The rise of the crypto-economy, riding on the back of currency revolutions such as Bitcoin, would seem to have spelt doom for services such as PayTM, which rely on the virtualization of fiat currency in order to sustain their business models. Viewed from this perspective, the disadvantages of PayTM’s current business model are painfully obvious.
First, the use of fiat currency in online transactions leaves the service vulnerable to the inflationary tendencies that are inextricably linked with such currency.
Second, the clearing of transactions is subject to heavy regulatory scrutiny, making ease of use a problem for some customers.
Third, the service as it currently stands is a pull payment model. Fourth, the entire burden of transaction validation and record-keeping, along with KYC implementation, falls upon PayTM as the centralized service provider.
In order to remedy these inefficiencies, PayTM can transition (on a medium to long-term timeline) away from fiat money towards a blockchain-enabled, semi-decentralized model in which a crypto-currency forms the back-end. Such a shift would benefit the company in several ways, as described below.
While it appears attractive to use Bitcoin, Ethereum or another mainstream cryptocurrency to power the back-end, such a solution is inadvisable from a monetisation standpoint. This is because it makes financial sense for PayTM as a service provider to develop and use its own proprietary (albeit open-source, to promote a robust developer community) cryptocurrency for two reasons: first, this would ensure that the currency is customised to PayTM’s needs, such as smart contracting; second, it would ensure that PayTM’s back-end remains insulated from the volatility that continues to characterize mainstream cryptocurrencies in these initial years.
Thus, a novel and tailored cryptocurrency (let us call it “PayCoin”) could be developed exclusively to be used within the PayTM ecosystem – to implement cash transfers from one party to another party’s PayTM wallet, to purchase goods and services on PayTM’s online marketplace, to pay utility bills, etc. The customer need never know that PayCoin is involved in the transaction, in a manner similar to the implementation of cryptocurrency in Abra.
The use of PayCoin would be beneficial to PayTM in the following ways:
1. PayTM would be insulated from the vagaries of the monetary system, at least insofar as its internal value chain is concerned. Even if prices in rupee-terms increase or decrease due to the change in the value of the rupee, these changes can be passed on to the customer at PayTM’s discretion without the company having to absorb any risk or loss.
2. The migration away from fiat currency would mean freedom from regulatory suffocation, at least in the short term.
3. The transition would effectively render PayTM transactions as push payments, improving ease of use and efficiency of the process.
4. PayTM would no longer bear the entire burden of transaction validation and record-keeping. Independent network nodes, through a blockchain implementation, could process the payments in return for a transaction fee to be split between themselves and PayTM. However, such a solution would be through a permissioned ledger, in which PayTM retains the ability to carry out a KYC implementation (through the system it currently uses to validate users on the marketplace).
The fourth benefit is especially important to note, since it illustrates the perfect progress of the platform economy that services such as PayTM represent. The rise of the PayTM and the Uber business model rests on aggregating market players on either side of supply and demand and ensuring that they connect with each other. Thus, in status quo, these business models offer platforms, not goods or services.
In future, even the provision of a platform would slowly be abdicated by these entities, with more and more of the platform provision function being delegated to other parties, such as peers on the network in our example. Thus, while PayTM started off by providing a wallet service and a marketplace that connected buyers and sellers while leaving the actual provision of goods and services to its customers, it will now move on to a situation in which even this intermediary role of maintaining wallets and validating transactions will partly be “outsourced” to peers on the network.
Such “outsourcing” will result in lower revenue per transaction for PayTM, since some part of the transaction charge will have to go to the community of network nodes that performs such validation (through a proof-of-stake system, preferably). However, the drastically reduced costs for PayTM will more than compensate for this shortfall in revenue. Further, other benefits such as increased transaction speed, reduced volatility risk, etc. will make the move towards a blockchain solution immensely beneficial for the company.
The embracement of the cryptoeconomy does not have to stop here – PayTM has all the resources required to diversify into other areas of the cryptoeconomy, such as the setting up of its own currency exchange. Since PayTM has large financial reserves, a robust KYC implementation for its customers and existing ties with banking partners, it is perfectly positioned to become the pre-eminent cryptocurrency exchange in the country if it chooses to enter the field.
PayTM could also acquire new relationships with merchant partners such as Uber to boost the utilisation of PayCoin – this would happen as soon as the valuation of PayCoin has been agreed upon between PayTM and its merchant partners. Thus, it could be possible in the near future for a PayTM customer to pay an Uber fare or an electricity bill or send money to a friend in a far off place instantly, through a push payment that is validated by other customers on the network (and who get a portion of the transaction charge). Such a change would benefit all stakeholders involved.
Finally, with PayTM gearing up to launch its own payments banking service, this is an opportune moment to implement the PayCoin back-end, since this could make payments banking transactions and services incredibly smooth and hassle-free both internally and for the end customer.
(Disclaimer: This post was a result of students’ role-playing assignments that they did while learning through India’s first ever course on Bitcoin and Blockchain Applications at NALSAR University of Law, Hyderabad. It was a single credit 16-hour long course spread over seven days from 29th Jan-4th Feb, 2016. All roles were designed to enable contextual and deeper learning about crypto-currencies and blockchain technology among students. It was only an academic exercise of speculation aimed to uncover the potential of the new paradigm.)
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