Edited for length and clarity
Brian Kenny: Paper money, or bank notes, was introduced in the Song dynasty China in the 11th century. For a long time, cash was king, but it wasn't very convenient. Then in 1950, Diners Club introduced a card that could be used to pay for items at restaurants and stores. Over time, plastic supplanted paper as the preferred method of payment, but we're finding out that it's not very secure. Credit card fraud cost customers and retailers $16 billion in the United States in 2016, an amount expected to double in the next four years.
Enter mobile wallet. Convenient and secure, and fueled by the proliferation of smartphones and high speed bandwidth, mobile payment globally is expected to quadruple to $3.2 trillion by 2022. Today, we'll hear from Professor Sunil Gupta about his case, Paytm: Building a Payments Network. I'm your host Brian Kenny, and you're listening to Cold Call.
Sunil Gupta is an expert in digital technology and its impact on consumer behavior and firm strategy. Those are both right in the sweet spot of what we're going to talk about today. Welcome.
Sunil Gupta: Thank you.
Kenny: I will confess upfront, I'm a bit of a Luddite when it comes to paying with my smartphone but I'm starting to come around to it. Reading this case made me feel like I'm way behind the times and I need to jump on board.
Gupta: I learned all these things from my kids also.
Kenny: I'm going to ask you to start the way I start all of these interviews, by asking you to tell me who's the protagonist and what's on his mind.
Gupta: The protagonist is Vijay Shekhar Sharma, who is an entrepreneur. On his mind is that the company Paytm ) has been very successful, beyond his imagination. By the end of 2016, they have 140 million wallets, digital wallets, on the platform. But he's very ambitious. At the end of 2016, the company valuation is still private, it's about $5 billion. His goal is to make a $100 billion company.
Kenny: That's very ambitious.
Gupta: This is the first Indian company in his mind which will be $100 billion. It's a very ambitious thing. The question is, is he dreaming or this is for real?
Kenny: Can you describe what mobile wallet means?
Gupta: The evolution of the company is very different but mobile wallet simply is a mechanism to pay through your mobile phone. In the US, it's Venmo, for example, or PayPal. In Kenya, it was M-PESA. There are different versions of it in different parts of the world, but emerging market is very interesting. In China, WeChat is another mechanism for mobile payment and of course, Alipay.
Kenny: How did you settle on writing a case about Paytm?
Gupta: I'm interested in mobile as a particular medium, whether it's through for-payment or whether it's for health care or whether it's for banking and other purposes. India as an emerging market is also fascinating because I grew up there and I see a lot of changes happening in India. The combination of mobile, payment, and India seemed like the perfect combination and I was curious to see what's happening.
Kenny: I've had the benefit of having been to India a few times. I'm always surprised about how many people there have smartphones.
Gupta: That's true for all developing countries, emerging markets like India, that they leapfrog. India went through a situation where very few households had landlines, but now everybody has a mobile phone. Nobody has a landline. So I think that's the typical thing that happens in Kenya and many other places--people jump from the old technology straight away to the new generation.
Kenny: Let's talk about Paytm. They had a long history, around for quite a while. This is a newer aspect of what they're doing, but can you talk a little bit about the evolution of the company?
Gupta: It's kind of interesting. The founder, Vijay Shekhar Sharma, started the old company which was called One97 in 2000. 197 is the phone number you dial, just like in the US you dial 911 or 311. In India, you dial 197 if you want information from a telecom operator. They started by being a value-added service to the telcos. There are several large telco operators in India. They would, back in 2000 when most people had feature phones, they would call 197 to find out the latest cricket score for example or listen to a song or something, like that. They were selling these value-added services.
That's how they grew. They became a reasonable size and they were servicing the largest telecom operators. Once that revenue segment grew, the telcos said, hey, we don't need you. We can do this ourselves. Why do we have to give commission to you? They were literally wiped out of business in four or five years, just because they were so successful.
Then this company morphed into a marketing platform of cross-selling services for the telecom operators. The notion was that if a telecom company can see you making long distance calls from India to the US, they can start selling you packages that I know you're interested in. Very soon, they were wiped out of that business because many of these players said hey, we can do it ourselves.
Kenny: They keep working themselves out of a job here.
Gupta: They keep working themselves out of a job. Only in 2010, they got into initially what they called the mobile recharge business. In India, the majority of the people who have mobile phones have a prepaid phone. They basically pay upfront and load some money on a SIM card. As a result, there is no loyalty for any telecom operators.
Kenny: And you're not locked into any kind of relationship.
Gupta: You're not locked in. You basically switch the SIM cards to go from ... AT&T or Verizon. Your phone is unlocked and you can go anywhere. The typical scenario was people would go to their local mom-and-pop store to load money onto their SIM card. The only thing this new company did was say, rather than walking into this hot summer month to your local mom-and-pop store, why don't you just go to this website and you can recharge your phone and reload money.
That's how they started. Very simple use case. The typical amount money people put in is about $2 or $3, which is 100 rupees or 150 rupees. Of course, I could put in $2 dollars into my account and then take out $2. There would $0 left in my account, but the company by default created a mobile wallet for you. That's how they started. They started finding new use cases. That encouraged people to keep some money in their wallet, more than just for a recharge.
Kenny: What's Vijay like? ...As we get further into the case, it becomes apparent that he really is very ambitious and wants to reach this goal, but what's he like as a leader?
Gupta: He's actually a very humble and low-key guy. He's almost like a professor in some ways. When I first met him ... he loved using white boards and showing exactly how this thing evolved. He's also a guy who says, which I liked, that the role of a leader is to look at what is around the corner. He delegates the day-to-day operations to his team. It's their job to manage it as well as they can. I don't interfere with that. My goal is to look for the next curve in the bend, in the road, if you will.
Kenny: It's a pretty big organization. We're talking about 7,000 employees.
Gupta: It's a very large organization and they're becoming larger as they go into the offline operation.
Kenny: What was their strategy? How did they set about to achieve this ambitious goal of being a $100 billion company?
Gupta: It's not about technology. It's about finding new use cases for the solution that you have. They started with the recharge as the first use case but the moment you have the mobile wallet, you say okay, where else can people use it? The next thing they found is (people) can use it for bus tickets and rail tickets. Again, think about small transaction, frequent usage. That was their key. Find use cases where it's used by lots of people very frequently at a low transaction cost.
The next big jump was when Uber came to India. One of the challenges that Uber faced, as compared to (doing business in) many other countries, is that to use a credit card in India ... you need to go through double-factor authentication, which means your credit card company will send you a message. You have to approve it, get a PIN number, so that takes a while. Paytm didn't need that double-factor authentication. Paytm grew in a very different segment, a high-end segment, if you will, with Uber. That was another use case that helped them. Then they slowly found multiple use cases, whether it was for movie tickets, for their marketplace, for their offline commerce, and so on.
Kenny: They weren't really a brand in the sense that people knew who they were. They were just kind of in the background, but it's important obviously if you have such ambitious growth strategies to establish yourself as a brand. How did they set about to do that?
Gupta: Two things happened. One was just the organic growth and word of mouth. The offline entry for them also was very coincidental. The way Vijay described it to me was that they didn't plan for the offline expansion. India is very much a cash economy. Imagine you're taking a taxi and you have a bill of 765 rupees. You don't have that cash or you don't have that change, so the taxi driver also says: "Instead of giving me cash, why don't you Paytm to me?" because both of them use Paytm for small-value transactions. They learned from consumers that they are actually doing this (type of) transaction. Also, peer-to-peer transaction was free. Neither the taxi driver nor you pay any fee for that. It was like a great value added for both parties.
Once that was recognized, Paytm says, why don't we just expand that into offline because there are millions of small mom-and-pop merchants who can get that. Part of the brand building happened simply because people found uses for it. It became. In that community of 100 million people, it became a verb. Like in the US, if you say, “Venmo me the money,” the same way they say, “Paytm it to me.”
Then to reach a larger audience, they used the traditional methods of going to television and going to the popular sports.
Kenny: They did some co-branding as well, I think you mention in the case.
Gupta: Another great co-branding was with large brands like Unilever and Pepsi and Coke. It becomes a cashback kind of mechanism. So there's a lot of co-branding because Paytm is so popular among consumers. Even the large consumer brands find it useful.
Kenny: There are great exhibits in the case (that demonstrate) that they were reaching really far, really fast. You described some of the earlier failures that they had as they learned what they wanted to do. Are they moving too fast?
Gupta: I think that's a common challenge for every startup. In some ways, growth is good but is it too much growth too fast? The challenge is mostly in execution. Can you execute it well? In terms of funding, they're okay because a large funder for them is Alibaba and they have deep pockets. I don't think the funding is a problem. The problem for them is execution challenges and getting the right talent.
But on the other hand, there's always a tendency for startups to have a land grab. In many of these markets, there is a winner-take-all (tendency) because of network effects. Some of the growth is necessary because in India, unlike in China, you have major other players in e-commerce. Amazon is there in India and Flipkart is there in India. It's very easy for Amazon to start a payment service which competes with them. I think they want to grab a large share of the market before all these players start entering the market.
Kenny: If they try to do this more broadly globally, it's going to be even more difficult.
Gupta: That's actually Vijay's ambition, to say can we replicate this model in other emerging markets, for example in Middle East. Same problems.
Kenny: Have you discussed this in class with MBAs and executives?
Gupta: This case was finished in January of 2017, so it's very fresh. I've taught it only once. This was in an executive program in India.
Kenny: Well, I'm very curious to hear how (it was received in India) because they're living it, right?
Gupta: I had Vijay come to class, which was very interesting because everybody knows him by now in India for sure. My first question was how many people think that the current valuation of $5 billion will be more than $5 billion--let's say $5-$10 billion--in the next five years? Or more than $10 to $20 billion? Or more than $20 billion? Every single person in the class said it will be more than $20 billion in five years. There's a lot of optimism.
Of course, things can go wrong, but everybody's very excited. We talked about should banks be worried by Paytm--are they the banks' friends or enemies? Should retailers be worried? Should Visa and MasterCard be worried? Should telecom operators be worried? There are a lot of different players. Look at the world from their perspective.
Kenny: Thank you so much for joining us today.
Gupta: Thank you.
Kenny: You can find the case Paytm: Building a Payments Network along with thousands of others in the HBS case collection at HBR.org. I'm your host Brian Kenny and you've been listening to Cold Call, the official podcast of Harvard Business School.