Over 99% of plastic, Internet and electronic money transactions in India by Indians — by value and number —are purely domestic. Then why is this crucial business handled only by foreign companies?
Just for a moment, sit back and imagine an extreme scenario - it is the year 2010, in an alternative independent India, with a very open market philosophy, and low self-esteem. Our EVM (Electronic Voting Machines) are controlled and maintained out of Florida. The price of bus and train tickets is set in Singapore, and the Indian Railway's computerised reservation system is centralised in Toronto. Mobile phone companies are all from Holland, and mobile phone instruments are sold only if they were made in Finland or South Korea. Cars are now imported only from Germany, the UK and Italy. Auctions for tea and shipping freights are undertaken only in London - for domestic as well as international markets. And of course, India's currency is still printed and designed at Threadneedle Street, and fuel prices at filling stations will be set in Houston, Texas. And everything is released in India only after it has run its course abroad, and newer versions or products are released there.
The list can go on. And on a personal level - Indians are not allowed to be Captains and Chief Engineers on Indian flag ships. (Incidentally, this was the case with more than a few Indian flag owners even till as recently as the '70s).
Thankfully, over the past few decades, we grew out of all this dependence and lack of self-confidence as a country. Rare and stupid is the manufacturer who does not do a simultaneous release of anything in India. Regardless of anything said, slowly but steadily, India is reaching a level where everything can be manufactured or done locally.
Except for the payment processing industry. In the course of researching details for this series, your correspondent met up with a variety of people in the payment processing business - all with hardly a kind word for the Reserve Bank of India (RBI) and its rules - but none of them knew what to say when equally tough and strong rules about banking systems abroad were quoted. When asked a direct question on why this could not be done in India, the answer was always the same - oh yes, it can be done tomorrow, but the RBI has to take the lease.
I mean, even letting credit card data out of the US is something that is not permitted, and here we are in India - our complete plastic and electronic money information is transacted out of India. Wonder what the RBI has to say about that?
Now at the risk of being repetitive, but it is important, so, try to rationalise this. If over 99% of plastic, Internet and electronic money transactions in India by Indians, by value and number, are purely domestic, then why is this important business, as well as the information it generates, still permitted to be controlled by Visa, MasterCard and American Express, using three or maybe maximum four payment processing companies operating out of one geographical area of the USA called Georgia?
It would not be unfair to compare this with the way an entity called 'ARAMCO' operates in Saudi Arabia. An organisation so huge and powerful, that the bravest of the brave fear to even write about it, also because so little is known about it. However, being an ex-shippie has some benefits, and one of them is an exposure to the way oil moves all over the world. And an idea of the forces behind it. From landward, most of humanity cannot approach within miles of any oil facility, and those who do work there learn very soon to stay very quiet about realities. But we approach from the sea, and move right into the heart of where the action is, and after some time become very cynical as we go about our lives.
ARAMCO controls the transactions of all the oil in Saudi Arabia. Oil is currency and capital there. In effect, ARAMCO controls the spigot, the tap, and so it controls everything there.
Likewise, here in India, as the New Age progresses, it is our large consuming population which is increasingly currency as well as capital. The money they earn, remit, spend, save and everything else - the transactions go way beyond anything that the whole world's oil economy put together can even conceptualise. At least ARAMCO operates from Saudi soil. Here in India, our payment processing system doesn't have that privilege, and not because it is something that we cannot handle ourselves in India. Not just the hand on the spigot/tap, but the spigot/tap itself is located outside India. And it is not as though the payment processing industry is about rocket science. The standard on complicated monetary transactions across a vast range of platforms and modes is the Indian Railway Passenger Ticketing System. Setting up multiple switches for a domestic payment processing industry would be something they could do in very good order and very short time, as per inputs provided to this writer - and they apparently have been waiting in the wings to do exactly that for over a decade now.
Briefly, this is what the payment processing industry does. Like a many-sided crystal, each one linked to the other, it is beautiful in its simplicity. At its simplest, it operates as a trusted via media between a seller and a buyer, regardless of location or origin of both. At its most complex, it behaves as a multi-role middleman between the merchant and the buyer, again regardless of location or origin of both, but also facilitates the shipment and delivery of goods or services, to some extent intercedes in quality and quantity issues, handles foreign exchange transactions, provides credit and loans, assists in masking the real nature of the transaction, and so on and so forth. At the extreme, it also provides cover for and participates on the basis of money that has no colour or soul, in every dubious activity that humanity can possibly think of - witness the close synergy between them and, for example, the corporate pornography and organised prostitution business.
Since we are not in the morality business, we let that one pass - but let nobody else pass snide remarks on India's black economy being one reason why payment processing cannot be done in India.
As an aside, here is this question: Which two corporates are the world's largest - first and second - and are possibly now merging, in the pornography business?
It is nobody's case that the payment processing industry does not have a role in society, either. Large New Age companies like Cisco and Google were initially funded and started using credit cards, going through the same payment processing industry which approved the credits in the first case. Likewise, in its role as a counter to counterfeit currency, this industry is unbeatable.
The issue here, in its simplicity, is this - when will India run its own payment processing industry (in India) especially for pure domestic transactions?
And what is the delay about?
(This is the second part of a three-part series)
The payment processing industry-I
We have seen how over 99% of plastic, Internet and electronic money transactions in India by Indians are purely domestic. When will we finally get into this industry?
Sure, State Bank of India has its own credit card. As do a variety of other banks, shops, airlines, oil companies — even the Indian Railways has one. But it is not really “their” card, it is simply something called “co-branding”, which works very well for everybody concerned, especially for the payment processing companies, who get access to everything that banks or all other commercial establishments hold sacred and would normally never share so easily.
Which are their client lists and business secrets. And a very nice way to pull the wool over our eyes, fooling us into thinking that it is our own Indian card. Something like versions of history taught telling us that the British built the railway network for the benefit of the natives — while actually the broad gauge lines were laid out largely to ensure better movements of troops and cargo — while the rest of the country got the metre and narrow gauge lines, or none at all.
“But an India card will not work abroad.” How many times have you heard this? This statement, however, is incorrect. Just like your mobile phone service provider has tie-ups abroad now, with foreign networks falling over backwards to service the travelling Indian public, so also will interface work in the payment processing industry. Certainly, there will be resistance in the beginning — recall, for example, how difficult it was in the beginning to get the world to accept that technology made in India was not just cheaper, but often also better.
Likewise, the real fear that the established payment processing companies in the US have is that any real Indian competition will simply be far better. Because, most of that technology is already made in India. There is not a single mid-sized or large technology company in India not doing work for some element or part of this industry, so expect voices of protest from those lobbies, too — after all, why does the otherwise flag-waving NASSCOM keep so quiet about this subject?
“This is a very complex business, and needs specialised providers.” If it was about making airplanes, one could understand. But the payment processing industry is about as complex as another processing industry, say, the jam and pickle processed food industry. The raw material is all there, available off-the-shelf or from local vendors — who have handled bigger projects like elections and railways. The technology is truly as simple as jam. The networks already exist, and increasingly are largely secure over the Internet — and can be retained within the Indian end of the Internet cloud, too. In fact, this single move can also strengthen the approach towards an ‘Indian Internet’. The customer base is of course also all there, present and accounted for and growing at a rate unseen anywhere else in the world, and will certainly move towards something that will be cheaper and better.
Only thing left is that somebody has to take the plunge — and soon. Once again, draw a parallel, how efficient and cheap the Indian telecom industry is compared to the Western world’s telecom service providers? Despite all the fuss and song and dance about bandwidth and regulatory bodies — can we imagine what things would have been like if Ma Bell and AT&T were the companies calling the shots in India?
It is not this article’s role to try and advise the Reserve Bank of India on what needs to be done. There are certainly people who know better, and who already have this on their mission statements as well as list of things to do, and are probably addressing issues in ways unknown to the general public. We can only wish them well, and hope that they also agree that we are all still loyal to our countries, and not to corporates. As the salesman from the movie Network said, “There are no countries anymore, only corporates.”
After all, in a country where it is murmured that even the present PM was allegedly branded a ‘Naxalite sympathiser’ by the Punjab Police about 30 years ago, it would be very easy to brand somebody as being ‘anti-national’ for daring to suggest something that would be portrayed as slowing down the growth in India’s economy. Which is what some segments of the payment processing and banking industry, as it exists in India, have said and continue to say today.
But, the fact remains, the sooner this is done, the better. It is not difficult to imagine a day and age when using plastic provides the end-users — merchants as well as customers — a benefit over using cash. After all, the cost of handling paper money is something that most people forget — and that benefit needs to go downstream to people not using paper money.
Which, apparently, is something not too many people have factored in as yet. Because none of us are told the true cost of printing and using paper currency in India.
Among other things, the introduction of the Goods and Service Tax (GST) is going to speed up commerce within the country like never before. Across the country, manufacturing and consuming, as well as distributing and retailing capabilities, are being notched up at a rate which is amazing and currently visible only to those actually supplying equipment and technology to them. From the motoring hat that I wear, it is now increasingly evident that the country is moving towards an amazing leap forward as far as the small truck and small
quasi-public transport sector is concerned, both of which factors (GST and transport revolution) will increase by multiples the amount of money transacted.
Another anecdotal example — a particular religious organisation, headed by a very street-smart and television-savvy leader, is relentlessly building an empire of health foods, both processed as well as fresh. In addition, a series of healthy beverages — carbonated as well as otherwise — are way ahead of the development phase. For all these, and more, the manufacturing, labelling, marketing, distribution and cash management network is coming up very rapidly. Analysis on time taken between money collected at the retail counter till the time it hits the manufacturers’ bank is on a level which even the MNCs have not matched — and the better benchmark is the Indian Railways.
The big issue here is about how long the existing payment processors (a) keep the money with them and (b) how much they charge. The thinking here is that (a) the money should be credited to their bank as soon as the sale is rung up at the retail outlet and (b) the processor should give them a small royalty amount for the privilege of doing their business and the visibility therein to their other related financial products.
Well, if large retail chains as well as small shops can now charge large MNCs not just for display space but also “technical charges” for entering products into their billing software, then this is not a far-fetched idea either.
There is no denying the simple fact that the Indian economy and nation needs its own payment processing industry, just as it needs its own armed forces, external policies, postal systems and much more. Just because India was a comparatively late entrant to this system does not mean it has to depend on external providers for the rest of history, and pay royalties by way of transaction costs forever. In some ways, its own payment processing industry is about as important as its own armed forces — such is the nature of the business. This is overdue, if we have any self-respect as a nation, and there is no argument about this simple fact. India Card for domestic customers should have been launched yesterday.
But more importantly, if India as a nation is to stand tall amongst others, then it needs to start providing for how to take India Card international. And very soon. It is not just a question of self-respect, self-confidence, self-esteem and self-benefit as a nation. It is, simply, our due, as Indians, from our government. In the old days, people carried their national flags with them, and waved them whenever required. Now, all of us carry plastic, and we need to see more than a symbolic symbol denoting the Indian rupee when we travel.
The business model for an Indian payment processing industry is unarguable.
(This is the concluding part of the three-part series).
Long term investments require one thing, certainty. You are not going to get certainty and you are not going to win a game where your opponent is free to set and change the rules.
All trade, like a good personal relationship, is a matter of reciprocity. The last economic expansion of the prior decade even though successful was not sustainable. Mercantilist policies that limit domestic consumption, protect local markets, subsidize export industries and currency manipulation might be very successful for a while, but they cannot ultimately last, because the benefits are unequal. Eventually one partner will refuse to play.
Although many countries have increased their protectionist policies, China in particular stands out. Its policies might not have been so important when its economy and share of global trade was small. In those days the issues could be ignored. No longer.
In the past the lure of a fast growing economy with the largest consumer market on earth was sufficient to silence critics, but things have changed. China's trading partners have started to complain, loudly.
One of the most recent outbursts came from Jeffrey Immelt, CEO of the American conglomerate GE. In a speech in Rome, Immelt accused China of becoming increasingly protectionist. "I am not sure that in the end they want any of us to win, or any of us to be successful."
Immelt is not alone. Peter Löscher of Siemens and Jürgen Hambrecht of BASF have spoken about China. Formerly, these "foreign friends" kept their counsel. They stayed quiet about the problems and often defended China from overseas critics. The reason is simple. No one would criticize China, because it is often the largest market in the world and companies need it to grow.
But it is not only companies that have problems with China. Usually trade disputes with China are viewed as between China and the US. But recently other countries including Indonesia, Brazil, Thailand, Russia, and Europe have expressed concerns. Last year India filed more trade complaints against China than any other nation. Argentina was involved in spat with China over agricultural exports that originated as reprisal for Argentine anti-dumping measures.
The Chinese themselves have been dismissive. Before the price of gas collapsed, Russian foreign policy was anything but accommodative. The Kremlin felt that they had Europe by the scruff. China feels its markets and place in the world economic order gives it similar privileges. As Vice Premier Wang Qishan said last year, "You are going to invest here anyway."
Not exactly. Some companies may have already concluded that China's business environment is not worth the risk. They are realizing what they should have discovered many years ago. Despite the spin, China is not a market economy. Probably more that 50% of its economy is directly controlled by the government and the government sector is growing not shrinking. The rest is tightly managed through a vast regulatory bureaucracy and the state banks.
Since the state owns the economy and has the power to make laws and policies, why would it create a system that would allow more efficient companies or countries to compete? The barriers in China are just what you would expect. The state has used its power with an excessive bureaucracy, an "undervalued" currency, subsidies for home-grown industry and lack of enforcement of intellectual property rights to protect what it owns. Worse, China uses its security apparatus as a weapon for corporate espionage.
A good example is the case of Google. Google has been the subject not only of censorship of what information it can present; it was also the target of hacking. The hackers, who proved to be from China, were responsible not only for hacking and stealing intellectual property but of trying to hack into the emails of human rights activists. Google of course is not alone. Security has been breached in at least 30 and perhaps as many as a 100 companies.
Certainly it is true that other countries have used subsidies, non tariffs barriers, currency manipulation to further what they consider their national interests. China is not alone in this. The difference is in degree and the incentive to change. Without economic incentives of the state ownership of industries, other governments have to cater to other groups including consumers and voters.
For now China can and will most likely ignore the complaints. It rulers are heavily invested in what they see as a successful policy and see no reason to change. But markets are, if anything, flexible. There are other countries with lower wages. They are building infrastructure and have governments more amendable to changing laws. One country's arrogance is another's opportunity.
Still these multinational companies have only themselves to blame. Long term investments require one thing, certainty. You are not going to get certainty and you are not going to win a game where your opponent is free to set and change the rules. In the end, they will simply have to move on. As one expert said about Google, "If they didn't leave this year, it would have been next year." Immelt was right. Chinese government has no intention of letting it succeed.