Payments is not a consumer product


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After a recent flight back to Mumbai, I undertook the perennial anxiety-inducing ritual of booking an Uber to take me back home. Since my Paytm balance was low, I had to scramble my way through the tedium of filling up the wallet, which would finally allow me to summon a cab.

Anyone who has landed in Mumbai has dealt with the vagaries of cellphone reception. If you’re lucky, you get out fast; other times, make yourself comfortable, everything that could go wrong will go wrong. This means that topping up your wallet can be no simple task; there’s a good chance the app won’t load; the SMS with the OTP won’t arrive in time; something ridiculous will happen, all the edge cases of technology wearing down your patience.

I stood near the front exit of the shuttle as it made its way haltingly to the terminal, 11 pm in Bombay, the bed beckoning. Itching to make my distance from the ambient stress you encounter at airports, I waited with bated breath for my OTP to go through, praying under my breath for probability to favour me for once.

It did.

Thanks to a habit of never checking my luggage in, I was able to get out in 5 minutes; a Cab was waiting in the pickup zone. It felt great. The complex systems undergirding the world just worked; a state of flow.

But the whole thing felt ridiculous, and I wondered if this convoluted process was really necessary. Why did I spend so much time on confirming a payment that I wanted to make? Should I have just taken a prepaid cab had it gone wrong?

The resistance was real; anything other than a genuine need to get home and I might have distracted myself with something else.

We never notice this consciously because we don’t know any better, but payments in India takes entirely too long.

Why? Because there’s still friction.

What is friction?

Think of eating out. In 2018, you can quickly tap Zomato and use its tremendous compendium of information to browse through what the top 500 restaurants are, filter it down to 20 by how much time you’re willing to travel, the money you’re willing to spend, and what other people like you say about a place, and finally take a gut call that the new sushi place looks interesting for a Thursday night.

In 10 minutes, you have decided to give this sushi place your money in exchange for food. In 1990, you wouldn’t have heard about it unless you stumbled by during a drive, or someone went out of his or her way to tell you. There’s a good chance this exchange wouldn’t have happened; dissatisfied by your lack of options, you might have stayed home. There’s a good chance this sushi place wouldn’t exist, because as a niche product, it wouldn’t find enough customers fast enough to survive.

This is friction at work — a thing you wanted to do is impeded by the sheer difficulty of being done.

Friction manifests in many forms — asymmetric information (do I know what I’m buying so I’m not cheated?), search costs (time and money), transaction costs (the cost of doing business), assortment (do they have what I want?), price (can I afford it?), convenience (delivery, after-sales support), trust, and working capital.

The goal of all businesses is to solve some friction that is preventing people from getting something done. When Zomato is able to solve a problem for restaurants and customers to find each other, they’re able to make money because they’re creating value that previously did not exist.

Payments technology is a solution to exchange friction.

Payments is about the last mile of an exchange—where value between two parties is actually settled. I give you something, money or good, in exchange for some possession or service of yours that I fancy.

In a world where 2 people want to trade, payments tech can reduce the impediments to a trade by doing atleast one of many things better:

  1. Establishing identity and transaction validity between counterparts who want to trade;
  2. Underwriting and managing risk of default;
  3. Ensuring security of payment credentials;
  4. Providing liquidity and settlement to the seller;
  5. Providing audit trail, receipts, and customer service tools;
  6. Provide data and metadata to improve the chances of a sale;
  7. Marketing to customers for the seller;
  8. Improving user experience: Providing a method of activation that improves the chances of the trade occurring by reducing some friction — what in product development parlance is called better user experience.

Any payment technology will do a mix of these elements with varying levels of competency. The seller of the payment tech bundles a mix of these services to as many sellers (or merchants) as it, and picks off a slim tax from every transaction that it enables. Paise on the rupee, but huge across the length of the economy where more than a billion transactions are processed digitally.

People who control value in this stack therefore are in a great position to set standards and prices by which everyone who wants to trade needs to abide by— a government of settlement commerce. Visa or Mastercard.

Now think about the payment experience with reference to probability.

In this second, I have a 100% desire to order a pizza home. Every additional second the fulfillment of this desire takes is a second where I might change my mind.

  1. Thought about ordering a pizza: 100%.
  2. Open the app and bring up the pizza shop: 90%.
  3. Browse through options, try to take a decision: 80%
  4. Consult friends if the choice is good: 80%.
  5. Get to payment page, select payment option: 75%.
  6. Fill CVV, receive and OTP, payment successfully goes through: 60%.

Each of these individual instances has a high probability of coming true.

But thanks to time, effort, and decision-making friction, the chance of a customer actually ordering that pizza falls to 60%.

(This is a highly simplified model to make the point).

If you have a 1000 customers who want pizza at some point in the day, only 600 actually get one. Over a year, if every person dreaming of pizza got one, 3,64,000 potential transactions could have taken place; only 2,18,400 actually did. This yawning gap could be the difference between a thriving business and a shut one.

This is friction.

This is what every business is fighting. This is why Dominos became a technology company.

In the US, thanks to regulations, customers are never on the hook for more than 50 Dollars if a fraud is committed. Banks and merchants eat credit card fraud, which means customers never have to worry about unforeseen liabilities arising, and thus they can shop trigger happy without facing the friction of 2-factor authentication.

This trade-off is worth it to companies because the seamless customer experience—no fraud risk, 30 day interest-free credit, wide acceptance—makes buying so easy that customers take to credit cards way faster, and spend far more over the course of their lives.

Ben Thompson explains this very well in this article with the following image:

Credit cards won well in this US because they’re so much more useful than cash.

In India on the other hand, 2-factor is near ubiquitous because banks and the RBI are reluctant to take the risk directly, and customer most definitely won’t.

This slows adoption.

2-FA means digital fraud and card skimming are way less of a risk here, and thus the cultural suspicion that Indians hold towards non-cash instruments is obviated to some marginal degree, and markets can function, though at a much smaller scale.

But these options are all still based on fundamental constraints.

You’re always on Visa/Mastercard rails, using switches between banks who are tied together by an incentive structure and business model that strongly limits how much you can innovate with the customer experience.

Why?

Because the suppliers down the stack are way more powerful than you are, and they like their steady stream of revenue, and thus, unless you can skilfully aggregate customers and demand, you are unlikely to have negotiation leverage that can push your suppliers to conform or standardise their service to ways that create value for you as payment technology, customers, or sellers.

Amazon can tell a seller, “Hey, put your stuff in my warehouse and pay me if you want to improve your sale.”

A seller (merchant) or a payment gateway can’t tell Visa or the assortment of banks anything of the sort.

So you end with defending legacy infrastructure that works okay, but severely constraints the consumer experience to protect its business model. This is tragic for the people who most care— the people making the trade; the seller and the buyer.

I think Mastercard/Visa create a ton of value, but my point is that because of the outrageous success of their previous business models, all possible innovation never takes off the ground because of the duopoly structure of the 2 networks, restricting innovation to the top, rather than right across the entire structure of the payments value chain.

To understand why this happens, you need to understand the problem that arises when intermediaries don’t have to compete for business.

Intermediaries generally arise when there is an efficiency to be exploited that generates more revenue than the cost of the intermediation. In digital payments, payments networks add value by enabling sales that wouldn’t exist in a world without payments instruments and infrastructure.

But this comes at a cost; if intermediaries become too large, they can demand a greater percentage of the transaction than simply the cost of servicing the transaction. This is how you end up with American payment networks like Visa and Mastercard companies charging upto 3%; customers have no chance of negotiating a better deal because they have nowhere else to go.

This is rent-seeking.

Thankfully in India, the RBI—by regulating the sale price—recognises the inherent tradeoff that comes when an intermediary eats the margin of businesses who are struggling to make money ,i.e., fewer businesses adopt the service, consequently, fewer consumers end up transacting with cards.

As so we end up desperately praying for the OTP to arrive on time while at the airport.

There is a better way.

If you want to get from the airport back to your home, how much time should you spend on payments?

The correct answer is zero.

Payments should be invisible.

Every single second added, everything you are made to look at or do to achieve your goal, every OTP, interminable pages that load, confirmation buttons, carts, time spent scrolling, everything is superfluous.

Everything is friction.

Every decision is friction.

And in a world where every other cost of the transaction is eliminated by giving the best price, the best selection, the best customer support, the best timing of delivery, the best financing deal, the only cost remaining is some form of lingering friction.

Every additional second of interaction increases the probability that someone drops off.

If friction is the only cost, then any business—all possible trade that does not come to be—is lost because of residual friction.

And thus the platonic version of payments is not a consumer experience—because creating any consumer experience for payments is creating friction. Forcing an OTP is friction; asking for 16 digits is friction; card failure rates is friction; offering 20 options to pay is friction.

Friction is loss.

Customers lose. Sellers lose. The world loses because people don’t trade.

Loss is opportunity—it means something better can help.

Get rid of this friction, and you have a new business opportunity; a positive-sum game.

This is what Simpl tries to fix—a step function improvement over the old ways of doing things; because that’s what customers need in this new era.

Here’s an extremely poor diagram made in Keynote to illustrate the future. (As they say, the future is written on napkins; this is the digital equivalent)

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