a sufficiently large number of other members (beyond a critical threshold number of the members) validate that “S” indeed had enough BITCOINS to pay to “R”, they ‘authorise’ this transaction and allow it to be included in a “BLOCK” of valid transactions.  Thus in the world of BITCOINS “S”, “R” and rest of the members are trusting each other without any need for a Trusted Third Party. BITCOINS also allow “S” and “R” to remain completely anonymous from each other as well as from rest of the members of the network.

This now begets the fifth and the last question as to  ‘who and why would anybody want to be receiving and paying money anonymously’? The proponents of the BITCOINS claim to be libertarians and advocate laissez faire. The doctrine of Don’t Ask Won’t Tell.  One can understand such a need under exceptional circumstances such as  natural or man made calamities of unimaginable magnitude. However if you are earning your money legitimately, paying your taxes, transferring money for the business you don’t want to hide then there’s the good old money which you always trusted.

* BLOCKCHAIN – BITCOIN probably is the only well known, well publicized even glamorized  by product of the brilliant BLOCKCHAIN. Opportunity or the need for the BITCOINS to become mainstay is yet unknown.  But the underlying philosophy powering this phenomenon, the BLOCKCHAIN shows huge promise. Stay tuned for a deep dive into BLOCKCHAIN and how it may be used to provide wonderful solutions for payments, remittances, stock and commodities trading or even inventory management.

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Payment Banks - There's many a slip between the cup and the lip

Payment Banks – Why is it also brave to turn back

“Because it’s there”, George Mallory’s immortal riposte on why he longed to  climb  the Mount Everest is now part of the folklore. But it will take a lot more than the heroic bravado to want to run a payment bank (PB). Like the Everest, the challenge is twofold. One, it is about the degree difficulty posed by the mountain itself. And two, it is the climber’s mental and physical endurance, his skills, his will power and maniacal focus on the goal to stay on the course.    

So what’s the degree of difficulty in setting up a PB and turning it into black?

First and foremost let’s see how a typical universal bank (UB) earns most of its revenue.  Net Interest Margin or NIM is a major source of income (60 to70%) of a UB. A typical UB operates at about 4% NIM. What about a Payment Bank? It will not be difficult to imagine that being the new entrants these banks might end up paying higher interest on the deposits than what most of the UBs are offering, say 6 to 7%. More over PBs will need to maintain 75% of their deposits in safest securities such as government bonds. A back of envelope calculation says that their NIM will hover around 1.5% to 1.75%.

This is not all. UBs also supplement their income by earning fee. This fee is earned by advising their customers on Investment and Insurance, Treasury Operations and Commercial Banking.  Fee from Commercial Banking is primarily  due to their ability to extend fund and non fund based limits to their small, medium and large corporate customers. Anybody would guess by now that a PB on the other hand has no opportunity to earn fee from Commercial Banking operations as it simply can’t offer those fund and non fund based limits. It can only earn fee by way of Transaction Banking and by  distributing Insurance and Investment products. It is still early days to comment on their ability to earn large revenues by way of Treasury operations. This will stunt the opportunities of earning fee for a PB.

These challenges are presented to the Payment Banks by the very design that created them in the first place. Payment Banks are going to have to take a route to the top through a very steep climb indeed. Dozens of people and organizations had applied to the Reserve Bank of India to get a license to earn the privilege of setting up a Payment Bank. And one hopes that they had a reason other than the one offered by Mallory.

What do the climbers need to possess to conquer the challenges posed by the Mountain?

We know now a mountain, even the mighty Everest can be conquered.  But it’s not a game for the novice. Beneath the dauntless spirit and nonchalant attitude of Mallory, there was one of the finest mountaineers in the world. That’s the point a PB should bear in mind.

For better odds to be successful as a PB, a player must have some unassailable core strengths.

• First of all, it needs clarity about who its target customer is.  It also must have a finger on  the gaps in the apparent needs of these customers and the existing options available to them.  It will then have to identify if there are yet any undiscovered needs of these customers which can be fulfilled for a price.
• Second, it should be a brand that people will trust with their money. It is easier if the aspirant of a PB has already acquired and serviced those millions of customers in its present avatar.  
• Third,  it is inevitable that customers of a PB would prefer to avail its services primarily through their own mobile phones. This will require a PB to have an ability to deploy its mobile banking solutions easily onto the phones of its target customers.
• Fourth, it should be able to run a lean and mean force with bare minimum overheads. So as a corollary, cutting edge technology should enable every single aspect of its operations, from running customer facing businesses to managing back office processes. 
• Fifth, it should have ability to source and service millions of customers spread across the length and breadth of the country at a cost far lower than that  incurred  by a traditional Universal Bank. Rent and HR costs form bulk of the fixed costs of UBs. This would obviously mean that the last mile customer service points (CSPs) of a PB will have to come out of independent network such as local grocery stores.  This will afford them the ability to partner with such Business Correspondents on a variable pricing model. It is anybody’s guess what it would cost to retain loyalty of such independent network when a dozen odd other banks are also trying to woo them simultaneously.  
• Sixth and the last point is its ability to sustain for unpredictably long periods before it can hope to see positive returns on its investment.

No mountaineer ever dared to set for the Everest without full insight into his own ability and the danger posed by the mountain. World lost two of the finest climbers in Rob Hall and Scott Fischer to the Everest in 1996 because they did not turn back. One hopes that the worthies didn’t apply for a PB license because it was available. Cholamandalam surrendered its license because it was brave. 

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Sound of Disruption

It is an awe inspiring ingenuity of Man to have built ships, pyramids, steam engines and  rockets. These were the disruptions that determined how wandering nomadic tribes metamorphosized into civilized societies. Nobody heard the drumrolls when a bathtub spilled water out, a kettle jerked with boiling water, an apple fell on the ground or a kite flew in a storm. More often than not many more of such mundane, nondescript occurrences have caused disruptions of such gargantuan proportions that the civilization of the past couple of millennia is unimaginable without them.

A probable meteoric shower made the dinosaurs extinct and an atomic bomb terrorized generations. But such disruptions are few and far between. More often than not history has witnessed  disruptions tip toeing around unannounced. In the recent past a Jobs, a Gates, a Zuckerberg and  closer home a Dhirubhai Ambani or a Karsanbhai Patel went almost unnoticed in the early phase of their careers which belied the deafening disruptions they caused later. Google ran a brilliant search engine for years and Whatsapp runs to date  without having a clue about a sustainable business model. It is needless to even mention what they have left behind in their trails.

Google reminds me of one Tanmay Bakshi. Tanmay says he has invented a search engine which is better than Google because when you ask a question to Google it shows you a few million pages and expects your to look for an answer. Whereas if you ask “Tanmay”, it gives you an answer with an accuracy score. Tanmay is 12 year old Indian Canadian and may alter for good how we search online in the next few years or the next few months.

For a smug organization waiting to “hear” the sound of disruption can be a double whammy. There are two ways in which an organization can allow itself to be annihilated by missing to identify or recognize a  shy  and almost demurring  DISRUPTION. First, ignore an idea heard  at a routine  town hall meeting or presented by a bunch of employees way down in the hierarchy. For an idea not presented by a hot shot consultant and which came without  a hefty bill is really not worth pursuing at all.  If  disruptive ideas came out of the brilliant consultants’ lengthy market research reports, then somebody forgot to keep a record. Second, ignore  an event, a trend,  a recurring customer demand or a complaint as just a passing fad or too vague.

Famously ignoring the touch screen cost both Nokia and BlackBerry their very existence. iPod and now generations of iPhones have walked by the Walkman, Eastman Kodak’s photo print is but  a footprint in the  history of photography. Pagers, Fax machines, Video cassettes and Compact Discs and now even  PCs have been disrupted by newer better cheaper technologies.

There is no one silver bullet to tame this animal called disruption. What may help is to keep one’s eyes open, listen more than talk,  put ears to the ground and once your gut says this is the one go for the home run as if there is no tomorrow. And then let the drums roll.

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Matter of Perception

Ptolemy’s perception of the Universe was such that the Earth was at its centre. And before Columbus,  the whole World perceived that the Earth was flat. Perception may be a result of intelligence not just of an individual but that of the entire species.  Edwin Abbot’s novel Flatland imagines a 2 dimensional world populated only by the 2 dimensional geometric figures. Mr. Square in the Flatland ‘perceives’ a sphere – a 3 dimensional object – passing through the flatland only as a series of expanding and shrinking circles. Since a sphere can’t be ‘perceived’  by the townsfolk  of the Flatland, it simply can’t exist.   

But it is not only the experts whose perceptions are borne out of their ignorance or in case of the denizens of the Flatland, their own inadequacy. Each one of us is a creature of our own perceptions. I don’t even want to guess – at this point in time - whether the perception is a cause or an effect of who we are!

What determines our PERCEPTION? It could be any or all of myriad of factors; Genetics, Gender, Ethnicity, Education, Social &  Cultural milieu, pleasant or tragic Experiences or just plain providence. Perception as we know, also changes over a period of time.   An individual’s ‘perception’ or his world view seems to me as unique as his fingerprint. However at times a person or a whole bunch of them will simply suspend his or their own perception and ‘adopt’ the perception of the majority because it is either safe or convenient or profitable. Naturally, perception is at the core of how families, communities, organizations, even states behave  and respond at any given time to any given situation.

Despite having discovered a tricky quagmire around this seemingly innocuous perception, I want to use mine to reflect on several relevant topics we encounter in our families, societies and organisations. I want to take liberty to share my commentary on such topics and look forward to hearing from you.  What better name than the Matter of Perception.

I have used the pronoun he or his as a matter of habit. The intent is gender agnostic and also  implies she or her.  

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