The Road Ahead for Electronic Payments in Emerging Markets
What does the future hold? There is strong growth in e-payments, and regulatory support exists for them – but the market is complex. New entrants and investors are lured to these markets by their vast potential, but they need to think through some very important points. The following framework is recommended to help determine the right approach.
Financial inclusion – think “size of profit” not “size of margin”
Think about absolute returns: how much can the investment generate? If a market entrant focuses on metrics such as gross margins, its business case may never pass muster. However, by looking at the longer-term picture, it may see that financial inclusion initiatives can pay off.
Most likely, a new market entrant will not reap profitable returns in two years’ time, based on profitable volumes and ticket sizes. It needs to invest over a longer term: five years and beyond.
Timing to market is key
Some products enter the market before their time and fail (think: Apple Newton). Organizations need to consider whether their idea or product is ready for the market. But they should over analyze this – sometimes they just have to seize the moment. There are countless stories of companies investing in India ten years ago to tap into a 900 million person mobile market. First Data has observed over 20-25 failed ventures there that started too early. When starting up, how ventures implement their strategies is critical. It may actually be advisable to be slightly late to the market, in some cases.
Invest big or partner – trusted brands matter
Many companies are entering the e-payments market, so new entrants are advised to partner with the top brands. Choosing the right trusted partners can help companies get into market, enabling them to learn the ropes. It is very difficult to test the waters solo; it is much better to sit alongside a smart partner.
Leverage expertise of existing players
Existing players in the market have a wealth of expertise to leverage. Most importantly, research what they have failed at, and learn from those experiences.
Given the reach it has in the Indian e-commerce market, smaller players with innovative technologies are looking to partner with First Data to achieve greater distribution there, which helps bring new products to customers – making the partnerships beneficial for everyone.
New technologies, but existing form factors
Consider how new technologies may be implemented in existing forms that already have widespread acceptance (e.g., cards, mobile phones). This could ease the transition into new technologies, but in emerging markets these new form factors have not penetrated yet. Therefore, for the next five years, the form factor will still be the card. Maybe it will evolve to mobile but probably not within five years. Despite the desire to “leapfrog,” there is still much innovation to be done with the card form factor. Even PayPal is getting into the cards space, going “back to the future.”
Manage regulatory complexity
Be proactive, and don’t hide from regulators – understand their issues and work through them. In some cases, regulators will help organizations make decisions – for instance, if a regulation exists that prohibits something that is being considered. But most of the time, new ventures will need to be vigilant in approaching new markets – as they evolve, so do their regulations, especially in today’s changing payments landscape.
Unquestionably, banks, merchants, and service providers entering emerging markets face many challenges and uncertainties – but with carefully planned strategies and well-chosen partners, the likelihood of success increases considerably.