In our last blog we presented an analysis of the 11 players that have received the “in principle” approval from Reserve Bank of India to operate the payments banks. None of the Over the Counter (OTC) remittance players got the license which surprised many in the payments and financial inclusion arena. This blog talks about a major upheaval in the OTC market post the announcement of the payments bank licenses.
While conducting OTC transactions the sender does not need to have a wallet or a bank account as these transactions are agent initiated. The sender hands over the cash to the agent, the agent debits his account/wallet and credits the receiver’s bank account. MicroSave has debated about OTC being a trap here, here and here. But, the fact is that the remittance business in India is huge and largely dominated by OTC service providers who either have a Pre-paid Instrument (PPI) license or are a business correspondent (BC) of a bank.
In the OTC business the end customer is normally oblivious (unless the agent is exclusive) to the service provider used to remit his/her money and the actual transaction fee. It is the agent who gets to choose the service provider to remit customer’s money. This autonomy of the agent stems from the fact that the service providers always find it difficult to own the customers hence they focus on agents to service the customers. In the current state of remittance business where exclusivity of the agent is becoming extinct and one agent is being acquired by 5-6 service providers, it is not an exaggeration to say that, “The Agent is the King”.
So what factors trigger the agents’ decision to choose a particular provider? The recent field studies conducted by MicroSave in the immensely competitive remittance market of Indian metro cities suggest that agent commission is the main trigger. The agents have access to multiple service providers and for obvious reasons, prefer the highest paying service providers. There are a few exceptions wherein service and operational support are placed ahead of pricing as triggers. But, all this has changed with the midnight stroke of clock on August 31st 2015. We can now see a new paradigm of strategic co-opetition (co-operation with competition) in which all the major PPI players, that collectively control a majority market share of remittance business, have joined hands and reached to an agreement to extend universal pricing for OTC transactions.
This agreement essentially means that all the service providers charge the agent with a standard rate as agreed. So agent commission is not a decision trigger anymore.
With this change in place few areas that the service providers will have to delve deeper and with more seriousness than ever before are:
- Technology: The service providers will have to rework their front end and back end technologies to make it flawless. Service uptime needs to come at an acceptable level, applications need to scale up to avoid any time out, the user interface of the portals will have to be simplified, and the processes for mandatory fields need to be more intuitive with minimum information for faster and effortless flow. As agents say, ROTI (Return on Time Invested) must go up.
- Operational support: Agents would gravitate towards service providers that provide excellent operational support by proactive communication. Reactive approach towards grievance handling will fall way behind the proactive approach in the race of winning agent’s trust. Service providers will have to define aggressive TAT (turn-around-time) for grievance redressal and will have to ensure that the timelines are strictly adhered too. Similarly, marketing and promotional support will be of more importance than ever.
All these factors were equally important for building a sustainable business but the market perhaps favoured better pricing. Now with universal pricing, these factors will drive the business and differentiate one service from another.
The revised universal pricing, as it stands today, would translate into increased margin for most of the service providers. The service providers may also like to invest this surplus to create better experience for their partners and achieve competitive edge. The service providers will need to continuously innovate to sustain the edge.
Some of the players who are party to the mutual agreement of having universal pricing will surely have business implications in the shorter run. This is because, with a uniform pricing structure in place, their agents will now earn substantially less (20-50%) per transaction. It will be interesting to see how these service providers handle the uproar from the agents.
The feelers from the market tell us that the agents are already anticipating other incentive schemes to keep them motivated despite the universal pricing. The other implication could be higher prices for the customers till competition comes in.
Two facts force us to think that this agreement is a ripple effect of the payments bank licenses. First- almost all of the service providers who have agreed to have a universal pricing structure, failed to get payments bank license. Second is the timing of this agreement which comes in only days after the payments bank licences were announced. Only time will tell whether is it really the effect of payments bank licences or not, but for sure the way of working of service providers is up for an overhaul.
The other open question is whether it is a step in price discovery for remittance business in India? Or it is beyond this wherein we can see co-opetition from various players in payment industry.
Keep reading, we will bring more insights into the rapidly changing payment market in India with a variety of players.