FinS 🍲 for the Soul (12 Sep 2021): Facebook to disburse $4.3M grant supporting Indian small businesses
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Latest headline:
Facebook to disburse its $4.3M grant supporting Indian small businesses
Background:
Facebook ties up with Indifi this week to launch a new programme, Small Business Loans Initiative. The programme will disburse the company’s $4.3M grant supporting over three thousand small businesses in India with small ticket loans between 500,000 Indian rupees ($6,800) to 50,00,000 ($68,000).
No collateral or joining fee is required and the pre-defined interest rate charged will be 17-20% per annum. A business must have advertised on the Facebook family of apps for at least 180 days at the time of application as one of the factors for eligibility. According to Facebook, they are “not monetising this programme”.
This fresh initiative is on the back of the company’s largest single investment of $5.7B investment for a 9.99% stake in Reliance Jio Platforms, a subsidiary of the nation’s biggest telecom operator in April 2020.
It’s all about small businesses.
The entry of global players into India’s digital payments space is poised to grow the segment to over five times within half a decade to hit $1T by 2023, according to a Credit Suisse report. However, despite onboarding more than a hundred million users, many payment firms are struggling to cut their losses or even break even. For instance, Paytm recorded a loss of $231M in the year ending March 2021, despite being the nation’s third most popular payment app. As such, many businesses have chosen to focus on their merchant base to drive their next phase of growth.
There are about 60M small and medium businesses in India, a portion of which are neighbourhood mom-and-pop stores. Brick and mortar continue to drive more than 95% of sales.
WhatsApp is the most popular communication tool in India with over 400M individual users and 15M business accounts. WhatsApp Pay went live in November 2020 but its rollout has been gradual. Furthermore, the National Payments Corporation of India (NPCI) has imposed a 30% cap on total payment volumes via every third-party payments app, hindering the expansion of apps like WhatsApp Pay, Google Pay, PhonePe, Paytm, and others.
These apps are built on top of the Indian government-backed Unified Payment Infrastructure (UPI), an interoperable real-time payment system that enables transactions with over 227 supported banks. In just three years after its inception, UPI had amassed 100M users and processed over a billion transactions. The annual run rate of transactions flowing through UPI is about 19% of India’s Gross Domestic Product. Google allegedly found the UPI pipeline so fascinating that it has recommended similar infrastructure to be built in the U.S.
With regulations in place to curtail Facebook’s growth in providing financial services, it is no wonder that the firm is looking to other avenues to leverage its sizeable user base. Playing its cards right could potentially grow the firm to become as big as WeChat, China’s largest messaging application with over 1.25B active users, and establish it as an integral player in the financial services ecosystem.
The grey area of embedded finance.
Mukesh Ambani’s Reliance Jio Platforms was established to accelerate the move for small businesses from physical storefronts to digital. The firm has raised more than $10B in the last month by selling a roughly 17% stake and amassed over 388M subscribers, more than any other telecom operator in the country.
Meanwhile, Ambani’s Reliance Retail, founded in 2006, remains the largest retailer in India by revenue. It serves more than 3.5M customers each week through its nearly 10,000 physical stores in more than 6,500 cities and towns.
Deep pockets are necessary for entering the e-commerce Indian market. Several such as Koolkart, Mirai Store, Rock In, and Timtara have launched their websites and failed.
Facebook has invested in and pledged to work with Reliance Jio to help small businesses across the country. This partnership would involve embedding JioMart’s eCommerce app in WhatsApp, and enabling the ordering of products and payment to be made without leaving the app.
“It is essentially the marrying of strengths for both companies. The JioMart integration is essentially adding a retail layer for WhatsApp chats. With payments now available on WhatsApp, it makes all the more sense. Now your chats, retail, and payments will all be integrated within the same interface,” said Jayanth Kolla, founder and partner, Convergence Catalyst, per Mint.
Aligning with India’s richest man may also have additional political perks. Ambani is a close ally of Indian Prime Minister Narendra Modi, and his firm has consistently supported policy proposals from the ruling government.
The synergy between Jio and Facebook has been touted to unequivocally help realise Modi’s ‘Digital India’ Mission with its two ambitious goals of ‘Ease of Living’ and ‘Ease of Doing Business’.
Big Techs’ creep into financial services.
Big Techs have forayed into providing a wide range of different financial services. Amazon and Google have both stepped into the business of offering fixed deposits for the first time. Amazon announced a partnership with investment platform Kureva.in to enable its customers to invest in mutual funds and fixed deposits this week. Google recently teamed up with Equitas Small Finance Bank to enable the opening of fixed deposits directly on the Google Pay app in under two minutes.
Moreover, Xiaomi is planning to offer gold loans, credit line cards, and insurance products. Mi Credit, a curated marketplace for personal loans of up to 100,000 rupees ($1360), witnessed a lot of euphoria in 2019, and more than a hundred thousand loans were disbursed. It will now offer a higher pre-approved loan of 2,500,000 ($34,000) rupees with a tenure of up to 60 months.
Such moves have not gone unnoticed by India’s financial regulators. The country’s central bank, the Reserve Bank of India, raised concerns about the entrance of big tech firms in offering financial services in its Financial Stability Report published in July 2021.The RBI recognises that there is the promise of supporting financial inclusion and generating lasting efficiency gains by encouraging the competitiveness of banks. However, the RBI sees policy issues behind the move of the big techs.
“Specifically, concerns have intensified around a level playing field with banks, operational risk, too-big-to-fail issues, challenges for antitrust rules, cyber security and data privacy,” the RBI said.
According to the RBI, tech giants pose three challenges to the Indian system. “First, they straddle many different (non-financial) lines of business with sometimes opaque overarching governance structures. Second, they have the potential to become dominant players in financial services. Third, big techs are generally able to overcome limits to scale in financial services provision by exploiting network effects,” it said.
The regulator is proposing blending activity and entity-based prudential regulation of Big Techs and strengthening international coordination of rules and standards as the digital economy expands across borders. It has also picked up on regulating online lenders and ensuring that exorbitant interest rates are not charged.
Conclusion:
As Big Techs discover their innate strength and appetite for leveraging consumer data and technology to their advantage, the competition in the financial services arena will become more intense. In this regard, regulators will need to be one step ahead to rein in dominant firms, while ensuring that businesses can thrive without financial encumbrances.
Such a balance between allowing innovation while safeguarding financial stability will not be an easy feat with cross-industry innovation occurring with speed and at scale. However, if done right, India can serve as a testbed for new payment technologies that can fundamentally alter how we interact with our world.
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