Global Digital Divide

Gated Garden: India is Cultivating a Crop of Homegrown Digital Payment Companies to Challenge American Conglomerates on its Own Soil

May 03, 2020

Market Customers browse through a string of merchants of mom-and pop stores in Delhi.

Rajeev Garg is on the frontlines of the battle for India’s wallets. At eleven each morning, Mr. Garg opens his doors to wedding planners and housewives hunting for kitchen utensils to craft the perfect meal. For the past century at Mr. Garg’s family-run cookware shop in Agra — home to the Taj Mahal — cash was king. Now, alongside the wads of rupees in his cash register is a small but growing stream of digital currency hitting his bank account.

India’s government policy of removing paper notes from circulation to fight tax evasion has given a boost to a new breed of local players in the digital finance space such as Paytm and RuPay. These homegrown champions, which are valued at tens of billions of dollars by venture capitalists, are transforming every aspect of India’s economy.

Now, global heavyweights - Google, Facebook, Visa, and Mastercard - cry foul, saying support of these fast-growing Indian payment firms raises barriers to direct entry into the market and stifles foreign firms from gaining local market share.

Despite some heavy-handed international pushback, India’s moves to challenge foreign incumbents in the digital payments industry are essential to the nation’s goal of becoming a major global competitor.

By creating successful players of its own, India fosters an ecosystem where consumers can use diverse and unique payment options at varying costs, merchants can efficiently capture revenues and track customer trends, and the Indian government can protect valuable data from the arms of Big Tech while harnessing tax revenue to support critical infrastructure and assist in greater financial inclusion for all.

India’s homegrown strategy

Over the last decade, India has launched several initiatives to create a more favorable ecosystem for entrepreneurship — with a long term goal of bolstering the economy and making India more competitive on the world stage. This past January, Prime Minister Nardendra Modi reinforced his 2025 vision for India to be a $5 trillion economy by leveraging India’s unique strengths to improve prospects for homegrown champions.

Initially, the policies focused on developing infrastructure to support and encourage digital payments, which led to the rise of domestic firms. However, these domestic firms were far behind international incumbents, and the government implemented further regulations to equalize the space.

In 2012, the National Payments Corporation of India (NPCI) — a non-profit operating under the Reserve Bank of India to create nationwide standards in payments — created RuPay. RuPay is India’s own domestic card network, similar to Visa, Mastercard, and American Express, offering a system that enables all Indian banks to participate in electronic payments.

RuPay started to gain traction two years after it was introduced because of Mr. Modi’s implementation of a financial inclusion plan, Pradhan Mantri Jan Dhan Yojana (PMJDY), which pushed for all Indian citizens to open jan dhan (“people’s wealth”) bank accounts. This resulted in 380 million newly-opened bank accounts across India in six years – each attached to a RuPay debit card. By the end of 2019, RuPay’s market share in terms of the number of cards issued has increased to over 50%, with RuPay cards accounting for nearly 30% of all transaction volume.

But PMJDY’s jhan dhan initiative is not without its shortcomings. Due to the lack of available banking infrastructure in rural India, many of these newly created jan dhan accounts have remained unused. Miranda Pollard, a former associate at IDinsight, an international development nonprofit, explained that in rural India “citizens were aware of the new financial services offered, but didn’t know how to actually use the infrastructure — for example, not knowing how to use the debit card or ATM machine.”

Buckling to government pressure to keep PMJDY alive, banks were required to put small amounts of their own capital into accounts until 2016, when the NPCI stepped in to launch the Unified Payments Interface (UPI), an interbank money-transfer system.

Today, UPI lets consumers and merchants alike access different bank accounts on a single platform. India’s 40 million merchants are able to implement a seamless fund collection from customers in their shops and now 100 million users utilize applications such as PhonePe, Google Pay and BHIM, that operate on UPI’s infrastructure.

Another major policy in 2016, and one of the most radical with regards to the digital transition, was the government-mandated demonetization, in which 86% of Indian banknotes in circulation were recalled. The policy was initially implemented to curtail counterfeit cash and the shadow banking system but also forced Indian citizens to trust digital payments and store their stashed cash in banks.

According to a policy expert in the digital economy domain, Paytm was a small player before demonetization. As Indians scrambled to transfer their wealth to digital platforms, this currency shock indirectly led to the rise of Paytm to be one of India’s largest digital wallets. Today, Paytm has over 350 million registered users and has expanded to include an online marketplace and a financial services and banking branch.

As a result of these policies, digital payments have become a small but growing part of India’s payments ecosystem. Ninety percent of all retail transactions in India are cash, but digital payments are growing at over fifty percent every year. With ample new profit opportunities in an attractive market, it was only a matter of time before Visa and Mastercard caught on.

Sensing the growing threats to local players from international tech giants, the Indian government has swept in with additional steps to support domestic firms. Effective in January 2020, the Indian government waived merchant discount rates for transactions via all RuPay cards, which essentially makes it free for merchants to accept payments from consumers via RuPay. Further, In 2018 and 2020, the government presented two key regulations: data localization and a 2% equalization tax.

In April 2018, the Reserve Bank of India (RBI) introduced a bill requiring foreign firms to store transaction data in India, even if the transaction was processed abroad. This Personal Data Protection Bill (PDP) required that for transactions processed abroad, data must be deleted from abroad systems and brought back to India within 24 hours. And just last month, the 2% equalization levy came into effect, withholding 2% of e-commerce transaction revenue for non-resident businesses, in an effort to match the taxes that resident businesses have always been paying.

These recent policy moves are signals from the Indian government about its dedication to the homegrown strategy. While international incumbents balked at the announcement of these changes, the purpose of such actions is to level the playing field and poise Indian firms for major growth.

A gated garden

India’s homegrown champion strategy is not quite a walled garden, but instead, a gated garden. While local firms are encouraged to flourish and gain ground, the seeds of other firms from abroad have a chance to take root as well, under the watchful eyes of the Indian government.

At first glance, the storyline of Silicon Valley reaching into emerging markets for increased share, only to be chased away by homegrown champions, isn’t a new one. However, India’s approach to competition is distinctly different from that of another attractive market which has been successful at keeping foreign incumbents at bay — its neighbor, China.

In China, powerhouse firms Alibaba, Tencent, and UnionPay are iconic fruits of a homegrown strategy. With virtually no competition from Visa and Mastercard in China, UnionPay has grown into the largest card scheme provider by both card and transaction volume.

Alipay and WeChat Pay completely dominate mobile payments with their optimized algorithms and smooth user-interfaces designed for Chinese consumers’ tastes and preferences. These platforms are so-called “super apps” where all transactions, from paying apartment rent to food delivery, take place in a single application.

In major Chinese urban centers, cash use has almost dwindled to zero. A cashless society yields lower transaction costs, reduces the instance of counterfeit fraud, and most importantly creates immense amounts of valuable user data that companies can then use to further improve their products. China’s roaring economy and global prominence boast the successes of implementing a homegrown strategy whereby domestic companies can tailor their products directly for their nation’s consumers.

But China’s walled garden is not infallible. Foreign firms continue to face restricted access to the country’s $27 trillion payments market, with only some signs of the Chinese market opening up in the near future. The full blooms of Tencent and Alibaba now face the shears brandished by the Chinese government’s demands to monopolize information and require these firms to aid in making China a world leader in AI by 2030.

While India can learn much from China’s walled-garden approach, the country still thrives on competition between foreign and domestic firms on its soil as well as on foreign investments. Homegrown companies have benefited from the experience of foreign investors who have succeeded in other markets.

With at least 40% of share ownership, Alibaba and Jack Ma’s Ant Financial are Paytm’s largest shareholders. Paytm’s other key investors include SoftBank and Warren Buffett’s Berkshire Hathaway. PhonePe — the first UPI-based application — was an Indian-owned payments startup in 2015, before being acquired by Walmart in 2018.

A homegrown champion strategy for India benefits its citizens via exposure to multiple options. But a ‘consumers-first’ mentality isn’t necessarily the reason for the Indian government’s recent interest in the payments space.

India first

Visa and Mastercard have such an extensive stronghold on payments globally that it begs the question regarding India: why poke the bear (or bears)? The two companies operate in over 200 countries and have been successful in other emerging markets. Why does India want to compete in the first place, and why is it the government’s initiative and not the private sector’s?

Fostering a positive competitive environment to improve product offerings for Indian consumers is an obvious first answer. But India’s competitor to the American companies, RuPay, is backed by the Indian government and isn’t at all a private initiative.

A more plausible answer lies in Prime Minister Modi’s political agenda. Mr. Modi was first elected in 2014 as the candidate of the Bharatiya Janata Party (BJP). The BJP is the world’s largest right-wing party with strictly Hindu nationalist positions — and Mr. Modi’s rhetoric reflects this.

Modi + Trump Prime Minister Modi affectionately greets U.S. President Donald Trump.

In 2013, Mr. Modi’s campaign slogan was simple: “India first.” He’s consistently encouraged citizens to put India above all else, saying “Whatever you do, wherever you work, India should be the top priority of all citizens.” This sentiment aligns with the views of the BJP — and if this nationalism has trickled down to Indian citizens at all, customers may want to use RuPay regardless of whether it’s the best product or not.

That’s exactly what has happened in Brazilian e-commerce. In 2018, Jair Bolsonaro — a right-wing nationalist — won Brazil’s presidential election, and a wave of nationalism surged afterwards.

Amazon, widely regarded as one of the best e-commerce companies globally, struggled to enter Brazil due to local company MercadoLibre. MercadoLibre did already exist before Amazon’s entrance, but strong Brazilian nationalism and support for the local company essentially made it impossible for Amazon to take on e-commerce in the region, even if Amazon offered a better product.

The political parallels between Brazil in India are apparent given their respective leaders’ ideologies. And if India’s government has its way, its citizens will follow the nationalist sentiment and use exclusively Indian payment products as opposed to those offered by international competitors.

Prime Minister Modi wins regardless, but will get to take the credit if there is widespread adoption of RuPay and homegrown payment platforms such as Paytm, at the expense of the American powerhouses.

A crowded field in an important market

For American companies, the Indian payments market is important beyond its exceptionally large consumer base of over 250 million households. Rajeev Yerukalapudi, former Product Director at American Express, suggests that foreign companies will attempt to get data out of the Indian subcontinent to make their offerings better outside of India.

Mr. Yerukalapudi looks outside of payments as an example. “Look at what Amazon can do,” he says. “The average ticket size is way less in India than in other markets. They can take all of this consumer behavior out [of India] and drive offers and cross-sell to people across the globe.” He mentions that while there isn’t a guarantee that customers will buy similar items elsewhere, there is still a vast amount of reliability for cross-selling and pricing.

In India, the average online order is ₹1,250, or $16, while the U.S. average is $135. Because of this, companies like Amazon are comfortable testing different strategies on a small scale, as they leave more room for failure, and then they can extrapolate successful strategies to larger markets. Amazon even does this with its cloud computing arm in India. Foreign payment companies operating in India have a similar opportunity.

Visa, Google, and other payment heavyweights have entirely unfettered access to information about what consumers buy — the knowledge and reach into India’s massive data trove has the potential to generate billions of marketing dollars, but fails to pass the bulk of that value back to the Indian economy in the form of tax revenue.

In the past decade, foreign direct investment into the payments industry has flourished and shows few signs of slowing down. Accenture estimates fintech investments to have crossed $5 billion over the last two years, with notable investments into Google Pay, PhonePe, and Paytm. Paytm is often viewed as the market leader in Indian payments, given its first-mover advantage with its digital wallet offering further compounded by demonetization in 2016.

But the rise of UPI-based applications, such as Google Pay and PhonePe, as well as Paytm’s slow adoption of UPI has decreased its relevance in the payments industry. As of last year, Paytm has a lower UPI market share at 7%, compared to Google Pay and PhonePe at 57% and 27%, respectively.

Paytm is not quite yet the dominating champion India desires. In 2018, the mobile wallet was criticized in an investigative piece for doubly serving as a data collection pawn of the Indian government in turn for government backing against digital payment competitors. In full response to the scandal, Paytm reiterated that data requests are only answerable for national security purposes and lauded “trust” as the central “holy grail” policy of the firm.

Beyond privacy concerns, some Indians chastise Paytm’s core business model where reimbursements are delivered to the mobile wallet, not to the bank account of origin. As a result, Paytm users are required to pay transaction fees each time money moves between their digital wallet and bank account.

While Paytm may be a weaker player for now, its current market position produces the desired optionality for Indian citizens. India supports homegrown champions like Paytm to provide the much-needed check on the influx of international powerhouse-firms. In the meantime while Paytm scrambles to address customer complaints, Indians continue to use its platform along with other UPI-based payment methods at their discretion reflecting the overwhelming success of India’s homegrown strategy.

Street Shops Street Shops in Agra, India.

In fact, these UPI-based applications increasingly serve as primary competitors to legacy card schemes Visa and Mastercard, as noted by a Strategy Associate at one of these firms. “It’s the real-time payment networks built on UPI that are our main competitors. We’re constantly trying to identify use-cases where we may be replaced by UPI-based applications with changing consumer behaviors. We hardly pay attention to what RuPay and the other card schemes are doing.”

Increased investment and competition in the payments industry from India’s gated garden continues to benefit the average Indian consumer. Payment providers offer lucrative promotional offers for specific use-cases to encourage the adoption of their service. Indian consumers are spoilt for choice and often switch between providers to leverage the best deal.

This has driven significant positive externalities, including improved financial literacy for Indian citizens. Such strides in consumer education are crucial for a country where 76% of the population — roughly 1 billion people — are not financially literate.

Merchants like Mr. Garg are poised to benefit from further penetration of digital payment platforms across the country. “We’re able to check out customers faster to free up store space which lets me process more customers at a time,” he says. Mr. Garg’s cookware shop has seen increased efficiency through digitally-enabled business solutions and smoother payment processes for customers.

Offering such benefits to merchants across India is largely believed to be the rationale behind the payments industry’s biggest deal to-date: Facebook’s $5.7 billion investment for a 10% stake in Reliance Jio, Mukesh Ambani’s telecom business.

This deal will spearhead an e-commerce partnership between Mr. Ambani’s JioMart and Facebook’s WhatsApp. WhatsApp boasts 400 million users in India, as well as a recent approval from the Indian government for a full-scale rollout of WhatsApp Pay, the messaging service’s proprietary payments platform.

Reliance’s JioMart has access to the country’s largest retail network — including 30 million mom-and-pop stores across India — as well as deep pockets from Mr. Ambani, Asia’s richest man. The WhatsApp - JioMart partnership will enable consumers to conveniently transact with millions of small businesses, with merchants enjoying much-needed access to scale.

The benefits to consumers, merchants, and the broader payments industry are driven by the high degree of competition in the market, which is a direct result of India’s homegrown strategy of leveling the playing field for domestic players. Unlike China, India’s policies welcome foreign players into the payments industry, suggesting that the country’s homegrown strategy is in fact a way of promoting electronic payments across the nation.

An emerging ‘Silicon Delhi’?

However, India’s government must determine the extent to which it can allow competition to go unchecked at the potential for abuse by powerful Western firms. Lawmakers believe that a technology market unbridled by government regulation, in which foreign incumbents have full right to exercise dominance over newly emerging local players, comes with its own set of tremendous drawbacks — namely Western economic dominance, privacy violations from Silicon Valley, and the immediate forfeit of a technological arms race that could leave India at the mercy of other nations.

To establish itself as a new world power, a key mix of the correct set of checks on foreign players, policy that promotes India’s financial well-being, and an environment that fosters breakthrough technology from within the nation becomes critically important. These initiatives, if taken now, will be crucial in breaking away from the shackles of digital colonialism and re-setting the scales in favor of the rapidly developing nation.

Officials and citizens alike believe that with the right nudge, India can become the next Silicon Valley when it comes to driving new innovation. Traditionally positioned as an outsourcing hub to service larger, Western corporations’ labor arbitrage strategies, India has recently taken strides to change the narrative to one of invention and entrepreneurship, improving its ranking from 81 to 52 on the Global Innovation Index between 2015 and today.

Yet, unlike China, India knows that this is not an overnight, nor a solo, operation. “When it comes to innovation, ‘who will reach the moon at the lowest cost’ becomes our mentality,” said Dr. Manoj Mohapatra, the Minister of Commerce at the Indian Embassy in Washington, D.C., “Developing low-cost technology that complements advancements in the U.S. has been a strength in the advancement of India into a major economy. In the amount of money that was spent to produce the American film ‘Gravity,’ Indians are sending real satellites to space.”

Over the years, the government has worked to develop policy in payments that favors every Indian citizen with this same “low-cost economy” mentality in mind. Aadhaar, India’s biometric ID system first launched in 2010, was the nation’s first large-scale attempt at expanding financial access to the unbanked — via a suite of financial services that link to the identification platform.

In addition to Aadhaar, Mr. Modi’s PMJDY stresses the importance of financial deepening across all socioeconomic groups, many of which are historically unbanked, as another pillar to long-term prosperity for the nation. Before its creation, over 40% of the nation lacked a bank account, facing high fees as the primary barrier to entry into the financial system.

While criticisms regarding unused accounts and lack of banking infrastructure across India’s rural areas are valid, officials believe they are short-term hurdles to a longer-term objective of financial well-being — as India has always had the consumer in mind through both Aadhaar and PMJDY.

According to experts in social innovation, the subtle but significant impact from financial services in emerging economies can happen very slowly, usually from the sustained use of the service over time, yet may drive positive impact in several other areas of the lives of Indian citizens.

Alongside innovation and financial inclusion, however, effective policy regarding competition in India’s digital payments market is the missing piece of the puzzle. As noted by India’s Chief Economic Adviser K. V. Subramanian, while effective competition certainly plays a role in promoting growth and economic development in a perfectly competitive market, the incentives to innovate are low.

“If this century is to belong to India, then innovation is something we have to focus on. Therefore, competition policy in the context of innovation becomes really critical,” he said in a speech to the Competition Commission of India early last year.

With this in mind, the right set of checks on Big Tech from the Indian government, such as India’s latest 2% “equalization” levy on foreign e-commerce operators within the country is now regarded with special new importance.

Designed to level the playing field for local businesses that are required to pay income taxes unlike their foreign counterparts, the new law doubles as an “untapped resource” for the Indian government — additional tax revenue to deploy for critical development projects in areas like infrastructure and education. The 2020 Finance Bill, effective April 1st, arrives almost four years after a 6% equalization levy on foreign digital advertising firms (aptly nicknamed the “Google tax”) was first introduced.

In order to place further checks on Silicon Valley all while expanding India’s development budget, the government has also advocated for change within the Organization for Economic Cooperation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) initiative to collectively harness an additional $100 billion from Big Tech multinationals by shifting tax methodology.

“There are companies generating billions of dollars in revenue from India but manage to pay abysmal amounts in taxes,” said an official familiar with the matter in an interview with the Economic Times. “All we want is that these companies cough up what’s only India’s fair share.”

However, critics fear that India’s measures to stunt foreign multinationals might be too extreme, citing concerns of increased risk of retaliation from the U.S. in the form of overseas trade. Even so, the nation continues to exercise its leverage as an attractive data trove and toe the line. India’s latest 2% bill is merely a continuation of its aggressive digital policy approach — bolstered in 2018 with the Reserve Bank of India’s Personal Data Protection Bill.

With the intent to protect personal data and create a national data governance framework, the PDP included a controversial mirroring provision requiring a live, updated copy of all personal data be stored in India and restricted any cross border data transfers for all “critical personal data.”

The sweeping impact of this bill on Big Tech operations within India startled international firms with fears that such a regulatory move could be a step to the protectionist model used by China.

In an interview with CNN, Google’s then-India head, Rahan Anandan, said, “data localization of any form slows down the internet economy and innovation in countries. We’re hoping India remains progressive.” India’s tech revolution is partially attributed to its open-door policy and even today, international players participate in India’s payments market.

A policy expert at the U.S.- India Business Relations Council (USIBC), also objects to any notion that India could go the way of China. They contend that India is truly a democracy that values the creative destruction encouraged by a free market and these policies (like the PDP) are purely mechanisms to level the playing field for domestic firms.

Yet the RBI, facing the lobbying efforts of multinationals, amended the PDP and in the revised draft released in December 2019 — the mirroring provision was not to be found. However, the hallmarks of the bill including the RBI Payments Directive and mandating localization of payments data are still effective today.

Privacy advocates are apt to point out that the PDP bill has the capacity to lead to too much state surveillance and control over citizens’ data — with adverse effects for Indians. For example, India’s Muslim population, the nation’s religious minority, could feasibly experience higher levels of government oversight without their knowledge simply under the guise of national security. However, with adequate safeguards set in place to prevent abuse, India stands to improve from a national security perspective with data to aid anti-terrorism efforts.

These benefits accompany the larger set of advancements the Indian government looks to generate by leveraging a strong data governance framework. Namely, India can better protect the rights of Indian data principals while simultaneously weakening any power imbalance that currently exists between large technology firms and individual Indian citizens around data collection.

That said, it is crucial that India layer these policy initiatives for financial deepening on top of regulation that promotes healthy competition and fosters homegrown innovation in the digital payments space if the nation is to position itself with a runway of long-term economic success.

In the endgame, India is a winner

The jury is still out on whether India can match the technological prowess of Silicon Valley. But for merchants like Mr. Garg, the government’s actions have increased optionality across the board. And even more importantly, it has ensured that sensitive customer data never leaves India’s borders.

Mr. Modi’s administration has somehow found a way to restrict foreign corporations enough but also keep them around as competitors to the government-backed companies — and Indian citizens are actually the benefactors, regardless of the government’s motivation for backing these companies as homegrown champions.

Even in what is an oligopoly, customers benefit from RuPay, Visa, and Mastercard competing to offer the best product at reasonable price points — and customers have the freedom of choice in most cases.

For Mr. Garg and other merchants, digital payment technology is the key to giving time back to virtually all employees. For the 90 employees in his store, paying electronically is a way to facilitate a faster customer turnaround as well as track customer metrics much more efficiently. In most cases, Mr. Garg sees a seamless process when customers pay for items through Paytm — and it simplifies the entire transaction process.

While many customers at these stores do still pay with physical cash, India’s payment companies are poised to succeed due to their government’s support. If they are successful domestically, the question may become whether they can expand their footprint outside of their homeland — and without the pampering of India’s government.

On the other side, the American payment powerhouses may feel that they’re getting the short end of the stick through their mandatory compliance with India’s government. But if they want to participate in the Indian economy, they must invest substantially, and pass significant value back to the nation’s economy. For now, these companies must settle for the ability to merely compete in India.

Whether Visa and Mastercard are successful in India or not, there will be successful digital payments infrastructure in India. If that comes through American companies offering the best product, India will get to keep all of the consumer data generated from tens of millions of transactions, and its citizens will enjoy products from the most prestigious payment companies in the world.

And if the homegrown champions that India’s government is backing become the reason for digital payment success, the bragging rights will belong to Mr. Modi for cultivating companies that offer citizens the best product and that managed to outsmart Visa and Mastercard.

Either way, it’s a win for India.

By: Carew’s Crew

We spent the past four months studying the most pressing issues facing the future of global technology. This site represents our attempt to dissect and contribute to the current conversation around some of those topics.

© Spring 2020, Global Digital Divide: Big Tech in a Multipolar World @ The University of Virginia