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The Engima of Zero

Abdul runs a ‘kirana’ (a small grocery) store in Dharavi, the world’s largest slum in Mumbai. The area is also the hub of several financial inclusion, remittance and micro-lending initiatives. Abdul is now exposed to both mobile and card based banking and payment systems, as he sees new age ‘bank’ staff affiliated to Business Correspondents traversing his neighbourhood, issuing plastic!

Right across the street lie a few hundred leather goods outlets selling merchandise to mass affluent customers who make payments with plastic similar to those that are now increasingly visible on his side of the road as well. On enquiring he soon discovers that the retailers pay upto 2% of the value as transaction fees. Abdul is astounded and soon realizes that would be unimaginable for him! That would be the monthly cost of milk for his child, if he were to conduct all his business on cards!

The challenge at the Bottom of the Pyramid, as has been often stated is not in the opportunity or the scale, but in rethinking the basic principles of conducting business and commerce. Several industries have made significant progress in this area, led foremost possibly by the FMCG manufacturers, introducing low price variants in innovative packaging and sizes that can meet the stringent distribution and retailing environments in these markets. The low price points, as low as Re.1 for a shampoo sachet, is possibly the single largest breakthrough in breaking through this barrier. Is there a key in there for future payment systems as well?

With mobile phone and smart cards driving financial inclusion efforts, vast amounts of cash are being disbursed to this new to banking segments for government subsidies and welfare efforts. Business correspondents have been completing the last mile allowing these customers to deposit the funds into their bank accounts and also withdrawing cash as per their needs.

Electronic G2C disbursals have addressed transmission loss and costs incurred in managing cash whereas financial inclusion efforts have provided a safe and accessible haven for these new age customers to store their hard earned daily earnings and savings. However the fact remains that a vast amount of cash continues to remain in circulation!

The true gains to the economy would be maximized when the end purchase and sale transactions too were to be conducted in electronic formats, thus taking cash and the related costs out of the system.

Several initiatives, technologies and standards are being evolved to make low cost transaction acceptance a reality, but the fundamental premise remains that there is a cost of processing the transaction that needs to be borne either by the bank, the merchant or the consumer!. And here lies the challenge.

The classical model would require a department store to bear the transaction fee consisting of Interchange and processing fee, hence making the consumer immune to the payment format. The adoption of non-cash payments by consumers is then drawn by the security and convenience of electronic modes of payments via card plastic or even the mobile.

However cut across to the new age retailers comprising corner-store groceries operated by Abdul, neither retailers nor consumers would readily accept the burden of paying transaction fees. Hence how is the banking and payment industry going to cross this last mile?

The onus would then lie on the banks & financial institutions in creating a low cost transaction processing system that can handle micro transactions in a scalable cost effective manner. The additional challenge with mirco-transactions lies in the scale that it naturally offers, with more that 95% of retail transactions in India lying below the USD 5 mark. Hence the model to process a 2 cent transaction would need to be ridiculously cost effective.

However coming back to the moot point, why should this new age retailer and consumer pay any charges to migrate to cashless payments?

A possible solution could be in offering a price point of ‘Zero’ for both consumers and retailers alike! The inflection point lies in the design principle that starts from this thought of ‘Zero’.

A classical but yet unviable banking approach to this ‘Zero’ philosophy would be to make enough float money from balances maintained in the retailer and customer bank accounts to subsidize the cost of acceptance and processing infrastructure. In the current scenario, consumers are quick to withdraw cash received, rather instantly and in making few deposits, making the float revenue opportunity scarce.

Hence, back to the moot question. Who is going to pay for this?

An alternative approach could be in re-engineering some of the business principles that have been deployed in mass affluent consumer markets. These would appear to be ancilliary revenue streams of most payment and card networks. The departure is the thought that makes these, the primary revenue streams in creating an economically viable electronic payments system.

A new payment system paradigm could evolve wherein it’s not the banks and payment processors alone who attempt to reach out to these consumers, but a coalition of players that are seeking in creating value on this end of the pyramid. With all these players attempting to reach out and transact with the same sets of customers, is it possible to evolve a new payment system wherein organizations and entities beyond the triad of consumer, merchant and bank fund the eco-system?

To trigger your thoughts in the Quest for ‘Zero’, some simple examples demonstrating the possible path….

1. Create a ‘Wow’ Pull Factor

Consumers need to be drawn in by incentives for using the new non-cash systems, offering greater value than using cash

ü  An FMCG manufacturer could transmit trial mobile coupons for a shampoo sachet trial to customers who have spent more than a specified amount in a retail community accepting the new age payments

2. Pay for Services that increase business

ü  A retailer may not pay transaction fees, but may avail a facility for a fee allowing him to transmit offers to customers who have transacted more than twice in a month from his store!

ü  Enable special promotional tie ups with manufacturers directly through this eco-system

3. 3rd Party Entities Pay for accessing the ecosystem

Financial Lending Intermediaries : Principles of microfinance extending to retail purchases allowing consumers to pay in EMIs for purchases from retail stores, and the financiers pay a distribution and collection cost to the merchants

Manufacturers & Service Providers : Manufacturers could extend cash back and discount schemes applicable as in the conventional card industry

Mobile Operators : Offering micro air time incentives (eg. 1 cent!) to drive customer acquisition and reduce churn linked with consumer purchases


This leads us to the next frontier in payment systems design? Would that be the right quest in itself? Yes, payments remain the bedrock of commerce and are designed to be adaptable in multiple modes. But with new technologies coupled with rapidly evolving consumer preferences and adoption cycles, should we actually be designing a consumer marketing and retail business system with payments embedded into it?



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