Now, banking is not merely about banking, it is also about technology. Banks are hiring more technology-oriented executives than those who can wax eloquent about project financing. Sangram Singh, CEO, FreeCharge, a company owned by Axis Bank, talks to ET journalists on digital transformation, fee on consumers and how the future would unfold. Edited excerpts:
With the amount of cash back in circulation and the slowing digital, there’s a kind of scepticism about the future of digital transactions…
There is a narrative right now that digital is not big in India, which no one argues with. Yes, compared to cash, it is smaller and there is this other fact that it is not growing as seen during demonetisation. During 2000, when credit card spends crossed ₹100 crore, it was a big achievement. Now we clock ₹100 crore every day. Earlier, we used to track card spends as a percentage of consumption expenditure. For the longest time, it used to be in the range of 2.5%. And at that time we aspired to hit 5%. Today it is 10%. Beyond cards, there are IMPS, UPI, wallets, NEFT, but to move from 2.5% to 10% is a story that has not been told enough. There will be few countries in the world of the size of India, which over a 12-year period, seen a 4x multiple, that’s like adding $50-60 billion, which used to be the total market size a few years back.
Isn’t the percentage still very low?
I don’t think there are silver bullets. You can’t wave a magic wand and say 15 to 85% digitalcash ratio will reverse in a span of few years. Consumer behaviour is not driven by some diktat, hence, when you see over a two-year period, you will say digital was 14%, now it has become 16%, so what is the big deal? But the compounding effect shows up over time.
A lot of non-banks have got into payments and are threatening banks. How do you see the future?
Banks are the foremost customer interface, so we are not worried what will happen to banks. It is more about partnering with nonbanks. Obviously, competition will continue to happen but making money is the most important issue. I don’t think 15 years back in India, we ever thought of a concept which said burn, burn, burn cash and create value. Right now, a lot of these things are been driven by valuation, which is a perception of value created. If any business model has to survive, it will have to return money at some time. The only question is how long is the cycle? And how much are we willing to wait for the break-even?
There are these cashback offers from everyone, including FreeCharge. Is it necessary? How do you make money from such deals?
Everything that you do with a customer to create engagement and get a sticky customer is similar to the cost of acquisition. How did you do it in the old world? You set up a branch, you create a lot of fixed cost assets, you assign marketing expenses and then you are able to bring in those customers. So as a payment company, a cashback would be part of the acquisition cost. As a consumer finance company, if I had you as a customer, I would want not only to have your savings bank account, but also sell you an insurance product or offer you a loan or give you credit card from Axis Bank. Yes, our costs eventually has to pay for itself. It is just that when that will happen and it can change with where you are in the life cycle and how large your appetite is.
The government, banks and the regulator are quarrelling over the charges on card transactions, or MDR. Is it such a big deal for banks to fight for a tiny percentage?
We have the issue of inadequate usage of PoS terminals. If you go and map terminal utilisation across countries, India will probably be one of the lowest. As we keep on adding these terminals, they will not come up in the stores which have high footfall. We are now fundamentally going to places where the PoS utilisation is going to be lower and lower. We are now going after the long tail. If you remove top merchants, the usage is fairly low. Which means that there is an asset out there which is not getting utilised enough and, hence, it is expensive. There is a lot of focus on reducing merchant discout rate, or MDR, so that merchants will have higher acceptance of digital payments… what is required is an equal focus on figuring out what will drive the consumers to use PoS. The more we squeeze revenues, the lesser will be the ability of banks to continue what they have been doing.
So, how big is your margin?
As a business, merchant acquiring has always been slightly margin negative because the total number of transactions are few vis-a-vis the terminals. But what you are trying to do is to have a relationship with the merchant and through that relationship you can do other banking services which will help you overcome the cost of doing business. If you look at the average transaction size and calculate the MDR, it is very small.
Who should bear the cost of MDR?
There is a cost of doing any transaction. The first question is: who should pay that cost? Should it be the consumer? The merchant? Or the taxpayer? Globally, it is the merchant who pays because it is a part of his cost of doing business. Why would a digital payment transaction be any different? You can take a view that it should not be the merchant, so should the cost be passed on to the consumer? It probably will, but it is not that we want to see that either. You cannot tell consumers that if you move from cash to digital, you will be charged extra.
So, will cards go the same way as passbooks?
Plastic is irrelevant, the account with a customer is what that matters. The customer is interacting with the merchant today with a plastic and a terminal, and it could change tomorrow. This has absolutely no bearing on the banking relationship. The form factor is trivial, it is really of no consequence. It is just a very convenient technology, which is there today and tomorrow it could change.