The Ongoing e-Commerce Revolution in India

The need for a smart payments platform for merchants and consumers.

Overview: The e-Commerce Big Bang in India

There are more than a few investors in Silicon Valley that fall victim to the thinking that the best ideas in tech are formed in the Bay Area, or that deals overseas are just not worth the trouble. After all, many of the iconic tech companies — Intel, Apple, Oracle, Google, Uber, Facebook, AirBNB, just to name a few — were born here so why look elsewhere? However, investors in tech would be wise to pay attention to what’s happening in the emerging markets of Asia, especially in India.

For starters, consider that India already boasts a GDP of $2.3 trillion, which is is expanding at at a rate of 7–8% per year, and a population of 1.2 billion. There are also nearly 300 million middle class consumers, which is seeing rapid growth in consumerism. Today, some 80 million Indians now shop on-line. The overwhelming majority of these on-line shoppers — 65 million to be precise — choose to make their on-line purchases via mobile devices. In fact, nearly one in four Indians have already made a purchase via their smartphone last year. This makes India as one of the leading markets for e-commerce transactions executed via hand held devices. In fact, 27 percent of on line buyers already purchase goods on a monthly basis via their mobile phones, and 24 percent purchase online goods / services weekly (source: Statista).

But there is even more explosive growth to come in on-line retail in India. Total e-commerce revenue hit $30 billion in 2016 in India, but is expected to quadruple to $120 billion by 2020. Nearly $65 billion of all on-line purchases were made by consumers via their cell phones last year (sources: World Bank, IMF, ASSOCHAM-Forrester, BCG). Looking ahead just a couple of years — 330 million people are projected to buy goods and services online in India by 2020. Let that sink in for a moment. In terms of numbers of on line consumers, we’re talking about several multiples of the number of people to who shop on line in the US. (According to the Pew Center for Research, at the end of 2015, US consumers spent nearly $350 billion on-line, which represented nearly 10% of all retail sales, excluding autos and fuel purchases.) These are dizzying growth metrics, and all of this has been achieved in a country where only 31% of the population is currently internet enabled (source: Morgan Stanley). The Big Bang in Indian e-Commerce, in other words, is now unfolding before our eyes.

Given the promise of Indian e-commerce over the decade ahead, the leading global players in banking, payments, and retail have all taken notice. Unlike in the US circa 20 years ago, however, the Indian economy has leap-frogged previous iterations of on-line commerce. Mobile purchases are increasingly driving overall commerce in India and will be the dominant platform for the foreseeable future. Yet, the traditional payment tools on offer in the country leave a lot to be desired for merchants and consumers alike, especially as it relates to purchases attempted on mobile phones.

The reasons for this are numerous. First, consider that only 8 million Indian consumers — i.e., less than one-tenth of one-percent of the total population — have a credit card. That’s it. Further, 30% of all on-line purchases attempted on a mobile device fail due to technical issues like poor network connectivity or the so called “fat-fingering” (i.e., mistyping of one’s credit card details) during the checkout process. The latter is not hard to do when you consider that even the lucky few Indians that have a credit card have to complete — at a minimum 50 thumb taps — to enter her credit card credentials at checkout via a smartphone and to correctly choose from among 16 different CVV codes on the back of her card. Thus, it is of little surprise that cash on delivery (“COD”) remains the predominant form of settlement for on-line purchases by consumers in India — representing between 60% and 70% of all on-line transactions (source: KPMG). For merchants, the pain-point of accepting COD means larger working capital requirements (retailers tend to settle up with their consumers every two to four weeks) and shopping cart abandonement at checkout.

While more and more commence has gone on-line, payments solutions offered by traditional financial institutions, whether they be local banks for global payments providers, have not kept pace with the innovation taking place in retail and this leads to an enormous opportunity for FinTech entrepreneurs in India.

Amazon, among others, is keenly paying attention and has committed to invest billions to grab market share in India. As Amazon’s nonpareil founder and CEO, Jeff Bezos, put it recently, this is only “Day 1 of e-commerce in India.”

Let’s explore some of the underpinnings of the digitization of Indian commerce and its implication. We begin by discussing the development of the so-called “India Stack” — i.e., the framework on which the digitization is being built.

The Digitization of India

Phase 1 create an electronic system of identification: Aadhaar launched in 2009 and is the world’s largest biometric database that now covers 1.1 billion Indians (i.e., 95% of the population). The system assigns a 12-digit ID to all Indian citizens and uses fingerprint and retina scans for authentication. Before Aadhaar’s launch in 2009, hundreds of millions of Indians could not access basic financial services, drive a car, or start a business due to lack of proper identification. Here are some mind-blowing stats about life before / after Aadhaar in India (source: The Economist). In India prior to 2009:

• 50% of all citizens lacked a birth certificate;
• 30% of all drivers license were likely fraudulent; and
• Only 27% of subsidy / welfare payments were distributed to those intended.

Since Aadhaar:

• 800,000 fictitious voters from Punjab removed from voter rolls;
• 400,000 phantom children were purged from student enrollment lists from schools that received government aid; and
• $8 billion savings in two in a half years on fraud / duplicate spending on central government subsidies, with a total annual budget of $40 billion.

The implementation of Aadhaar is a staggering achievement by any measure.

Phase 2 connect all major systems to Aadhaar: The process is now underway to store and share personal data such as addresses, bank statements, employment records, and tax filings via India Stack. Frictionless onboarding enables citizens to open a bank or brokerage account, buy a mutual fund, or share medical records anywhere in India with just a fingerprint or retinal scan from Aadhaar. The future of all commerce in India, not just financial services, will eventually have to run through Aadhaar.

Phase 3 de-monetization: In November 2016, India’s Prime Minister Narendra Modi announced the removal of 86% of all currency notes in circulation. If a cashless society is truly inevitable — it will likely be realized first in India. Our view is that this is all part of a grander plan with the ultimate goal being inclusion — some might also say control — and bringing every Indian into the modern, digital world. In this transition, our experience has been that traditional financial institutions are having a hard time keeping pace with the accelerating adoption of new forms of payments and financial services. Growth in India, in our view, is constrained by lack of innovation among financial services incumbents.

Payments Solutions Rapidly Evolving

Enter Simpl — a smart payments platform uniting merchants and consumers founded in 2015 by our colleagues, Nitya Sharma and Chaitra Chidanand. Their mission: enable growth in e-commerce, first in India and then in the rest of the developing markets in South East Asia. While digital wallets have become all the rage in India, a stubborn problem remains in India with regards to making purchases via mobile devices even when using a mobile wallet. Namely, local consumers prefer not to store a lot of cash in their digital wallets. This is why in India, Uber riders often settle their rides with cash. (India is one of only two markets in the world where Uber operates accepts cash from its riders, the other is Colombia.)

Nitya and Chaitra went to market with SimplCheckout, a mobile-first payment and check-out solution akin to Amazon’s “buy button.” SimplCheckout is integrated directly into their merchants’ mobile applications. Unlike checkout solutions offered by many other major payment companies, the integration with the merchant’s app or website takes only a few hours, or at most a few days. (One major payments company — that for time being shall remain nameless — takes weeks, if not months, to complete a merchant integration with its checkout button.) Once live with Simpl, merchants simply push SimplCheckout to only their top customers as a free VIP service. In return, Simpl collects a modest convenience fee from the merchant, while those customers who are offered SimplCheckout will see the Simpl buy-button as their first payment choice at the time of purchase.

Fueling the rapid adoption of SimplCheckout is Simpl’s ability to enable micro-credit decisions in milliseconds, which they call SimplCredit. (Think of the product as akin to a charge card — e.g., American Express — but for much smaller credit balances.) This enables consumers to buy now, pay later. The practice of buy now, pay later is wholly consistent with the way consumers in India are used to buying today (i.e., the so-called “khata” relationship between merchant and consumer). A consumer’s credit line with Simpl typically begins at US$25 with the consumer being invoiced every two weeks. The data that’s collected in real time by Simpl further refines its machine learning algorithms used in making credit decisions and marketing campaigns/loyalty rewards. We think that the Simpl team have created a very clever solution.

Conclusion

Our team often talks about how to best effect change in user behavior with our startup founders. Typically, effecting change among consumers takes a good deal of time and effort, which is why we encourage our founders to avoid falling into the trap of overestimating what they can get done in a day, but underestimating what they can accomplish in a year. As the quip goes: “the days are long, but the years are short” in the life of a startup founder.

But on rare occasion, change can come about seemingly in an instant — and is often the result of an exongenous shock that hits a system that’s long been in equilibrium. Our team uses the concept of “punctuated equilibrium” to describe how the innovative use of technology can give a jolt to an ecosystem in stasis and upend the status quo. The migration of commerce to hand held devices in India will have no less of an impact than a meteor wiping out the dinosaurs eons ago from the face of the earth. The race is on to build the smart payments network to power e-commerce in the 21st century in India and other developing markets around the world.

Epilogue

Following the success of SimplCheckout and SimplCredit, Simpl is also introducing SimplPay, SimplRewards, and SimplScore — all part of Nitya and Chaitra’s plan to offer a complete suite of payment, credit and data solutions to consumers and merchants in India. Though recently launched, SimplCheckout is now on 35 million unique hand-held devices and the company’s SimplPay app has been downloaded hundreds of thousands of times. (The app shows also dashboard to the consumer that captures his / her entire transaction history, and can be used to manage his / her balances.) SimplRewards is a merchant marketing and loyalty program that collects SKU-level data on every purchase made by every consumer on the Simpl platform enabling marketing teams to “micro-target” consumers. SimplScore is a consumer credit database that is addressing the problem of a lack of consumer credit bureaus in many parts of the developing world, including India. This is an “opt-in” service for consumers that increases a consumer’s credit limit as the consumer shares more and more information.