There are a few books that can give you the ability to visualize the future and give you a sense of why most folks from our communities struggle to understand the obvious. But again, the things that are obvious to you might not necessarily be obvious to the rest of the world. One of the best ways to visualize the future is to scroll the part of the history and identify the instrumental forces that unlocked the true potential of the developed societies - you might also get a sense of why India is a big deal. You can get a high-level sense by reading blog posts of economists such as Noah Smith about India's arrival. But these blogs will not give you any sense of what section of society will unlock the true potential of India or how this whole transition of our nation from a lower middle-income country to a high-income country will take place. And if you look through my lens, you will realise why India is going to make our world a better place…
Apple-to-apple comparisons by looking at the high-level data points are one of our biggest mistakes. This is potentially one of the reasons most of the ecosystem’s startups with something of X have struggled in the past, and they might struggle in the future. This happens when a society lacks truth seekers and doesn’t work with a mindset to fix society's problems. However, the good news for us is that we are probably the luckiest and at the best intersection of space and time: we can solve our society's problems at the speed of light with the help of technology, and unlock value for the rest of the world (now, please remember the last part because it is not only about our nation rather than it is about the rest of the world - Global 75% of the population - and to understand that you must read this essay till the end).
When I was trying to understand instrumental forces that unlocked the true potential of the developed society, I discovered that organizations with the ability to satisfy consumers' needs/wants unlocked society's true potential. And if you look at the first set of USA’s iconic organizations, they were really good at satisfying customers’ needs. However, as the per capita incomes improved over time, consumer spending was redirected towards wants, hence we see many successful companies satisfying customers’ wants. We need to take an example: YC’s tagline - “Build something people want”. Now this tagline is great for a nation where the needs are fully satisfied, and there is also no saving culture: the rest of the money will get redirected to wants. And hence super high motivations to pay on wants.
Now imagine a nation of 1.4 billion consumers and 90% of those who have been cheated in the name of satisfying their needs, in the year 2023, they are still struggling to have a better experience in the case of need even after paying money, and always look to save some amount from there combined earning. If someone asked money to satisfy their want, what is the probability to get the money out of pocket? I would say zero. There is a popular narrative in the ecosystem about trust, such as - People using SBI because they trust SBI, fuck no. People use SBI because they had/have no any other options. In fact, I remember when SBI set up their office in Baheri in 2012, around 6 KM from my village (before that, the next available any types of bank branch was in Darbhanga or Samastipur around 40KM from Dasaut) my dad used to cycle 6KM from my village to Baheri to cash out money or any other bank related activity. And even after around a decade, the experience of doing other bank activities is almost the same. Today thanks to the Government well thought initiative VLE-CSC (Village Level Entrepreneurs - Common Services Centres), my parents can cash out money using Aadhar at the village CSC. And he pays probably the highest percentage in terms of fintech pricing because that is saving them travel costs, time, and convenience. This is one of the reasons Fino Payment Bank is doing extremely well with over thousands of crore in revenue and 43 Crore PAT in just 3 or 4 years.
In a society where members struggle to have a good experience to satisfy their needs even after spending money, it is probably the biggest mistake to think members would pay money to satisfy their wants. And it is not just the India story, this has been true for the rest of the societies as well - also developed societies. And this essay is one of those stories everyone should know, especially if you are building for India (not just the top 10% of India’s population).
In the past, I have struggled to understand the fundamentals and find myself puzzling about the source of true value unlockers. I am going to use this essay as a reference to understand the fabrics of society’s value unlockers rather than making similar mistakes in the future.
If you read this essay till the end, you shall discover
Why the true unlocking of Indian societies is not just about India, it is also about 75% of the world’s population.
VISA’s POS story - massive society value unlockers
Let’s get started…
I have been a fan of History, and recently I have been reading part of the history that made this world a better place, unlocked society's potential, and surged global GDP to $100 trillion. And if you study that history, after a time you will have enough understanding about the source or tools that allowed a society to unlock the massive value for all participants. Again, we can only take those examples as a reference, we can’t copy/paste them because today’s solutions that will unlock the true potential of Indian society or the rest of the world will be drastically different. And hence the only way you can understand the true sources of value creation is if you study what helped the existing Developed country's population to improve their lives.
We all know at any point, there would be multiple forces that might have unlocked society's potential. And it would be impossible to cover all forces in one essay, hence in this essay, we will only talk about VISA’s POS story.
To understand this, we need to study the USA’s desire to become a cashless society and how they navigated from creating the Federal Reserve Bank (FED) that set up the cheque clearinghouse, to unsolicited delivery of Credit Card to the creation of VISA Inc, to automating the entire system and finally bringing this massive efficiency in the system - from 25 minutes to authorize a credit card transaction by the merchants to less than 7 seconds. I know you would say it takes a few seconds in the case of UPI, but that is our nation's true innovation.
Also, you would be surprised by the fact that in 1970, the cost per clearing a cheque was 7 dollars and the Fed’s Clearinghouse (I have explained this in the 2nd part of this essay) used to process 60 million cheques each year. The combined cost of cheque clearing was around 1% of the USA’s GDP. I am not kidding. :) And when you compare that with India’s almost cashless society at the stand of GDP per capita, you will be shocked by the potential future (lol). Here is a hint: thanks to NPCI, India is saving 4000+ Cr of Cheque processing costs. And its unintended consequences (2nd and 3rd order impacts) are yet to be reflected in our society.
Since this essay is 3500+ words, I will try to save words and hence to understand the impact, we must start with a comparison timeline table.
Table-1: Timeline of the USA’s desire to be a Cashless society.
From the above table, it is clear - Western society took almost 200 years to become cashless. And VISA and MasterCard were instruments in making Western societies Cashless.
Table-2: If we take a look at VISA’s current financial numbers, the data are staggering.
Please remember: According to World Bank, 85% of the world’s money transaction is still cash/offline.
VISA entered India in 1980, and it was ubiquitous for digital transactions, however even after 35 years till 2015, just 10% of India’s transaction was digital. And there were multiple reasons behind this
High interchange fees (Yes, for small Indian merchants, 1.51% was unaffordable)
Unaffordable price of POS for small merchants to start accepting digital payments
Education hurdle of setting up POS and starting digital payments
Fewer Bank accounts
Now let’s take a look at India’s cashless journey. (Again, this is just a representation, we have a long way to go. Also, in the past ten months I have been living without Cash in Patna).
Table-3: Journey of India’s Cashless Society
You see India took less than 25 to 30 years to become a Cashless society. But the best part: we become a cashless society at just $2200 GDP per capita. In 1950, USA’s GDP per capita was $2200. Okay, let's be honest, we should compare GDP per capita based on PPP (Purchasing Power Parity). On that measure, the USA achieve ~$7000 in 1970. Here is a picture of the USA’s financial system in 1970.
USA’s society was almost cash or cheque driven
The fraud related to float in cheques was at its peak - there is a famous movie on this: “Catch Me if You Can”.
Every function - Card authorization, processing, settlements etc. of VISA was offline. And Card authorization duration at merchants was between 7 to 25 minutes.
Now take a pause and think about the following
Unintended consequences (2nd and 3rd-degree effects) of a 95% Cashless society of 1.4 billion population
The UPIfication (There is no such word, I invested, lol) of the world. Can you recall 85% of the world’s money transaction is cash/offline?
Also, 87% of the world’s population is developing or poor countries. Even after ignoring China, we are still left with 75% of the world's population, no?
Why am I so confident in the UPIfication of the world? If VISA, with 1000X of higher cost, can capture 15% of the global money transaction, is there anything that can prevent UPI to not be the verb of payment for the world? Again remember UPI essentially solved the problem which is preventing the world from transacting online. (Powerful no, I can experience the sensation of blood cells through my veins, lol)
Can you answer the first question that I asked at the beginning of this essay? Okay, you don’t remember. :) Cool, the question was: Why the unlocking of Indian societies is not just about India, it is also about 75% of the world’s population?
At this point, you might have a sense of why the UPIfication of the world seems a no-brainer. And this applies to the rest of India Stacks - Aadhar, eKYC, Health id, ONDC, UHI etc. You see, as Indian societies will unlock their true potential, the improvement in the lives of 75% of the world’s population seems inevitable. I can’t express the feeling of thinking about the fact that India will guide the rest of the world. A big Heart <3
Here is one example: USA’s and China’s Healthcare per Capita is INR ~800,000 (~$10,000) and ~42,000 ($520). India’s current Healthcare per capita is INR 5030 ($60), and we believe India could potentially have a world-class quality healthcare experience under INR 10,000 ($120). Don’t you think 75% of the world’s population would like to use such solutions considering healthcare is a fundamental need? I will let you decide. :)
If you are still not convinced, we must wait for the future. For now, we must start the 2nd and the important part of this essay.
History is also a testament to the fact that most of the value unlockers for societies are the vision of one person. Of course, to execute that vision, you need like-minded people. But most of the scientific and technological breakthroughs are the vision of one person. And Dee Hock is one of those visionaries.
When I was reading this brilliant book - Electronic Value Exchange. I was getting goosebumps while reading the Day-0 thought process of Dee Hock. From Day-0, he was talking about a Universal Electronic Value Exchange (UEVE) that could connect - lines of credit, Deposits, and any other asset instrument - with a single Electronic Value Exchange (EVE). I also got confidence because this has been our thought process from day 0. I would like to pat my back for having this thought process (lol). The way today, it is possible to solve many Indian society's problems thanks to multiple forces. I need to give you some context on what led Dee Hock to have the vision to create the UEVE system.
If you remember Table-1: The USA’s Cashless Journey. To become a Cashless society, the Fed started incentivizing Cheques. However, the problem of cheque clearing and settlement between two different banks was painful. In some cases, a different bank from a distance of a few KM from the cheque-submitting bank used to take more than a month. In one line: the interbank Cheque clearing and settlement was super inefficient, painful, and costing a lot of money.
To solve this problem, the Fed set up a Clearinghouse. It prevented the physical cheque exchange between the two different banks. Now Bank-1 can directly submit the Cheque of Bank-2 to the clearinghouse. And Clearinghouse used to do the debit and credit, and that number used to reflect in the Bank-2 accounting system. You see, the clearinghouse eliminated the physical money/cheque travel into the manipulation of numbers in an accounting system. This means between Banks it was just manipulations of numbers in an accounting system. By the way, a significant percentage of the world’s money is in the form of numbers only. And the initial purpose of the Credit Card was to improve the customer’s experience at merchants.
At the Credit Card stage, most Bankers and the rest of the ecosystem folks used to consider the Credit Card business as a Money in Plastic Card. But Dee Hock identified the fundamental component of Credit Cards and said - we are in the business of the exchange of the monetary value. At that time, Dee Hock was an employee of Bank of America looking at the business of BOA’s Credit Card - Bank Americard. Bank of America started licencing Cards to other Banks to expand the merchant's base and business under a subsidiary company. However, there comes a time when the trust between BOA and Partner Banks started diminishing due to uneven power distribution which created two major problems.
Organizational Problem
Operational Problem
Dee Hock suggested a self-sustaining, decentralized organization that could solve the above two problems and incentivized all participants fairly. And convinced BOA to create an independent organization - Nation Bank Americard Incorporation (NBI) in 1970. NBI was a “for-profit, non-stock membership corporation. It was renamed to VISA.
Dee Hock was a focused leader and believed VISA should only focus on its core vision. And with this focus, kept improving the entire system. If you remember, at the start, the Card authorization duration at merchants was between 7 to 25 minutes. And VISA kept automating different parts of the Credit Card value chain - Card authorization, Clearing and Settlement etc. And they kept themselves away from the building POS to process Credit Cards at merchants. It was not the case that POSs were not available, however, the price of available POSs was $1000 to $2000 which was unaffordable for 95% of the merchants.
VISA Inc kept itself away from building a POS system considering that was not the core of their vision. However, the true unlock of society was only possible when small merchants accepted Credit Card payments. And after avoiding building POS for ten years, in 1980, VISA inc took the matter in hand and built an affordable POS system.
Here is the building thesis for founders building or thinking to build for 90% of Bhartiya. VISA inc fixed the price point and asked the team to come up with a POS that could not cost more than $500. And around 1980, most merchants had terminal phones for various other purposes. VISA inc team came up with a solution that could leverage the terminal phone, and build a POS system for merchants to process Credit Cards. Here is the thing that got interesting, in the next few years, new features eliminated the need for the multi-paper system - merchants' receipts, sales drafts etc.
Before the POS system, due to multi-paper systems banks used to justify higher discount rates from merchants. But the new POS eliminated the need for papers and forced Banks to lower discount rates. In fact, over time Credit Card becomes a scale-based business model for merchants. (WOW). And this unlocked the true society’s values. You see the power of solving the right problem that can unlock the true society’s potential. In fact, an affordable POS system created a strong flywheel for all participants. And that was the true force behind unlocking the massive society's potential (How?).
Lower Card processing time = better customer experience and hence higher customer adoption.
Lower Card processing time = Lower discounting rate which means higher adoption by small merchants
Lower Card processing time = improve merchants' efficiency
And all these ended up converting the Credit Card business into a scale-based business model. If merchants cross transaction value above the limit - the effective discount rate becomes zero automatically. And the rest is history! :)
You see, this is how developed societies have unlocked their true potential.
We must wrap up this essay faster, so let’s conclude it quickly. If you take a pause and think for a second, India might never build companies like Google, Microsoft, Apple, or OpenAI. And this is true for any other scientific and technological breakthrough. Because if you try to understand the fundamentals of these breakthroughs, non of them have come from building a definite solution to a definite problem. And Indian venture industry demands this first. There is a beautiful book to understand this - Scientific Freedom by Donald W Braben. However, we can create a 2nd class of Breakthrough revolutions that can not only unlock the true potential of Indian society, it can also make the rest of the world a better place!
I started this essay by writing: some books give you the superpower to visualize the future. And Electronic Value Exchange - Origins of the VISA Electronic Payment System is one of those books. If you like reading, you might find my 2023 reading list helpful: https://bit.ly/Progress-2023
And before I go: We all need to understand that our work is not limited to just the top 100 million or 1.4 billion Indians rather than it is for 75% of the world’s population…
This is the part of the essay where I must stop typing and request you all: if you find my essay informative - please share this with your network. I will see you all the next week :)