January 9, 2020 by Sujay Seetharaman

(originally posted on Pipecandy Newsletter #96)

Remember, remember the eighth of November,
The News, ATMs, and Queues
I know no sister, no brother that
Demonetization didn’t bother.

Blowing past my cringe-worthy attempt at pulling-a-John-Milton, for those of you who don’t know what I’m singing, on the evening of 8th November 2016, the Indian government declared that come midnight, the high-value currency ‘notes’ (our equivalent of ‘bills’) of 500 and 1,000 would cease to be legal. The move was taken in part to push the country towards adopting digital payments and make India ‘cashless’. The implications were massive for a country that has over a billion mouths to feed and was suddenly told that 86% of all its cash in circulation was henceforth unusable. People started hoarding cash leaving ATMs high and dry.

But fortunately, given the country’s extensive mobile and internet footprint (about 500 million), people were relatively quick to adapt. O2O payments such as plastic cash and e-wallets became the order of the day. Within 30 days of the announcement, transaction volumes on Debit and Credit cards both spiked 4X and adoption rates of e-wallets such as MobiKwik, Google Pay, PhonePe were up 271%! Paytm, the country’s renowned mobile payment platform saw an overwhelming increase of 435% in overall traffic as millions of people took to using Paytm wallets to make payments immediately after the Demonetization announcement. App downloads for Paytm were up 200% and average GMV up by 400%.

People (myself included) grew accustomed to paying for everything – right from utility bills to cab rides – through O2O payments like e-wallets, and cards. It wasn’t until this one time I paid a beachside vendor for a plate of fries using QR code that I witnessed the ripple effect of the note ban. The much-needed impetus to the country’s digital payments sector IMO, came one month after demonetization in the form of UPI.

UPI and QR Codes – O2O’s Success in India:

Unified Payments Interface, a first of its kind fintech innovation anywhere in the world, is a homegrown real-time payment system that enables you to send money just like how you would chat with your friends. Scan a code or simply select a contact and click ‘Send’! India is now testing this piece of tech in other countries as well to power their financial systems.

The government is also pushing O2O by attempting to standardize QR payments (powered by UPI) across the country. While QR codes may not displace cash, it will result in massive cost savings for retailers that own and operate PoS machines. It’s too soon to say if India will leap to that phase where QR codes are the order of the day (like China) but a few mom-and-pop stores have already started offering this option alongside cash and cards, signaling that things are changing. There are an estimated 14 million such retailers that dot India’s retail landscape; a market worth $800 billion open for QR code to test the waters.

Mobile Payments – O2O’s Success in China:

At the start of this decade, most Chinese people were still using Cash everywhere and Cards were rarely used outside of the big cities. Today, QR codes have become the norm, covering everyone from meat vendors to white-collar workers. How did this happen?

People began to earn more and wanted a new way to pay that would help them go cash-light. Smartphones were becoming ubiquitous and mobile payments seemed to be the logical next step. QR codes won over the NFC-based payment apps like Apple Pay, Android Pay, and Samsung Pay chiefly because it costs next to nothing to create and adopt them, and they don’t require an internet connection to work. WeChat is credited with making the entire nation go crazy about QR codes. It has an adoption rate of over 93% in Chinese cities.

Skepticism towards O2O in the U.S:

The US, however, has repeatedly mocked and shunned this tech. Even retail and e-commerce companies that implement it, primarily use it as a marketing tool to link to a website collateral. The friction involved in opening the app, scanning the code properly, getting the scan done right and waiting for the transaction to complete seems like a lot as opposed to just swiping a card or plunking down cash. Besides, the uncertainty around what lies behind those codes (unless you scan and find out for yourself) has been a key factor for discouraging retail and e-commerce companies from adopting it.

In a survey of 1000 US shoppers, 55% of them said they prefer to pay by Credit cards while another 25% opted to pay via PayPal. E-wallets have an adoption rate of about 30% and the most popular options are those of legacy tech players such as Apple, Amazon, and Android. QR codes don’t even appear among the least preferred options like Invoice or Direct debit. Besides these, there are the likes of Venmo, Square Cash and PopMoney, and retailer wallets such as Walmart Pay and Kroger Pay. What U.S retail and e-commerce companies probably needs to realize is that too many options can slow down the pace of innovation and kill competition, and now is a good time for an overhaul of its payments tech sector especially with credit card frauds at an all-time high.

America has a very active online retail market next only to China and South Korea. Per some estimates, American consumers carry 1.8 billion credit and debit cards (in a country with a population of 330 million) which makes it a soft target for credit card frauds. It should come as no surprise that the country accounts for two-fifths of global credit card frauds today. Card-not-present or CNP frauds as of 2018, account for 4% of the population (down from 5% in 2017). While that’s encouraging, that’s still 13 million people or more aptly, 71 million credit and debit cards that are still vulnerable to scams and phishing attacks.

The Solution:

So what would help United States retail and e-commerce companies to see the merits of O2O payment options? A UPI or QR code equivalent would solve this problem by cutting out the multiparty routing of cash (from Merchant to Acquirer to Network to Bank) followed by cards and instead transact very conveniently from merchant-to-merchant; rather more specifically from one phone number to another phone number. Tim Armstrong probably sees this. It’s then with good reason that he pushed for Flowcode, a rebranding of the QR technology, on some of The DTX Company’s brand’s commercials in the run-up to DTC Friday.

The minds behind Flowcode probably realize how layering one piece of tech – such as the UPI in the case of India or the QR code in the case of China – on your smartphone can cause the payment stack to explode, paving the way for seamless inclusion of multiple use cases such as loan disbursements, lending, and insurance. Until the US figures out what that tech is, it will have to continue battling what the Federal Reserve calls “a drag on economic activity”.

At Pipecandy, we track over half a million companies and their O2O strategies. Contact us and hit reply if you’re looking to dip your toes into the O2O market.

Sujay Seetharaman

Market Analyst @ PipeCandy

Currently donning the Researcher's hat. Talks to himself.