Racing To The Bottom

Fortune-at-bottom-of-pyramidI always get a kick out of opening the morning newspaper and reading about some high end brand setting up shop in India. Usually, halfway through the article they will throw out some crazy goal of setting up 100 locations in 10 cities in 2 years. I just shake my head and laugh at how ridiculous those goals are. It shows that the company has no clue about India, they probably sent some business development guy on a 10 day trip who stayed at the Taj Palace in South Bombay and at the Taj Mansingh in New Delhi. On the plane ride back, a 100 slide PowerPoint deck was created and thus the Indian expansion plans were created.

Pro Tip: If you are planning to launch a high end brand in India, park yourself in Indore as your base for 6 months to get a sense of what India is really like. Then decide if setting up 100 locations in 10 cities in 2 years is feasible, let me save you some time – it’s not feasible.

In the early 90’s in the US, the three major Japanese automakers (Honda, Nissan and Toyota) found a gap in the high end automotive space. They decided to go up market and launch separate brands for their new luxury brands. Honda launched Acura, Nissan launched Infiniti and Toyota launched Lexus. It was a massive success and Lexus today is one of the top luxury car brands in the US and consistently gets rated by JD Powers as the leader in quality and customer satisfaction.

If selling to the top of the pyramid in large numbers is years away, what does a company do in the meantime for their India strategy? Go down market. People always have a negative connotation of “going down market” or believe it means selling to people at the very bottom of the pyramid. Many companies think selling products at the lower rungs of the pyramid might impact their overall brand image which they fiercely want to protect. But, with the sluggish global economy many companies are re-adjusting to a new normal and looking at going down the pyramid to increase sales.

Two companies that have started to re-adjust in India are American Express (AmEx) and Nissan. AmEx is a marquee name I would have NEVER imagined selling to consumers in the middle of the pyramid. AmEx recently launched their AmEx Payback card that has a yearly fee of Rs. 750 (USD $13) and a minimum income of USD $5,000. This is from the same company that has the Centurion (Black Card) which is invitation only and one of the most expensive cards to have. But then again if you are worth a couple billion what’s a USD $2,500 yearly fee. The logic behind the AmEx Payback card is to get new college grads in the habit of using credit cards and hopefully they will move up to the higher level AmEx cards as their income increases.

Forbes India recently did a cover story on Nissan’s plans for India which includes relaunching the Datsun brand for consumers who are in the middle of the pyramid. Nissan will use the Datsun brand in countries where they want to sell lower priced cars. In India, the Datsun brand will be squarely competing against the 800-pound gorilla which is Maruti. A quote from the article:

You shouldn’t build a car for the emerging markets with development costs of first world countries

The quote can be applied to almost any product/service being sold in an emerging country like India. As the global economy slowly moves along, I think more and more companies will adopt a similar strategy to AmEx and Nissan. Get people hooked to your lower end product and then as their income rises they move to your more pricer higher end products/services.

Personal Finance Mirage


MProfit competitive slide (click for a larger image)

It’s another day and another personal finance startup shuts down in India, this time it’s InvestoPresto. Several Indian focused technology blogs (NextBigWhat and TechCircle) have reported a couple other names of startups that have recently shut down – Moneysights and That’s only half the story, as part of a VC pitch deck from several years ago I listed all of MProfit’s competitors and honestly I think only half of them are still around.

It would be easy to blame the ecosystem, government regulations, the VC industry or the lack of consumer awareness but then you are just kidding yourself. Forget about India for a moment, I know its an emerging market with 1.3 billion people and the opportunity is so ripe but let’s focus on America.  Please tell me how many internet focused financial startups in the US have made it big either via a large user base or an exit? The answer would be simply one – which exited at USD 180 million to Intuit.

For all the talk about Americans having a do-it-yourself culture for financial services that assumption is just plain wrong. Most Americans like Indians have no clue where to invest and don’t have the long term disciple for personal finance. Americans love houses and cars. Indians love insurance and gold.

So back to India. In the 4 years we have run MProfit, there are 3 general buckets of potential consumers that visit our site or call us. 1. Looking for tips/signals 2. Technical analysis 3. Portfolio management tool. The first group has been misled thinking that tips or trading signals actually work, they work till they stop working. I could go on and on about them but I’ll spare you the rant. Group two are investors that are putting some thought into their trading/investing style and a group we don’t target as there are many tools already available.

Group three is where we spend the bulk of our time and really try to understand what customer wants. We do have a segment of our customers that use MProfit and crave it, but it’s a small segment. And, that’s the trap that many personal finance startups face – a revenue generating product with limited appeal. We are still trying to create a product that has mass market appeal which people need like oxygen and willing to pay for.

No doubt the market is brutal but I still think around the world, no one has cracked the product/market fit for a comprehensive personal finance tool. A startup’s sole purpose is to figure out the market and create a product for it. The question is whether the need for such a tool exists or is it just a mirage?

Why Are Credit Card Merchant Fees So High?

american-express-centurion-black-cardA month back I was complaining on Twitter that credit card merchant fees have stayed the same for the past 60 years. The fees which retailers have to pay for accepting credit cards is known as the merchant discount rate which has hovered between 2-3% since the 1950’s. You would think with the increased volumes, technology and innovation that the rates would have been pushed lower. But they haven’t.

It’s easy to complain about something you know nothing about. It’s also a very populist attitude – “yeah man, they should lower the rates.” I decided not to be stupid about the topic and do a little research to understand why no one has tried to upend the current system and lower the transaction costs for retailers.

If I were to ask you who makes the most money from a typical 3% (300 bps) merchant discount rate fee that is charged to the retailer, who would you pick?

  1. Issuing banks such as Citibank who issues the credit card
  2. Acquiring banks where the retailer has their account
  3. Network payment processors such as Visa and MasterCard

The answer might surprise you and it explains why the system has never been attacked by lower priced competitors. Below is the breakdown on a typical 3% merchant discount rate:

  1. Issuing bank – 2.4% (240 bps) – interchange fee
  2. Acquiring bank – .50% (50 bps) – acquiring bank fee
  3. Visa/MasterCard – .10% (10bps) – payment processor fee

I was surprised by the answer as well. I was 99% sure that Visa and MasterCard were taking the biggest piece of the pie. It also explains why no one has challenged them. If you had to target any one of those 3 segments, why would anyone go after the payment processors which makes the least amount of money in the value chain.

The fee that the issuing banks collect is called the “interchange fee.” Banks are pretty happy to be getting the largest piece of the pie by a wide margin and have no economic interest to rock the boat. In fact, banks like issuing American Express cards because they get an even larger interchange fee then from Visa and MasterCard branded cards. The flip side is many retailers hate AmEx because they get charged more for using the AmEx payment network. (EDIT – AmEx is a bank. Clarification provide by Sheel Mohnot who heads the business development team for payments at Groupon.)

The only way to lower the overall merchant discount rate is to dramatically cut the interchange fee. That might seem impossible but there are a couple rays of hope from some unlikely places – China and India. China’s answer to the Visa and MasterCard duoploy is something called UnionPay. Like everything else in China the rates that UnionPay can charge are handed down by the government, in this case the central bank of China called the People’s Bank of China (PBC). Interchange fees are capped at 80 bps and can go all the way to zero bps for certain government services.

While in India they are rolling out a service called RuPay. (I wrote a post about 4 months back about RuPay and the various payment systems in India). Back then I was pretty sure the fledgling system would be killed off by Visa and MasterCard to protect their turf. But the government is pretty serious about providing a low cost transactional platform to its residents. I would imagine this is all part of the governments effort to switch from cash based transactions to electronic transactions and to get residents into the banking system. Today when you apply for an Aadhaar card, a universal ID card, you can connect a bank account and in the near future they will probably issue a RuPay card as well.

The other bright news for India is that its central bank – the Reserve Bank of India (RBI) has set a cap on the merchant discount rate for debit card transactions. If the transaction is under Rs. 2,000 then its 75 bps and anything over that is capped at 100 bps, which is really good. Remember that is the merchant discount rate which encompasses the interchange fee, acquiring bank fee and payment processor fee. A major win for retailers and consumers alike.

The market is ripe for disruption but where exactly it will come from is anyone’s guess.

Note: Many small retailers pay even more then 3%, hence the rise of startups like Square (2.75%), MasterCard Simplify (2.85%) and Stripe (2.9%).