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Paytm Karo! Will Govt End Up Building a Private Monopoly?

Jan 30, 2017

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One company which has benefited tremendously from the process of demonetisation initiated by the Narendra Modi government has been Paytm. In fact, recently, the annual party speech video of the company, in which an overexcited Paytm CEO Vijay Shekhar Sharma can be seen speaking to his employees (to put it very mildly), went viral. The attitude of Sharma in the video did not go down well with whosoever saw it.

Indeed, the rise and rise of Paytm is worrying, simply because government actions are helping build a private monopoly in the finance sector. I had first written about this in The Vivek Kaul Letter (subscription required), but given the importance of this issue, I am writing this for the Diary readers as well.

In early December 2016, around three weeks after demonetisation was announced, I had to run an errand and ended up paying Rs 650 in cash. But before I paid the merchant in cash, I had a very interesting conversation with him, which is worth recounting here.

"You don't have Paytm?" I asked, hoping that I could simply transfer money to him through Paytm and in the process save on my cash reserves.

"Yes, I do," he replied, much to my surprise. So, I immediately downloaded the app on my phone and activated it. I already had a Paytm account given that I had been using it to pay for my Uber rides. But I hadn't used to pay for anything else before.

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Once, I had downloaded Paytm, I asked for the merchant's mobile number, which I needed to enter into the app, in order to transfer money to him.

He didn't give me his mobile number and instead suggested why don't I just scan and pay him. He felt that would be much easier. For the uninitiated, merchants who accept Paytm, have a code. This code is typically a part of a large sticker that has been pasted on to a wall in the merchant's shop. The app allows you to scan this code and the payment gets made to the merchant's account. (This like when it comes to technology needs to be tried in order to be properly understood).

I decided to scan and pay him. When I tried to do that, the payment didn't go through. This was a little surprising, given that there was no reason for the payment to fail. I had money in my Paytm account and I was using the app properly.

It took me a few seconds to realise that the merchant did not have the Paytm app but had Freecharge instead. I pointed this out to him. His reply was very interesting. He said: "Haan mere paas Freecharge ka Paytm hai (I have Freecharge's Paytm)."

This was a classic example of a brand representing the entire category. Dear Reader, I am sure, you would have heard of similar examples earlier as well. Like "Amul ka Cadbury (Amul's Cadbury)" or "HDFC ka LIC (HDFC's LIC, meaning HDFC's insurance," or simply "Xerox (meaning photocopy)". Along similar lines, in the mind of the merchant, Paytm stood for the entire category of mobile wallets.

This isn't surprising given that Paytm has been one of the biggest gainers in the aftermath of demonetisation of Rs 500 and Rs 1,000, by the Narendra Modi government. As the company said in a statement on November 29, 2016: "Paytm has registered a strong surge in online recharges on its platform post the government's move... As millions of new consumers tried online recharges for the first time, Paytm has registered over 35 million online recharges in the last few days."A major reason for this huge jump was because a picture of the prime minister Narendra Modi appeared in a Paytm advertisement. Also, the fact that the Paytm is the main sponsor of Indian cricket gives them a sort of legitimacy that other wallets don't have. Over and above this, for a period of close to two months people were short on cash.

But there is a basic problem with Paytm and other mobile wallets. As I found out, they don't talk to each other. There is no inter-wallet clearing mechanism. Like in case of credit or debit cards I can use a credit or debit card from one bank on a point of sale machine from another bank. Hence, my HDFC Bank debit card can be used on an ICICI Bank point of sale machine. This makes the entire system of consumer payments extremely easy given that the card and the machine need not be from the same bank.

The same logic doesn't hold in case of mobile wallets. If I am on Freecharge I cannot use the app to pay someone who is on Paytm. To pay him or her, I also need to be on Paytm. While, technology wise this is hardly a problem because all I need to do is download the Paytm app. Nevertheless, the way digital economics work, we may end up creating a monopoly in the financial space in the form of Paytm. And any monopoly, government or private, is never good for the simple reason that monopolies rarely think about the customer. This is primarily because there is no competition that can make them think about the customer.

Before we go any further, we need to understand the concept of network effect. The best way to explain this is through the example of a telephone. As James Evans and Richard L. Schmalensee write in Matchmakers: The New Economics of Multisided Platforms: "A telephone was useless if nobody else had one. Even Bell and Watson started with two. A telephone was more valuable if a user could reach more people."

The point being that more the number of people who had a telephone, more the number of people who would want to have a telephone. The economists call this the phenomenon of the direct network effect. This essentially means that more the number of people who are connected to any particular network, the more valuable it is to people who are already a part of it.

Here is another example. As Niraj Dawar writes in Tilt - Shifting Your Strategy from -Products to Customers: "For those who want to be a part of a social network, it makes sense to congregate where everybody else is hanging out. There is only one village square on the Internet, and it is run by Facebook. Being on a different square from everyone else doesn't get you anywhere-you just miss the party."

I am on Facebook because everyone else is on Facebook. When was the last time you heard of Google Plus? Economist Paul Oyer makes a similar point in Everything I Ever Needed to Know about Economics I Learned from Online Dating: "The rise of the internet has made network externalities more apparent and more important in many ways...Perhaps the best example of the idea is Facebook. Essentially, the only reason anyone uses Facebook is because other people use Facebook. Each person who signs up for Facebook makes Facebook a little more valuable for everybody else. That is the entire secret of Facebook's success-it has a lot of subscribers."

The more the number of people on a particular network, the more the number of people who want to join it and the more valuable it becomes for those already on the network. At the same time, as one company gets bigger, it also leads to a situation where the competitors get driven out of the market.

As economist John Kay writes in Everlasting Last Bulbs-How Economics Illuminates the World: "The company that is first to create the largest network denies access to competitors and establishes an unassailable monopoly...Connectedness is vital, and it is best to be connected to the largest network."

This explains the rise of Facebook and how it killed competitors like Myspace, Orkut and Google Plus. Or how Google killed the likes of Ask Jeeves, Alta Vista and many more. In fact, search engines like MSN and Yahoo, which have survived are barely used in comparison to Google.

So, the digital game is centred around building a monopoly and cashing in on it. As Ray Fisman and Tim Sullivan write in The Inner Lives of Markets in the context of network externality: "The bigger a company gets, the more valuable it is to each successive customer, there's a huge premium on expanding your customer base." An important part of this monopoly is to ensure that the app or the website, does not talk to other apps and websites. To talk to someone on Facebook, you need to be on Facebook as well. To talk to someone on Twitter, you need to be on Twitter as well.

Along similar lines, to pay someone on Paytm, you need to be on Paytm as well.

But that is not the case with other forms of communication or making payment. Take the case of the mobile phone. Calls made from a phone connection issued by one company are not limited to only those connections issued by the same company.

As Kay writes: "The world telephone system consists of many operators, large and small. Most provide service in a particular geographical area, and connect each other call's through negotiated access agreements."

The same stands true for ATMs as well. Payments can be made across banks. "Today, a network of clearing and correspondent agreements ensures that you can make a payment through your local bank to anyone in the world," writes Kay. You can withdraw money from an ATM of one bank using a card from another bank.

But this is something that is not possible in case of the web based messaging services. You cannot send a message from Facebook to LinkedIn, for example. Like you cannot make a payment from Paytm to Freecharge or any of the other wallets.

The mobile wallets need to be like email. As American writer Kevin Maney once told me: "Email is technology's cockroach: Everyone hates it but we also can't kill it. We can't kill it because it's the only communications tool since the telephone that is universal. As company walls and national borders break down in cyberspace, email is the only way we can share ideas and digital matter with nearly anyone, anywhere."

This is how mobile payment apps need to work. They need to talk to each other. This becomes even more important once we take into account the fact that prime minister Narendra Modi already has a dream of India moving towards a cashless society.

As he said in the November 2016 edition of the mann ki baat programme: "The great task that the country wants to accomplish today is the realisation of our dream of a 'Cashless Society'. It is true that a hundred percent cashless society is not possible. But why should India not make a beginning in creating a 'less-cash society'? Once we embark on our journey to create a 'less-cash society', the goal of 'cashless society' will not remain very far."

In the process of moving towards a cashless society, we shouldn't be creating private monopolies like Paytm, in the field of finance. The only way to counter this is to get mobile wallets to talk to each other.

I am not a technology guy, so I really don't have an answer for how this can be implemented. Nevertheless, the government's unified payment interface works across banks. We also have the Immediate Payment Service (IMPS) system which can be used for transferring money from one bank account to another bank account with a different bank, almost immediately.

Something similar needs to be developed for the mobile wallet companies as well. This would mean the involvement of the Reserve Bank of India. It would also mean developing similar standards and a clearing mechanism around which mobile wallet companies can work.

Of course, the venture capitalists funding the mobile wallet companies won't like it, given that each one of them wants to become a private monopoly and cash in on it.

Postscript: The merchant I talk about at the beginning of this column, seems to have learnt his lesson. The next time I went to him in early January 2017, he had the Paytm payment mechanism in place.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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18 Responses to "Paytm Karo! Will Govt End Up Building a Private Monopoly?"

DDB

Jan 31, 2017

Dear Sir,

You have through several articles on Demonetisation have established yourself as a " Modi hater" and propagationist of the "Demon" in Demonetisation. Once again , you have fallen short of acknowledging the benefits of less cash society which is a direct fall out of demonetisation.. Sir, if you may recall, the full page advertisement was an acknowledgement of the "Digital Move " our PM had taken issued by PAyTM. PAYTM just happened to take the "First Mover Advantage" and capitalised on the Oppurtunity which the situation offered like any other astute businessman/business house would have done.You seem to have misinterpreted it as if the Government has been supporting / building a Private Monopoly."Sir, Had you appreciated / acknowledged the initiatives taken by the Government to address the shortcomings of nthe mobile wallet in your article (as pointed by other readers), and the acceptability of the mobile wallet by all segments of people of our great nation within such a short time, your article would have been "worth a read and time well spent".

Like 

Shreek

Jan 31, 2017

Hope Vivek that this article is updated with views expressed by many of the readers. most readers would go through your article and not feedback given by your readers. in addition i would like to state the following points:
1. Ability to transfer monies across banks instantaneously was developed by NPCI at least 4-5 years back,may be more. During those days, such payment was made by using SMS through a featureless phone.
2.UPI which is a terrific innovation was created as early as April 2016 much before demonetisation. it is unique since it allows payment among banks without the need to use bank account number that automatically takes care of customer privacy. of course account numbers need to be shared for payment to non participating banks.
3.Paytm took advantage of the situation and converted itself from a noun into a verb

Like 

manish

Jan 31, 2017

As usual Vivek at his best to bash modi, you remind me of Mani Shankar Aiyar , both of you have brainless hatred for modi and find innovative ways to criticize modi.

Your article is ill researched lacks data and fundamentally flawed for various reasons.,,, As you mentioned you are not technology guy to better not talk on subject you dont know and have no data to backup.

Many of other readers have argues why your article makes little sense and is outdated.


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R Tayal

Jan 31, 2017

Can't believe it is Vivek writing this article insinuating Rahul Gandhi kind of allegations of patronage by the Govt to Paytm. Tomorrow if any govt comes out with a massive push to infrastructure spending, would one say they are favouring L&T or any such Co.? Is the Govt curbing competition to Paytm? How ridiculous can it get? Not expected of Vivek.

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Thilakanandan C

Jan 31, 2017

Through the BHIM app, one can transfer money to any bank account. even if someone has not installed the app, money can be transferred.

Like (1)

manoj

Jan 31, 2017

Dear Sir,

Let me share that now the euphoria or requirement is going down and what I seen people are removing the paytm. One reason is high amount of cash. We love cash and it is easy.

Like (1)

Chintan Patel

Jan 31, 2017

Hi Vivek,

Looks like this arricle was written a few month back and just posted now. You mus see the youurtube link of Nandan Nilkerni (Infosys) about disruption technology in Indian economy.

I think government new app BHIM and USSD money transfer technologies are much cheaper and I think in few months PayTM also will suffer. BHIM will become more unversal platform for cashless transection as it is cheaper and more secure and easy than PayTM

Like (1)

Varun Narula

Jan 30, 2017

Hi Vivek,

There are a few points that I would like to highlight on the article -

(1) The UPI Unified Payments Interface was created to address the interoperability issue. It actually makes the mobile wallet redundant because one does not need to pre-load the wallet to make a payment, the payment can be made directly from one's account. So, for e.g. the ICICI bank iMobile app now includes the UPI and one needs to create an id like 'first_name.last_name@icicibank'. Note that there is no .com at the end. This is your UPI id. Payment is made from UPI id to another. One need not disclose either the bank account or mobile number. Also, it will work across bank accounts. The GoI launched a reference app called BHIM . BHIM takes the abstraction a bit further, so one need not even disclose which bank your account is in as the id is of the form 'first_name.last_name@bhim. This is what the GoI is pushing and not PayTM. All the mobile wallet companies will have to include UPI in their apps to remain relevant.

The situation you have mentioned was true for a few days after 8 Nov, not today.

(2) The QR code which you scanned at the shop would have prominently displayed the brand of the mobile wallet. Obviously, there will be an error if you use PayTM to scan a Freecharge code. How could you miss that ?

I would request you to include the details on UPI as the article looks incomplete and thus misleading. I am not for or against mobile wallets or PayTM for that matter, but you have a large readership, many of whom will be aware of this.

Cheers,
Varun

Like (1)

VK Bhargava

Jan 30, 2017

The Paytm has very poor security system, my account was hacked and Rs 1074.00 was paid without any intimation to me.
On reporting, the Customercare of Paytm has not given any satisfactory reply/response. This shows the arrogance and irresponsible attitude of Paytm.
A Big Fraud is developing in the name of Paytm.

Like (1)

DINESH NAYAK

Jan 30, 2017

Product of a brand representing the entire category -- Bisleri mineral water.

Like (1)
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