One of the core principles of corporate strategy is to create barriers to entry in order to build a sustainable business. We know it works because we have seen some of the world’s most valuable companies like Amazon expanding its network of warehouses and Google expanding its database and data mining capacity from day one. The 2nd-decade startups are also learning from the best. While Indian entrepreneurs have shown absolute promise in expanding their topline, time and again, they have also reflected that they understand the business well.
In Feb’20 edition of our newsletter, we talked about the launch of the All-in-One Android Point of Sale (PoS) device by Paytm. We believed that the PoS device holds a huge potential of unlocking access to large volumes of transaction data of the unorganized sector by allowing the recording of cash transactions and generation of bills. However, as our wise businessman, Vijay Shekhar Sharma (founder of Paytm) correctly puts it, “the device also in a way restricts competition entry, since a user avails an integrated Paytm platform for all sorts of transactions.”
The timing indeed could not be better as The National Payments Corporation of India (NPCI)
revised Merchant Discount Rate (MDR) for the Unified Payments Interface (UPI) to zero for all
domestic transactions from 1/1/20. This essentially means that e-wallets that facilitate UPI
transactions (Paytm introduced BHIM UPI facility in May 2018) will no longer receive
interchange fees (MDR contributed about INR 1,800 crore to industry revenues in 2019, as per
B/S) from banks for these transactions.
In an interview with Business standard, Sharma reveals some enriching details and also
defends himself from the industry critics: Sharma says Paytm enjoys 54% share in peer-to-peer payments and a whopping 66% in the merchant’s category (currently manages a network of 16 million merchants). He expects a modest 6.25% penetration of the PoS device, into Paytm’s existing merchant network by the end of the year.
The PoS device enables Paytm to pocket 30 paise on every INR 100 of the card transaction.
The device costs between INR 12,000 to INR 15,000 (covers the hardware and the cloud software) which is payable upfront and also attracts additional subscription fees of INR 500/month. The pricing itself poses concerns over its acceptance by the SME sector, especially because it is above the average market price for a PoS device, which are also usually available on a rental basis.
Bottom line: In an industry where even cab aggregators (Ola) have their own e-wallets (Ola Wallet), we believe that the introduction of a PoS device for integrated payments, indeed comes as a worthwhile deterrent to competition because let’s admit it, a kirana shop will not mind downloading yet another e-wallet from the app store and allowing one more QR code sticker on their front desk, but will now think twice before changing their PoS device, especially with the ease and convenience that Paytm promises to offer. It will be however interesting to observe how the pricing strategy of the PoS device develops following the market response.
Also note: Digital Payments See 30% Drop In Metros Due To recent Travel Bans, per Inc 42
This article is a part of the March'20 edition of our Startup Newsletter. Here's the complete publication:
