Does Net Neutrality Make India Better for Fintech Startups?
This is a tale of two countries and how their respective government policies on net neutrality have affected the startup of nascent fintech companies. Governments have long chosen winners and losers in the private sector by providing different rulebooks for different players—the expansion of railroads across the western half of the USA during the latter half of the 19th century is a prime example. Today, a nation’s net neutrality policies profoundly impact Internet users and businesses, particularly fintech ventures spawning revolutionary products and services.
In the new millennium, international borders mean little to technologies like the Internet. Globalism allows and encourages businesses to locate where they can take advantage of competitive labor costs, lower tax rates and a favorable regulatory environment. With India’s adoption of net neutrality policies and America’s move to a more closed Internet, fintech startups are looking to locate (or relocate) to the South Asian subcontinent in order to maximize growth and innovation.
By contrasting regulations governing each country’s policies on net neutrality, it becomes apparent that India and the U.S. are headed in opposite directions. In India, as of February 2017 telecom service providers (TSPs) cannot charge users discriminatory rates for data services based on content. On the other hand, in May 2107 Federal Communications Commission (FCC) Chairman Ajit Pai announced a repeal of regulations to undo “the utility-style regulatory framework” the Obama administration adopted in 2015. This proposal, disingenuously entitled “Restoring Internet Freedom,” will solicit comments from the American public for the next three months before taking effect.
While many may be unfamiliar with fintech, it is one of the largest growth sectors in the financial services (FS) industry. Investment in fintech startups increased threefold from US$4.05 billion in 2013 to $12.2 billion in 2014. Moreover, “fintech investment increased at more than three times the rate of overall venture capital investment” during 2014, according to the global management consulting and professional services company Accenture.
At the crux of the net neutrality discussion is “zero-rating,” a TSP practice exempting certain proprietary apps from the data caps a carrier imposes upon its subscribers. In India, Facebook and TSP operator Reliance Communications sought to offer subscribers “Free Basics,” a free mobile Internet service accessing a limited number of web services. In denying the proposal, the Telecommunication Regulatory Authority (TRAI) noted this loss-leader strategy of “differential tariffs arguably disadvantage(s) small content providers who may not be able to participate in such schemes. This may thus create entry barriers and non-level playing fields for these players, stifling innovation. In addition, TSPs may start promoting their own web sites/apps/services platforms by giving lower rates to access them.”
In its statement above, TRAI summarizes why net neutrality is vital to fintech startups. With emerging technology and evolved business models, fintech directly challenges traditional FS business practices. Perhaps the best example of this duplexity is the prototype of fintech—PayPal—versus stodgy Visa and MasterCard. In the 20th century, if a business wanted to accept credit cards it needed to establish an account with a merchant account provider to process credit/debit card payments. This practice entailed rental of credit card terminals and the use of dedicated landlines/data circuits from the local telco. More significantly, this arrangement exposed the merchant to a number of fees with the processor taking a sizable percentage rake from each transaction.
But fintech pioneers like PayPal and FourSquare transformed the credit/debit card processing paradigm with web-based ecommerce solutions that reduced merchant credit/debit transaction costs while adding convenience and utility. Mobile credit card processors using apps or dongles on mobile devices allow merchants to accept credit/debit cards anywhere. It’s innovations such as these which have transformed fintech over the past few years. Moreover, consumers around the world are accustomed to accessing data and conducting financial transactions anywhere at any time and expect such services no matter how large or small a vendor may be.
Customer expectations are the biggest reason why nascent fintech companies are eager to promote net neutrality. According to venturebeat.com’s Pete Mastin, “a 25% drop in Google traffic is attributable to a 500-millisecond slowdown.” Thus by “prioritizing” content, TSPs in essence deny fintech startups equal opportunity to offer new and innovative products and services to Internet users accustomed to almost instantaneous connections. Meanwhile, those who pay to use the lion’s share of the Internet pipe have quicker access to consumers. In this light, it’s no wonder incubating companies look to nations like India that offer a huge Internet user base, plenty of growth possibilities and net neutrality policies.
As Thomas P.M. Barnett writes in his book Great Powers: America and the World After Bush, “It is in Asia now where the global economy’s newest consumer markets are being rapidly integrated through industrialization and urbanization and deep embedding within global producer chains.” India has tremendous potential for domestic growth within its home-grown fintech industries, facilitated by favorable net neutrality policies. A closed Internet will only drive American fintech startups to havens offering equitable access to the web.