The infuriating crack in India's glittery digital infrastructure

Hi,

Even as Apple opens store after store in the country, it knows that making Indians pay is indeed a tough task. This isn’t about the price of iPhones but the fact that the Silicon Valley giant had to give up on collecting digital payments for its services in India.?

In 2022,?Apple explicitly announced?the end of its struggle of trying to make subscriptions and related payments work in the country through credit or debit cards. Now, the only way Indians can actually enjoy Apple Music or any other subscription is if they go to great lengths to buy an App Store gift card and load their wallet. There’s UPI too but anecdotal evidence suggests that it seldom works.?

What is it about collecting payments in India that made Apple - of all companies - give up?

The answer lies in a complex policy conundrum which has not only impacted some of the world’s largest companies but has also made life difficult for millions of Indians.?

I’m talking about the recurring regulatory problem of recurring payments.?

Enabling frictionless recurring online payments remains a recurring problem in India. Over the last few years, we've taken one step forward and two steps backwards.?

The?RBI's last issued guidelines on recurring payments?require customers to re-authenticate recurring transactions under Rs 15,000, while transactions over that amount?require two-factor authentication.?Banks must also notify customers before and after each transaction via SMS or email. While the system is intended to give customers control, banks usually decide which services are eligible for recurring payments.?

As a report in The Ken?makes transparent, companies that make the cut tend to be a selected few basis intangibles like “connections,” to quote from the story.?

If a company is not on a bank’s list, or the bank has not even set up their list yet, well, the customer is out of luck. The rules have also made it all but impossible to subscribe to a service from a company outside India.

For instance, the above graphic shows the only merchants "allowed" to receive recurring payments in India from cardholders of one of India's largest private banks, HDFC.

Going by this list, if you use a SaaS product like Salesforce, for instance, you may have lost your subscription because your payment can no longer be processed under the existing rules.

The challenges that arise on the?supply side were highlighted in a report by The Ken, who interviewed the CEO of Codedamn, a SaaS company that offers coding lessons to subscribers from around the globe. In response to the RBI regulation, the CEO noted that their business had been impacted significantly, with a 60% decrease in active Indian subscriptions, as cards suddenly stopped functioning.

The impact on SaaS companies

Indian SaaS companies are poised to meet a?fifth of the world's software demand and potentially make revenues worth $75 million by 2025.?

Any small-ticket SaaS company in India charges anywhere between $5 and $500 a month, and these payments go through a credit-card-enabled recurring payment system. For bigger enterprises, the billing can often run into thousands of dollars a month.?

Now think about all the failed transactions that have arisen from the RBI guidelines and how they would impact a company's cash flow.?

Not only does it create a much riskier environment, but a more uncertain one.?

leap.club, a professional network for women that operates on a monthly subscription basis,?experienced a 10% drop in subscribers.?The co-founder acknowledged that while this may not seem like a significant percentage, it does have a substantial impact on the revenues of small businesses.

To address the increased workload of reminding customers to make monthly payments, the platform has now shifted to yearly subscriptions. However, this transition makes it difficult to book new revenue.?Users?can be?more hesitant to commit to annual subscriptions, as some might prefer to get a taste with a shorter subscription before they commit to a long-term plan.?

Heroku, a cloud platform as a service (PaaS) stopped verifying and processing India issued credit cards?for Heroku online customers. Thanks to the new RBI regulations stating that they can no longer process automatic recurring payments using India-issued credit cards without an additional factor of authentication.

The 2016 Watal Committee and the 2019 Nandan Nilekani Committee?highlighted the importance of recurring transactions in their reports. While some argue that the RBI's new rules on recurring transactions affect only a tiny volume and value of transactions, recurring transactions are vital for the growth and success of SaaS companies.?

That also means?SaaS companies’ subscription to essential services like Slack, AWS, Apple, Google, web hosting, and others have been impacted. Several SaaS companies in India are still receiving notices of payment failure due to cards being declined. And these services are critical to business - for instance, not being able to pay for AWS could bring down many software or product companies.?

And what’s worse? Payment failures are random and inconsistent. A card that works for one person's subscription to a service might not work for another person's subscription to the same service

Primarily subscription-based SaaS companies benefit from the recurring revenue customers generate. The convenience of recurring payments is central to their proposition, allowing users to quickly sign up for a service by providing their card details and agreeing to be billed periodically.?

Any SaaS company looking to scale fast should be able to experiment with pricing, trial management, and discount coupons rapidly. However, when payments fail, their room to scale is choked and their churn rate dips.?

It’s one thing when SaaS companies’ customers choose to stop paying, but it’s more painful to lose revenue due to churn when your customers didn’t?intend??to stop paying - and that’s involuntary churn. Nearly?20-40%?of churn for SaaS companies is usually from involuntary churn!?

The impact on SaaS companies cannot be overstated. But, trying to understand the RBI’s rationale might help soothe the agitation.?

In defence of the RBI

The cornerstone of RBI’s regulations is always customer protection. With recurring payments, sometimes customers share their card details with a website, which shuts down,after a month or two of genuine operations.?

And sometimes, it can be hard for customers to stop auto-debits, in effect sending the message to the apex regulator that recurring payments are being misused.??

Funnily enough, recurring payments have always been a matter or confusion for customers and merchants. First with NACH, which took about a month or two to set up. Then, with e-NACH, which took about a day to set up.?

In fact, with the e-mandate for card payments, the RBI had initially planned to roll out the new rules in?August 2019, but eventually pushed the plan to September 2021.?

And when it did, India's major payment like BillDesk, Razorpay, and PayU assisted banks in sending customer payment notifications. But starting January 2022, no merchant can store card details, discouraging impulse purchases

The RBI provided a solution by proposing?card tokenization, allowing merchants to store a unique token instead of a customer's personal card details. This ensures safety from fraud and eliminates the hassle of repeatedly entering card information for customers.

And in?June 2022, the RBI increased the limit for auto debit to Rs 15,000.

What I’m trying to say is..

The ongoing hullabaloo is well justified considering that many Indian companies and consumers struggle to find workarounds to get their subscriptions up and running. But, it’s the dichotomy of our digital infrastructure that I find fascinating (if not troubling).?

On the one hand, we have a UPI that’s the most cutting edge real time settlement rail in the world but on the other hand, we have things like glitchy mandates, downtime, failed cards and restrictive entry into ecosystems (think about how only RuPay cards can linked with UPI for?

credit).?

More often than not, regulation is like salt. You need just the right amount to get the perfect taste. Too little or too much of it only leads to complaints and worse. But, financial services is a more complicated space than most and hence, one could argue that even a bit too much is sometimes warranted.?

I hope that we find a way out of this chaos without too much blood or sweat, but I take solace in the fact that Indian regulators continue to put consumers first. Short term pain for long term gain, is it??

That’s all from me this week!

Written by Rajat Deshpande