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Fighting Fraud Thru a Cashless Society

Photo by Flickr user Weldon Kennedy

Emerging markets often leapfrog technologies. For much of Independent India, it was very difficult to get a fixed-line phone. They were expensive and the wait  could be as long as five years. In the 1990’s came the mobile revolution and people across India were able to get a communication device for a relatively small amount of money and they could take the device with them everywhere. Most importantly, they didn’t have to wait years, but only a few hours for the phone to start working.

When it comes to the adoption of non-cash payments, India is in a similar position. Cash has been the preferred source of making and receiving payments since Independence in 1947. Credit cards still have very low penetration across the country. While debit cards have slightly more penetration, mobile wallets (a method of storing credit/debit cards and cash on a mobile phone) have seen quick and widespread adoption. By some estimates, there were 19.9 million credit cards across India in 2014. PayTM and MobiKwik, two of the largest mobile wallet providers in the country, claim to have 20 and 12 million active users respectively.  It’s pretty evident that India is fertile ground for cashless transactions, but also has plenty of room to grow.

With the recent developments in government, essential steps for promoting the use of electronic payments, including withdrawal of surcharges, service charges, convenience fees on cards and digital payments are soon to be rolled out across the country. While the adoption rate of mobile, card-based, and online transactions is currently lower than many other countries, payments via online platforms still accounted for 14 percent of all spending in India last year.

India, with most other emerging markets, faces the challenge of regulating transactions and removing illegal “black money” from the system. A recent study has India ranked fourth in the world for illicit money outflows with an astounding $51 billion leaving the country per year between 2004-2013 alone. Yesterday, Prime Minister Modi took a bold step in curbing the use of “black money” by changing the status of the ₹ 500 and ₹ 1,000 notes as no longer legal tender. This could have short-term implications on GDP since cash purchases still made up a large chunk of the Indian economy. The Indian government will eventually introduce new notes in addition to the ₹ 2,000 that was just launched.

These changes are going to create a significant amount of intended strain on the country’s parallel “black” economy but it’s a blessing for Indian startups and new age, digital first, financial services solutions. It also helps advance the government’s policy of financial inclusion by bringing the unbanked into the financial system.

The Solution to the Black Economy: Going Cashless

Cashless transactions with the right security measures in place would remove customer reliance on underground markets (also known as the “parallel economy”). At the moment, high transaction fees, time to complete a transaction and potential security problems are hindering the popularity of cashless transactions, but legislative progress on both fronts does suggest a positive outlook moving forward.

Enabling people to make inexpensive and easy payments using a phone or a fingerprint is convenient both for buyers and sellers and offers tighter security. This ultimately limits fraud and decreases the circulation of capital in the shadow economy, which, in turn, will lead to more tax revenue.

Shining a light on the parallel economy is something that has challenged governments all over the world for ages, even in established Western countries. In Italy, these underground activities are believed to make up 21% of the economy.

The Indian government understands that a cashless society will make it easier to curb the illicit outflow of capital and is taking steps to encourage technology solutions that scale with the size of the Indian economy.

Trust in a Transaction: Know Your Customer (“KYC”)

Knowing the parties in a transaction has always been difficult but in the digital age, a whole new level of uncertainty and potential for fraud exists. It’s part of the reason banks make customers jump through hoops for seemingly minor and mundane information to authenticate identity.

The ongoing work by the Unique Identification Authority of India to collect biometric data and issue all residents a universal ID number (called the Aadhaar) is unprecedented and early results are promising. The program has continued to grow rapidly over the last seven years with recent enrollment passing one billion citizens. However, the infrastructure needed to effectively implement Aadhaar throughout the country still needs workaccess to localized bank branches and ATMs, for example, is not readily accessible to millions – yet. Though the program is still in the early stages of implementation, it represents a major leap towards a financial infrastructure with strong safeguards in place.

The tweet above by Sanjay is indicative of how Aadhaar is going to change the way verification of parties in a transaction (“eKYC”) and transactions themselves take place for more than a billion people. The largest mobile wallet in India, PayTM, has reduced paper based KYC to 1%.

In order for cashless transactions to catch on, mobile-to-mobile payments also need to be streamlined. Last year the National Payments Corporation of India launched the United Payment Interface (UPI) to make mobile-to-mobile payments easier. The system allows for the quick transfer of funds across different banks with the use of a single identifierremoving the need to exchange sensitive personal information during financial transactions. 

All you need to do is download a UPI enabled app and let the fun begin. Startups like Instamojo have been pushing the limits of how digital payments can be made or received for years. Now, with the policy finally catching up, they can make it even simpler to send money or receive payments with nothing more than a cell phone.

Transparency and Portability

The Aadhaar number is a good step in bringing a scalable identification system to an incredibly diverse population of more than a billion people. However, coupled with blockchain technology, solutions providing more financial transparency to the entire country can easily be developed. With blockchain, an open ledger of all transactions could be recorded in a secure and transparent network linked to the legacy banking system.

With a blockchain, customers could have account number portability when moving between banks. That portability is something that politicians in India are already calling for. Imagine, switching banks or brokerage accounts to a new service provider and taking your account number with you. Potentially, not having to deal with changing routing numbers or providing your employer with new banking information ever again.

NASDAQ is currently testing blockchain technologies in a trial program. Last year, nine of the world’s biggest banks announced a partnership to create a blockchain framework that could be used globally.

The Future

With all of these developments on the horizon, disruptive technologies and solutions around payments, financial inclusion, remittance, public market investing and broader financial services are going to be boundless. As India adapts and implements the proper security measures and makes bold policy decisions, digital transactions will continue to become accessible, easier, less expensive, and, hence, more frequent.

Customers will have peace of mind about their accounts being protected thanks to biometric security. Business professionals will also find comfort in knowing that blockchain technology records all transactions and protects them from fraudulent activity.

Arguably the biggest winner of all will be the Indian government. With such a system in place, it could greatly reduce its much-derided bureaucracy. The government will also be closer to it’s goals of banking the unbanked, stamping out corruption and black market activities while simultaneously increasing revenues and GDP (by adding in cash transactions that were previously not being captured by official mechanisms).

While India still faces some complex challenges, the country is certainly heading in the right direction with regard to a more sustainable cashless society. If history is any indication, India will, in fact, fully embrace the shift just as it did with mobile a decade ago, though, not without some teething pains.

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Not many individuals other than some of the partners from Long-Term Capital Management have spoken or written anything public about their experience. I happened to be up in Greenwich, Ct a couple of days ago to meet with one of the partners from LTCM and I realized that it’s almost 20 years since I started working there.

This isn’t a story of what happened at LTCM. This is a reflection on how I arrived at LTCM 20 years ago, some of what I did while I was there, and what I learned.

LTCM

The Liar’s Poker Influence

Upon graduating from NYU, there were only a few things most students from Stern did. We went to Wall Street, Madison Ave., or, at the time, the Big Six consulting firms. I chose Wall Street, primarily, because I read the book Liar’s Poker as a Sophomore in high school and was completely convinced I wanted to be a mortgage trader when I grew up.

Plans changed by the end of college. Kind of. While I was in college, I was lucky enough to get an unpaid internship at Merrill Lynch. I picked up writing Excel macros and working with Microsoft Access 1.0. That was my first real experience working with technology and I loved it. I decided to do a double major in Finance and Information Systems.

At the end of my junior year, a friend of mine, Anil, shared my resume with a recruiter at JP Morgan & Co. I got the paid internship. After the internship was over, my boss, Paul, asked me if I’d consider joining after graduating. I was ecstatic and agreed.

Job Hunting

Fast forward a few years and I decided it was time to move on from JP Morgan. I had interviewed at a few places before getting called into LTCM. Once the interview was over, I immediately decided that I wasn’t going to interview anywhere else. Working at LTCM would mean an opportunity to work with John Meriwether (someone I first read about in Liar’s Poker six or seven years prior) and some of the smartest people in finance. That’s where I wanted to be. If you’re in tech, it was the equivalent of getting a job at Google, Uber, 500 Startups, Facebook or Twitter when there were less than 50 employees.

Weeks went by and I hadn’t heard a thing. Weeks turned into over a month. I was sure that I didn’t get the job and it was probably time to start looking elsewhere. Before I started sending out my resume, I got a call. LTCM wanted to see me again. I was very surprised that when they told me I was being considered for an analyst position in the US fixed income risk management group. It was a Friday afternoon and I got a call giving with a verbal offer. A written offer would be faxed over to me shortly. I had to make a decision by the end of the day.

Here I was, twenty-two years old, excited but also scared about going to work for this company that no one had ever heard of. This up-start in finance. This startup. I laid out the pros and cons to my dad and he said to me, “I don’t know anything about your line of work. I’ve heard of and know what JP Morgan is but I can’t tell you what you should or shouldn’t do. You need to trust yourself and decide what you think is right.” I made a decision to take the job. After having been at JP Morgan for two years, Monday morning I handed in my resignation to my boss, Jack (who had been a lifer at JP Morgan).

Long-Term Capital Management

Two weeks later on June 10th, 1996 I started working at Long-Term Capital Management. I was now the youngest employee at the firm, much to Howard’s chagrin. Traveling for workUp until I came onboard, Howard had been the youngest employee at the firm. Being at LTCM was an incredible experience. It turned out to be a lot more than what I had expected. In good and bad ways. A few months after I had started working at LTCM, during the summer of 1996, I suggested to my boss, Lawrence, that we should consider evaluating technologies like the Netscape browser and a web server to build an Intranet. Back in 1996, not many knew what an Intranet or the Internet were. The few that did, mainly used it for email, Yahoo and a few other things. My boss was pretty excited at the prospect of bringing new consumer technologies into the firm. He spoke to two of the partners, Greg Hawkins and Eric Rosenfeld. Greg asked me some detailed questions about my suggestion. At the end of the conversation, he told me to get a prototype ready in a month. I was perplexed. I knew nothing about setting up and creating content for an Intranet. I just knew how to use Netscape (Thanks Marc)!

After work, I hit a few bookstores and tried to figure out whatever I could about  Intranets, HTML and CGI apps. Roughly a month later, with the help of our SysAdmin, Avi, we had the Netscape Suitespot web server in production, hosting all of our US fixed income risk reports. That set off a push over the next 18 months and the little proposal to create and Intranet turned into a team of people dubbed the “ATI” or “Advanced Technology Initiative” building a platform for all reporting and some applications being moved to the browser or Java.

LTCM office in Japan

LTCM office in Japan

In early 1998 I moved out of the fixed income research group and ATI into the “systems” group. Here, I took on more of an infrastructure role. My job would morph again to focus almost exclusively on data over the coming months. I had just been given a project that would essentially rip out the whole market data infrastructure of LTCM and replace it with a new PC product from Reuters called Kobra. Essentially, everything affecting trading, research, risk and operations that required prices for various securities would need to be replaced. Every Applix Spreadsheet macro, every Perl script and module, every C library, every MarketVision screen would need to be re-written by December 31st 1998 – the last date the existing MarketVision infrastructure would operate. Then August 1998 rolled around and Russia defaulted and all hell broke loose in every corner of global capital markets.

The Collapse

By September, an offer from Warren Buffet to buy the assets of LTCM had come and gone. The hemorrhaging continued unabated. I kept working on replacing the market data infrastructure, unsure if there would be a need for the infrastructure at the end of it all. The partners took steps to ensure that all of the employees would not need to worry about our salaries. All we needed to worry about was sticking together and getting thru this. Within a few weeks, fourteen of the largest banks on the Street bailed out LTCM. Tough decisions were made by the “Oversight Committee” which was comprised of representatives from each of the fourteen banks. LTCM was scaled back considerably but by December 31st, thanks to everyone pulling together, we had a new market data infrastructure running on Reuters Triarch and Kobra.

LTCM Tokyo Trading Floor

LTCM Tokyo Trading Floor

The Aftermath

All of us were in maintenance mode at LTCM for about a year. We were kept around by the OC to keep the place running and fix problems if they occurred.

My friend Ritesh and I caught the startup bug and began working on plans for world domination. I don’t remember what the idea was but we made a trip to Boston to meet with Perot Systems. It didn’t work out but I had my first taste of a tech startup. Looking back, it was convenient that in October 1999, I got laid off from Long-Term Capital Management. It bothered me. A lot. Fortunately, though before the end of the year, I was back to working with Hans, Tom, Ira, Jim, Ritesh, Peter, Nandini, Marek, Rob, Claudette, Kin, Graham and many others on GlobeOp Financial Services.

I frequently tell people that I’ve been very lucky and fortunate in my life. My time and experience at Long-Term Capital Management has a lot to do with it. I was privileged to work with some of the best and brightest in the industry and lucky to learn some very important values very early on in my career at LTCM – humility, integrity and most importantly loyalty.

As I continue working on 500 Kulfi, I hope to build something that embodies these values as well as our core values at 500 Startups with Dave, Christine, Bedy, Khailee, Soaib, Shalini and everyone else in the #500STRONG family.

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A Quick Introduction to FinTech in India

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According to CBInsights, there are seven Indian startups are already valued at more than $1 billion. If you include Micromax, Mu Sigma, and InMobi, the number would be ten. Merely 2 years ago, there were only five unicorns.

It won’t be long before large exits confirm India’s ability to deliver meaningful returns to startup investors. There have been more than sixty mergers and acquisitions in India’s tech sector worth more than $800 million in just 2015. Indian IPOs increased nine times in 2015. Also in 2015, “21 IPOs were launched on the BSE, the Bombay Stock Exchange, compared with five in 2014, the highest number since 2011, when 37 IPOs were launched.” Sure they weren’t tech startups but it shows that the domestic appetite for IPOs is on the rise – something, tech startups are very excited about.

While many Indian startups may not take the typical path to an IPO, the opportunities for exits are real and more options continue to emerge. Here are a few of these promising signs for Indian startups and investors.

IPO Me, Please

In September, the Securities and Exchange Board of India (SEBI) approved e-commerce firm Infibeam’s plan to sell US $68 million in shares. Infibeam was India’s first e-commerce IPO in March 2016, clearing the way for future e-commerce companies. Snapdeal hopes to go public in India within the next few years. It was valued at nearly $5 billion last year, and has said it is likely to IPO in India rather than on a foreign exchange. Flipkart is, also, likely to IPO in the next few years, although rumors of a merger between Amazon India and Flipkart keep making rounds. Other tech unicorns like PayTM, MuSigma, Micromax may also entertain IPOs either in India or in the US. As they go public, they will act as proxies for the broader digital startup sector where many larger investors can’t easily participate.

Acquisitions and Investments by Major Players

India’s major startups are spending significant amounts of money to round out their portfolios as they prepare for their next, more public phase of competition. Snapdeal acquired mobile prepaid recharge provider, FreeCharge for $400 million in April, then launched a digital wallet for their bundled  services in September. They’ve acquired ten more firms over the last year, such as online loan platform RupeePower, luxury goods retailer Exclusively, and MartMobi, a mobile apps developer and TechStars alum.

Meanwhile Ola, another member of India’s Unicorn club, acquired rival rideshare service TaxiForSure for $200 million. Ola also acquired Qarth and trip-planning company, Geotagg.

According to Crunchbase, Flipkart wasn’t sitting on the sidelines either, publicly announcing three acquisitions in 2015 as well as PhonePe so far in 2016.

MakeMyTrip, the NASDAQ-listed travel firm, picked up last-minute booking site MyGola, 500 Startups’ first investment in India back in 2011, and has launched an “innovation fund” to invest in more startups.

It’s not just Indian firms who are doing the buying – Twitter picked up ZipDial, an Indian firm that turns missed calls into smartphone alerts, for an undisclosed amount (also a 500 Startups portfolio company). Yahoo bought Bangalore based, BookPad in 2014.

Times Internet, part of the media heavyweight, Bennett, Coleman and Company, recently announced leading an investment of $11.2 million in Haptik, an Indian concierge service. FreshDesk, another Tiger Global backed startup, recently announced its 5th acquisition.

What’s In It For Investors?

The Reserve Bank of India recently made it easier for foreign investors to sell or transfer their stakes in Indian startups, and loosened disclosure requirements. Relaxing rules like these should go a long way in attracting new investment dollars from overseas investors as well as continuing to make investing in startups attractive to local investors.

Prime Minister Narendra Modi, has promised to make it even easier for investors to both enter and exit startups through its Startup India Plan. This initiative, launched in January, intends to expand the country’s culture of innovation in technology startups to other areas, such as agriculture, manufacturing and healthcare.

India Accelerating

There were 141 M&A deals worth US$1.26 billion involving Indian tech startups in four years from 2010 to the end of 2013, a stark increase from years prior.  If you consider the massive growth in mobile phone penetration, the second largest Internet user base in the world, acceleration of e-commerce in India (which is expected to top $17 billion this year, having quadrupled since 2010) and a government that is committed to creating the next “Startup Nation” of 1.3 billion people, then the future of exits in India starts looking far more interesting.

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Why India is the Next Frontier for Mobile

Girl Talking by Ramesh LalwaniUnmodified picture by Ramesh Lalwani under Creative Commons 2.0

All over the world, opportunities are flourishing for mobile development (and investment). In some countries, like the U.S.,64% of adults owned a smartphone in 2015. In China, 68% of adults have a smartphone. Yes, these countries still offer room for growth. But not like India.

Indian use of smartphones is rapidly growing. Google-sized companies will be created over the next decade to satisfy user demand, which is significantly more than in the U.S. and China over the same time period. Here’s why India is primed for massive mobile growth. This is why we are getting more aggressive in India.

Mobile Growth All Over the World

It’s hard to believe that just 20 years ago, the world had about only 80 million mobile phone users, representing 1% of the world’s total population.

By 2014, the world’s mobile phone user base had grown to 5.2 billion, or 73% of the population. 40% of that user base had a smartphone.

Based on these stats, it’s hard to argue against mobile development as a lucrative business endeavor all over the world. Even so, growth in countries like China and the U.S. is slowing. Based on what I’m seeing as I invest and work with Indian companies, India offers the greatest opportunity for mobile investment. According to a report by IAMAI and KPMG, the number of mobile Internet users is set to double by 2017 to 300 million!

India already has over 900 million mobile phones, representing 79.39% of the population, and it’s on the path to having more smartphones than the entire U.S. population. It has the second highest number of mobile phones in use, after China and before the U.S.

In 2014, the number of smartphones in India grew 54%, and is expected to reach 651 million by 2019.  In 2013,  only 6.2% of Indian people owned a smartphone. India’s smartphone usage is growing faster than any other country. It’s currently the third largest smartphone market in the world.  

Indian internet penetration is also rapidly increasing. India currently has an internet userbase of at least 232 MM users. This is only 19% of the population, which leaves quite a bit of room for growth.

Scalability

Having a population that is four times bigger than that of the U.S at 1.27 billion people, offers a massive opportunity to scale a business. Though, margins in India are typically pretty low, the numbers are massive. There are hundreds of millions of people across India  who will access new technology for the first time via their mobile phones. They will want entertainment, content, services, and communication. Startups that can figure out how to meet the demands of mobile-first urban and rural Indians will create multibillion dollar companies. Even now, most people use a mobile phone to access the Internet vs a computer or desktop – “According to Meeker’s report 65% of people accessing the internet in India do so from a mobile device and 41% of e-commerce in India takes place on mobile.”

Growth in India

According to the App Annie Index, “Emerging markets grew as low-cost smartphones continue to penetrate India and Southeast Asia. First-time smartphone owner numbers are on the rise.”

I also think that people are inspirational at their core. If you provide the best hardware, QoS, content, and services, they will pay for it as long as their payment options become easier and ubiquitous.”

Takeaways

Indian use of smartphones is growing rapidly. The cost of smartphones continue to decline. “In 2015, the number of mobile internet users from rural area doubled from 2014, and in 2016 the growth percentage is estimated to surpass all the previous figures.

  • India is a market that can’t be ignored by corporations, investors, and startups
  • Growth in mobile usage and GDP is surpassing the US and China
  • Internet penetration is second to China and there’s still a tremendous amount of growth left with less than 25% of the population online
  • India is one of the youngest countries on the planet with a massive workforce

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