Companies & Sectors
The payment processing industry-III

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).

Related Stories:
The payment processing industry-I
The payment processing industry-II

 

 

User

COMMENTS

Diwakar

5 years ago

I had a doubt regarding this article. You talk about cards only. How exactly is the online banking system handled? Isn't that another form of Payment processing? No cards, just your online banking account. So, are those networks also routed from abroad, or are the internet payment gateways of Indian banks situated in INdia?

Aman

6 years ago

Nice series of article about the payment process.
Hope RBI takes a note of this.

BY the way, i wonder why we are more interested in news like Rahul/Dimpy etc. The News channels have got no sense of responsibility towards India's growth.
Most (Almost all) of the Hindi News Channels broadcast just entertainment and worthless news, and that is how the peoples thought/thinking process gets affected.

If this free media broad-casted things which mattered most it surely would have helped in a good way.

JD

6 years ago

YES MUST HAVE OUR OWN CREDIT CARD HANDLER.

SAME WAY EVEN US$ TT TRANSACTIONS WHICH ENTAIL HUGE PAYMENTS FOR HANDLING, AS MUCH AS US20= BY USA BANKS JUST TO ACT AS INTERMEDIARY, I WONDER WHY CANT AN INDIAN BANK HAVING FULL USA BANKING LICENSE HANDLE INDIA'S TRANSACTIONS AND ACT AS CORRESPONDENT BANK ELEMINATING THE COST EVENTUALLY. SURE THERE MUST BE MILLIONS OF TRANSACTIONS PER DAY.
AS I DO NOT UNDERSTAND , MAY BE READERS LIKE ME BE EXPLAINED ON THIS PROCESS OF GOING THRU CORRESPONDENT BANK.

REPLY

V Malik

In Reply to JD 6 years ago

Good point, ID - and maybe you or somebody could file an RTI Application with RBI asking them the same question.

Thanks/VM

V Malik

6 years ago

To all those who have read this, thank you - and please also read up on "China Union Pay". Now that's something, isn't it?

No country, no economy, no investment lasts forever

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.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).
 

User

COMMENTS

nandakumar

6 years ago

Further China has now developed an industrial production efficiency comparable to any acclaimed foriegn producer. It does not need the crutches of their technology anymore. So the attitude of 'take it or leave it'. The greed of other nations to make a fast buck out of Chinese has now been put paid.

REPLY

V Malik

In Reply to nandakumar 6 years ago

Brilliant, NandaKumar, I am going to use this statement if you don't mind . . . thanks/malQ

Narendra Doshi

6 years ago

YES, global companies MUST look long term lasting business interests & MODIFY their stragies with time & first hand experience, as they grow along.

Bill Rothschild

6 years ago

The Chinese situation should not be a surprise it was very predictable. The problem is that most GIANT companies, like GE and Siemens have a problematic GO BIG and GO GLOBAL vision and strategy and so they are at the mercy of China and other emerging nations. They need to rethink their strategy and do serious, objective strategic thinking and decision making.

Bill Rothschild author of The Secret to GE's success.

V Malik

6 years ago

Is this like a case of the pot calling the kettle black?

Take this para; 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.

Which colonial or neo-colonial country has not done this, and why are they crying now when it is being done to them?

FMC order sets off panic among MCX’s sub-brokers

The Forward Market Commission’s order banning the sub-broker system in commodity exchanges will hurt MCX the most; panicked sub-brokers of MCX seek respite

Commodities market regulator Forward Market Commission (FMC) today ordered exchanges to bring an end to the sub-broker system; allowing members to service clients only through 'authorised persons'. Exchanges have been directed to amend their bye-laws and ensure smooth transition to the new system within 60 days. This ban against sub-brokers will come at a huge cost to the Multi-Commodity Exchange (MCX), which is the only commodity exchange within the country still operating under the 'sub-broker' system.

MCX currently has around 15,000 sub-brokers under its fold, spread across the length and breadth of the country. What has ticked the MCX off is the fact that FMC has only given a window of 60 days for exchanges to comply with the new regulations. This means that MCX will have to arrange for the necessary documentation and compliance procedure within a matter of two months to enable its intermediaries to function on its behalf as 'authorised persons'.

A source close to the development in MCX told Moneylife, "MCX will be the only exchange adversely affected by the new guidelines. It will be next to impossible to shift more than 15,000 sub-brokers to the new system under 60 days. This has unnecessarily created panic among the existing intermediaries as the FMC order has called for stiff eligibility requirements in terms of infrastructure, documentation etc."

Apart from conducting an inspection of the branches where the terminals of the authorised persons are located and records of operations carried by them, exchanges have to maintain a database covering details about the PAN number of the entity, details of the member with whom the entity is registered, locations of the branch assigned to the entity, etc.

Commenting on the FMC order, the MCX official stated that it is an exact replica of the Securities and Exchange Board of India (SEBI) circular on capital markets issued in November last year and that the issue is only of nomenclature. "This FMC circular is a complete replica of the SEBI circular on capital markets, which called for discontinuing the sub-broker system last year. Essentially, there is no difference between a sub-broker and an 'authorised person'. The deliberations have been going on for more than 6 months. We had notified FMC that it is only a matter of a change in nomenclature. So why not have the same requirement for sub-brokers, instead of banning them?" he said.

Several commodity brokers agree with this point of view, saying that it is just a difference in nomenclature and nothing more. Most of the national brokers have a practice of issuing contract notes to the client themselves. "It will impact only those brokers who are issuing contract notes to their clients through their sub-brokers. FMC had to intervene probably because of the practice of some local brokers," said an official from a leading brokerage house.

While MCX describes its market intermediaries under the 'sub-broker' nomenclature, other commodity exchanges use different connotations. NCDEX uses the 'authorised person' nomenclature while some of the others describe the same as 'franchisees'. It is all the more exasperating for the MCX as it already does not allow its sub-brokers to issue contract notes to clients, as required of 'authorised persons' under the new FMC guidelines.

FMC has introduced these guidelines to ensure transparency and efficiency in the commodities derivatives trade. The FMC circular stated, "In order to streamline the regulation of intermediaries in the commodity futures market, commodity derivatives exchanges are directed to discontinue forthwith the system of sub-brokers. The members of national commodity exchanges will be allowed to provide access to their clients only through authorised persons."

Earlier, the members of exchanges appointed sub-brokers. Under the new system, authorised persons will be appointed only with the permission of the exchange. Among other guidelines, the order states that the authorised person shall receive his remuneration from the member only and can't charge the clients for his services. This will probably reduce the incentive for the authorised person to have more clients under his belt.

User

COMMENTS

shipra

6 years ago

banning the sub broker system would bring a state of cofusion in the members as well as sub brokers..please do explain in detail the implications of this new regulation..

pensalwar

6 years ago

wheather trading platfrom of subbroker is going to close completely or is there anyother way for buisseness

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