Imagine a high stakes test in which you unexpectedly see a ‘match the following’ question. You remember everything that has led up to this moment, how you started doing those questions with random lines that made no sense to you after you were done-let alone your teacher-and how she told you the next time she won’t give you marks if you didn’t use the format of the numbers. The mental abstraction is broken by reality: it is the 1990’s and you have to guess the future – the 2020’s – and the options are before you:
| Column A | Column B |
| (i) A bureaucratic democracy that prides itself in nothing but that. | (a) Elimination of cash through the dominance of infrastructure backed by private players. |
| (ii) A leading technological giant winning the cold war whose military is investing in technology. | (b) Development of a payments system by a government agency utilized by private players. |
| (iii) A “communist” power gradually showing promise to the west that it could open to the world of technology but on the condition of more control for itself. | (c) A tech company struggling to make the process of payments better trying to counter the infrastructure problems that exist. |
As you think about the question, you suddenly find yourself switching to cognitive reverie. You know you will be wrong, but you are overcome with a certain intuition and can vividly see the future being spelled out in front of your eyes and find yourself here, with this article in hand.
Welcome.
PayTM Mat Karo: The Story of India
Amongst the people that know him, Vijay Shekhar Sharma is known to take punts that only someone who deeply understands India can. Needless to say, the institution he faced tough competition from in expanding PayTM-the Indian government-was one that claims the same thing about itself.
PayTM sought to take a big slice of payments in India with a wallet where people were supposed to keep money ensuring float for the company. The conditions seemed favorable and very similar to China a decade earlier: a $1B+ market, little competition from traditional banks, and a rapid increase in the number of people using smartphones. There was no shortage of funds: Ant gave $550m for a 25% stake in PayTM in 2015. It was expected to be a monopoly: the Ant and Tencent of India in one. The e-payments market received a major boost through Prime Minister Modi’s announcement of the demonetization of Rs.500 and Rs.1000 notes in November 2016. Nothing could go wrong for PayTM, or had it already?
In April 2016, the National Payments Corporation of India (NPCI) launched UPI. UPI allows seamless transfer of funds on a mobile platform connecting about 200 different banks in the country. The government sought to build the infrastructure and expected Fintechs to do the rest. Minimal costs (initially free), a convenient KYC, and the number of banks it had connected made it an attractive option for customers. Big Tech players willing to enter India quickly understood that India wasn’t the next China, at least in payments.
PayTM, however, faced a major disadvantage. It did not develop out of an e-commerce marketplace, unlike Paypal (E-Bay), Alipay (Alibaba), or even the late entrant, PhonePe (Flipkart). Its best bet was giving cashbacks and rewards to incentivize people and bring them to its wallet. This prompted the entry of PhonePe, Google Pay, Amazon Pay, and WhatsApp (almost, it could not gain regulatory approval till recently), who imitated this strategy, sidelining Paytm.
When you ask ‘who do you think controls the largest share of the market for payments both in volume and value in India?’ Google Pay is the popular answer. Think again. It is the regulator, NPCI and they aren’t shy about showing off their control. In November 2020, they capped the percentage volume transactions of UPI at 30% per third party application.
None of the players, including PayTM, can become market monopolies, as a large chunk of their business goes to UPI, which operates independently of the wallet. PayTM has tried to diversify its platform by introducing Paytm Mall, Recharge, Movie Ticketing, and recently, Stock Broking. Will the punt pay off? It might, but it still cannot be the Ant or Tencent of India.
Ant: The Tragic Hero
Alibaba’s founder Jack Ma, when asked why he was putting money into producing American films said that the heroes in Chinese movies all die in the end and he wished to create a movie where this didn’t happen. On 24th October 2020, he gave a speech at the Bund Summit criticizing the “pawnshop mentality” of traditional banks and regulators- stressing the need for data-based lending rather than lending based on collateral. He was not seen in public for the next 4 months, until early 2021. Meanwhile, Ant’s scheduled IPO (Initial Public Offering) which was going to be the largest in history did not receive regulatory approval, leaving people wondering if Ma was the tragic hero of his tale.
The tale began in the late 1990s and early 2000’s when despite having one of the largest populations with banking access, China and the system of payments it developed with UnionPay wasn’t willing to take up the large upfront costs that came with adopting digital payments and cheque payments. What was left behind was a cash economy with the largest currency unit of $16 and a government skeptical of tech companies of the West. Somebody heard opportunity.
Alibaba sought to integrate Alipay (its payment system) with an online market place that it had been developing since the early 1990s. Ant Financial was born. The opportunity presented to Ant Financial was similar to what India had, but unlike India, it had to bring the market outside of the legacy system without any governmental assistance. Ant, and Tencent its strategic competitor, utilized their e-commerce to beta test the product, before expanding services through investments by global private equity players, including a famous one by Masayoshi Son to better reach retailers and small businesses. More and more money started to stay on these platforms with the mobile revolution preceding these investments. Just like in India, there had to be someone who didn’t like the market power.
In 2016, the Chinese Government instituted the ‘Wanglian’ (Internet Payments Union) to challenge the ruling establishment of Ant and Tencent, who had captured more than 90% of the market share.
Anti-competitive concerns were amplified by the expanding lending business of these players. Slowly, the Chinese government became anxious over a credit bubble in the system and sought to give more loans in certain ‘priority sectors’. Jack Ma delivered his speech within this context, which angered some very powerful people.
Online payments are an interesting business: services provided to users are often of greater value than the revenue that is generated for the firm. Therefore, these firms are much better at collecting data than at being profitable early on. The data on lending is important to judge what kind of debtor a small business is, and therefore the market share allows you to control lending to those who can give back. It is based on this data that Ma wishes to make lending a function of the ability to pay back, but this is also the data that an autocratic government wishes to have. Giants often do not start with the intention of becoming, but they gradually end up creating value that is far greater than the cash on their balance sheets and their valuation in the capital markets. And powerful governments need that value to be utilized for their ends.
But what happens when governments aren’t autocratic? What if the land is free?
Stripe: Increasing the GDP of the Internet
The United States was a payments technology giant in the 1990s. Mass adoption of cheques had begun early on in the 1950s facilitated by the Bank of America’s initiatives and reached its peak in the 1990s. They were much ahead of India and China and should have been the winning choice for the adoption of digital payments as well (at least to a test-giving student). But the automation happened too quickly. Much of the system used in payments even today is based on infrastructure from the 1990s which isn’t good news. Despite having several online payment merchants early on, the payments scene in the US and much of the West needed a ‘convenience layer’ to allow payments to be thought of as an abstraction: something that would just work out for businesses and buyers like electricity or water. Stripe has tried to do just that with an aim to bring most of the payments in the US on the internet.
Having a small cut from a large volume business necessitates diversification. Stripe too tried to diversify. Through Stripe Capital, they wish to lend to cash-strapped businesses that can grow, with data and low rate float on their side. They executed this best amongst all the companies so far discussed.
Their services and fraud-detection become more streamlined with every payment. Slowly, they are becoming more adept at doing things that financial governments would do. Which is a value that they seek to monetize in the future.
The biggest source of their moat is not something they already have, but that they are constantly improving the process of payments with the aim of increasing the GDP of the Internet. With every problem they solve, they move ahead towards being the default choice of payments for both the consumers and businesses. Chamath Palihapitiya has an interesting hypothesis-the longer it takes to build a business, the longer it would take to destroy it. This culture of constant improvement on a day-to-day basis, compounded over time has the potential to forever change the way tech companies operate.
You realize this as you are still sitting in the test center, and you have seen it all before your eyes. You can still hear me, but the part on the three countries is in a haze. Even if you know the answer, you won’t be marked because nobody will believe you. It makes sense to tell the people that ask you to predict the future that you don’t know. They will probably be mad because, let’s admit it, not knowing isn’t an option. Perhaps you won’t get marks but you will be excited about what happens next.
The choice, of course, is yours.
