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

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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, 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.

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 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.

The column was originally published in Equitymaster on January 30, 2017

Will Facebook also make our decisions in future?

facebook-logoMany of us spend more time on Facebook these days than with our parents, spouses and friends. As Cathy O’ Neil writes in Weapons of Math Destruction—How Big Data Increases Inequality and Threatens Democracy: “About two-thirds of American adults have a profile on Facebook. They spend thirty-nine minutes a day on the site, only four minutes less than they dedicate to face-to-face socialising.” While, I couldn’t find a similar number for India, it is safe to say that many middle class Indians are spending a significant amount of their daily time on Facebook.

On Facebook, we comment, respond to other comments or simply Like other comments. In the process, we are generating as well as giving away data about ourselves.

In fact, this data when mined properly, in some cases is a better judge of our ourselves than even we are. Interestingly, a study published in 2015 found that the Facebook algorithm is a better judge of individual personalities than even the individual’s friends, spouses or parents for that matter.

As Yuval Noah Harari writes in Homo Deus—A Brief History of Tomorrow: “The study was conducted on 86,220 volunteers who have a Facebook account and who completed a hundred-item personality questionnaire. The Facebook algorithm predicted the volunteers’ answers based on monitoring their Facebook Likes – which webpages, images and clips they tagged with the Like button. The more Likes, the more accurate the predictions.”

Further, the predictions of the algorithm were compared with those of friends, spouses, family members and work colleagues. Indeed, the results were very surprising. As Harari writes: “The algorithm needed only ten Likes to outperform the predictions of work colleagues. It needed seventy Likes to outperform friends, 150 Likes to outperform family members and 300 Likes to outperform spouses.”

This basically means that if you are married and have happened to click 300 or more Likes on Facebook, the Facebook algorithm can predict your opinions, desires and tastes, better than your husband or wife.

Interestingly, in some areas the Facebook algorithm did a much better job of predicting about the individual than even the individual himself. As Harari writes: “Participants were asked to evaluate things such as their level of substance use or the size of their social networks. Their judgements were less accurate than those of the algorithm.”

Hence, the algorithm was doing a much better job than the individual himself. Interestingly, Wu Youyoua, Michal Kosinskib, and David Stillwella, researchers who carried out this research, conclude in their research paper Computer-based personality judgments are more accurate than those made by humans: “Furthermore, in the future, people might abandon their own psychological judgments and rely on computers when making important life decisions, such as choosing activities, career paths, or even romantic partners. It is possible that such data-driven decisions will improve people’s lives.”

All this is possible because Facebook has access to our innermost thoughts through our comments and Likes. The interesting bit is that the Facebook researchers have also studied how different type of updates influence people’s voting behaviour. As O’Neil writes: “No researcher had ever worked in a human laboratory of this scale. Within hours, Facebook could harvest information from tens of millions of people or more, measuring the impact that their words and shared links had on each other. And it could use that knowledge to influence people’s actions, which in this case happens to be voting. That’s a significant amount of power.”

Of course, Facebook is not the only company which has this huge amount of power. As O’Neil writes: “Other publicly held corporations, including Google, Apple, Microsoft, Amazon, and cell phone providers… have vast information on much of humanity—and the means to steer us in any way they choose.”

And in large parts of the world which are democratic, this is something worth thinking about.

The column was originally published in the Bangalore Mirror on January 11, 2017

What if Google goes paid?

googleA few weeks back a friend during the course of a conversation asked, “What if Google goes paid?”.  “I will pay for it,” pat came my response, even before he could finish asking his question.

As a freelance writer, who has ambitions of writing more books in the years to come, Google is a huge source of information for me. Research papers, data (Indian as well as international), news (both old and new, Indian as well as international) and so on, keep me going.

At least that is how I use Google on most days. But there are other uses as well. People use it to find out restaurants, electricians, plumbers, and so on. The uses of Google for an individual who has access to internet (either through a smart phone or through a computer) are simply way too many to put down in a 600-700 word column.

So, the question is will people pay to subscribe to Google, if it ever decides to go paid i.e. only those who pay a certain amount of money every month or every year, will be allowed to access it. While this sounds like an interesting question to ask, it is not the right question to ask.

Or so I figured out, after the conversation I was having with my friend came to an end. The right question to ask is will Google ever become a paid website, instead of asking will you pay for it, if it becomes one.

Before I go any further, it is important to explain the concept of network externality in economics, which applies in this case. This is a situation where one person’s purchase of a good or a service, makes it more valuable for other prospective consumers.

Take the case of a telephone (or a mobile phone). If only one person is on the network, it is essentially useless. For it to be of any use, at least two people need to be on it. Of course, if only two people are on it, then it is not financially viable. So the network needs to attain a certain size.

Or take the case of a social networking site like Facebook. I am on Facebook because most of my friends and people I may want to be friends with in the future, are on Facebook.

This, also explains why Orkut, lost out to Facebook, and ultimately had to shutdown. There just weren’t enough people on it, for it to continue attracting more people. Everyone had moved on to Facebook. This also explains why Google Plus never really took off. Most people were happy being on Facebook and did not move to Google Plus.

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.” Now look at this in the context of Google. It fits the bill totally.

As Fisman and Sullivan write: “Why, for example, does Google let you search the web for free, even though maintaining its primacy in the search engine market costs the company a fortune in R&D [and] computing infrastructure.”

The answer lies in the fact that more users that Google has, the more viable its business model gets. As Fisman and Sullivan point out: “A bigger user base allows Google to extract ever-higher revenues from the other side of the market—the advertisers, who pay for search listings.”

Hence, Google is free because that is the only way to ensure that it will continue to have the kind of following that it does. And if it is in that situation, it can continue to charge advertisers a good amount of money. The fact that Google is free, ensures that its business model continues running. Given this, it is highly unlikely that in the near future, Google will ever turn paid.

Not, at least, till its current business model keeps running.

The column originally appeared in the Bangalore Mirror on August 3, 2016

Why Facebook does not have a dislike button

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A few days back a couple I am friends with on Facebook ‘announced’ the arrival of their child into the world, on Facebook. The ‘announcement’ read like a press release and seemed more like an announcement of a new ‘product launch’ than the arrival of a new baby.

When I was cribbing about this to a friend, she asked, how else could they have done it? “They could have just said, we became parents,” I replied.
This wasn’t the only case. In the past I have seen couples ‘announce’ their weddings, their ‘engagements’ and even their ‘honeymoons’ on Facebook, making it sound more like a new ‘joint venture’ between two companies than the coming together of two individuals.

In fact, one Facebook friend even uploaded extremely intimate pictures of his week-long honeymoon on a daily basis and marked it with headings like Day 1, Day 2, Day 3 and so on. This led me to comment that we live in an era where we see honeymoon updates of people whose weddings we don’t attend.

Honestly, it is at moments like these when I really wish Facebook had a dislike button as well. The trouble with Facebook is that you can only like something, but the moment you do not like something, there is no way you can go about expressing it immediately. While one can always write a comment, but that needs some mental effort, which is not always forthcoming when one is Facebooking.

So the question is why does Facebook only have a like button? As Dan Ariely writes in Behavioural Economics Saved My Dog: “Facebook “Like” button is much more than a way for us to react to other people. It is a social-coordination mechanism that tells us how we can, and should respond. It subtly gives us instruction on what is OK (and not OK) to post and it gently tell us how we can and can’t behave on Facebook.”

And why does Facebook not have a dislike or a hate button? As Ariely  explains: “Adding buttons such as “Dislike” or  “Hate” would  change our mindset when we read different posts; it would prompt us to have more negative reactions and I suspect that very quickly it would destroy this social network’s positive atmosphere.”

This explains why Facebook does not have dislike or a hate button. While the atmosphere does turn nasty on Facebook once in a while, on the whole it has a positive atmosphere. In fact, Ariely even suggests that “for what it’s worth my preference would be to add a button for “Love”.”

This is something that Twitter did recently wherein they added a heart button which signifies “like”. Earlier this used to be called the “favourite” button.

Anyone who has used Twitter extensively would know that the medium has a very negative atmosphere on the whole unlike Facebook. It’s a medium where you have many people fighting, criticising, abusing and misleading, all the time.

Other than births and marriages, people also announce the deaths of their loved ones on Facebook. Now this is a tricky situation. Often such ‘announcements’ are accompanied by a very emotional write-up, which as a reader you may want to like, but then how do you like a post announcing someone’s death? This doesn’t stop people from liking posts which announce deaths of individuals as well.

As Mark Zuckerberg chairman and chief executive of Facebook said sometime late last year: “Not every moment is a good moment, right? And if you are sharing something that is sad, whether it’s something in current events like the refugee crisis that touches you or if a family member passed away, then it might not feel comfortable to Like that post.”

“What [users] really want is the ability to express empathy. Not every moment is a good moment,” he added.

I for one am waiting for some sort of an empathy button. Maybe a hug button to start with. How about you, dear reader?

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared in the Bangalore Mirror on February 10, 2016

Why Facebook hasn’t killed email

facebook-logoWe live in an era where we have multiple ways of communicating with each other. The landline phone is still used. Then there is the mobile phone. We also have Facebook, Twitter, Skype, WhatsApp, Telegram, imo, and a whole host of other web based messaging applications.
And we still have the email.

The funny thing is that email has managed to survive the onslaught of so many web-based applications. While people may no longer be sending email forwards like they used to, or writing very long emails, a lot of communication (especially the formal kind) still happens over email.

Why is that? Before I get into answering this, it is important to understand a term called “network externality”. As economist John Kay writes in his book Everlasting Last Bulbs—How Economics Illuminates the World: “Network externalities are a new buzzword in business economics…in which 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.”

Take the case of Facebook. It is one of the best examples of network externality. As economist Paul Oyer writes in his book 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.”

This explains why Google+ despite getting fantastic initial feedback from the tech freaks, never really took off—everyone was already on Facebook. This also explains why Orkut had to shut down because everyone had moved to Facebook.

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.”

Further, what this also tells us is that in order to communicate with someone who is on Facebook, you need to be on Facebook as well. But that’s not how things work everywhere. 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.

But this is something that is not possible in case of the web based messaging services. You cannot send a message from Facebook to WhatsApp, for example. As writer Kevin Maney puts it: “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.”

And why is that? As Maney explains: “Different age groups and different nationalities are latching onto messaging apps, but the messaging apps don’t talk to one another, or even do the same things.”

This explains why the email has managed to survive the onslaught of the web based messaging applications and continues to be used.

The column originally appeared in the Bangalore Mirror on November 4, 2015