Technical writersPreethi Rao and Gaurav Singhal

DRIVING UPTAKE OF DIGITAL PAYMENTS DOWN THE SUPPLY CHAIN A CASE STUDY OF THE FMCG SECTOR IN JAIPUR

TECHNICAL REPORT

This publication is made possible by the generous support of the American people through the United States Agency for International Development (USAID). The contents are the responsibility of CATALYST and do not necessarily reflect the views of USAID or the United States Government.

About CATALYSTCATALYST is a user-centric ‘digital financial inclusion innovation platform’ for the underserved last mile. The initiative is funded by the United States Agency for International Development (USAID) under the mSTAR Program, through funding provided to FHI 360. Housed within the Institute for Financial Management and Research, Leveraging Evidence for Access and Development (IFMR LEAD), the initiative aims to expand digital payments and financial inclusion in India.

CATALYST identifies, develops, and validates solution frameworks and business models in collaboration with facilitating government agencies and participating industry solution providers to responsibly transition small business ecosystems (i.e., merchants, consumers, suppliers) from an inefficient cash economy to digital payment platforms, and further onto broader digital finance solutions. CATALYST has also launched a new business incubator, ‘Fintech for the Last Mile,’ to promote entrepreneurs focused on developing innovative digital finance solutions for traditionally underserved segments.

Technical teamGaurav Singhal is a Senior Operations Associate at CATALYST. Prior to this, he was with the Centre for Innovation Incubation and Entrepreneurship, Indian Institute of Management-Ahmedabad where he worked on the bi-yearly Blpan competition, Power of Ideas; as an intern at Dexter Capital Advisors, a startup debt advisory and angel fund, where he assisted in early due diligence and outreach; and as a business development associate at CultureAlley, creator of the HelloEnglish app, where he worked on monetizing the app through multiple channels and upselling.

AcknowledgementsThe authors would like to thank and acknowledge the support of Sapna Bharath and Sudhir Kumar for work on conceptualizing project design, partner management, and monitoring. Thanks to the PayBee team for its support during project implementation and reporting. Special thanks to Josh Woodard and Jaheed Parvez (FHI 360), for editorial reviews and feedback, Sharon Buteau and Badal Malick for their consistent support and encouragement. Ananda Swaroop, Kanika Khanna for content editing and Allan Macdonald for design of the report.

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SummaryA supply chain in the retail sector is quite complex in nature with, at times, multiple layers in between brand, distributor/wholesaler, retailer and end consumer. In terms of Fast-Moving Consumer Goods (FMCG), a typical merchant engages with 50+ distributors/suppliers and places orders with each distributor manually, on average, 4 to 16 times a month depending on their size. While the brand to distributor processes and payment flows are largely digitized, the distributor to retailer transactions are largely cash-reliant (approximately 85 percent of the transactions in the network) and operationally heavy in terms of payment collection. In order to study how the FMCG supply chain can be digitized, CATALYST worked with different stakeholders such as the local FMCG distributors, payments service provider and retailers. CATALYST engaged with two distributors and around 1,000 retailers under this pilot during the active engagement period (September 2017 to July 2018). Thereafter another distributor was onboarded during the monitoring phase of the pilot (August and September 2018) and more than 2,0001 retailers were engaged cumulatively from September 2017 until September 2018. The total number of invoices digitized was around 15 percent over the pilot and monitoring period (September 2017 to September 2018). Overall, the numbers are not very positive in terms of building a business case based on a cost-benefit analysis as the number of retailers transacting on the payment platform are too few to provide a value proposition in terms of cost saved to the distributors. However, commercial adoption by an FMCG distributor highlights the right product fit and value proposition for distributors. Also, there are key learnings garnered during the pilot such as the role of the brand in the supply chain, applicability of incentives and comparative characteristics with other sectors such as pharmaceuticals that will be useful for the sector while digitizing stakeholders along the supply chain.

1The retailers engaged dealt with both FMCG and pharmaceutical goods.

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Table of contents

1 Background and context 61.1 Overview 7

1.2 Diagnostic 7

1.3 Pain-points 7

1.4 Stakeholder Analysis 7

2 Project Design and Implementation 10 2.1 Theory of Change 11

2.2 Scope 11

2.2.1 Objectives 11

2.2.2 Partnerships 11

2.2.3 Target Group 12

2.2.4 Methodology/Activities 12

3 Observations and insights 163.1 Metrics 17

3.1.1 Conversion funnel 17

3.1.2 Challenges in adoption and payments 19

3.2 Cost-benefit Analysis 20

3.2.1 Project investments 20

3.2.2 Outcome 20

3.3 Key Learnings 20

3.4 SWOT Analysis 24

4 Recommendations 264.1 Solution and business model relevancy 27

4.2 Go-to-market model 27

4.3 Drivers for sustained usage 27

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BACKGROUND1

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1.1 OverviewFMCG is the fourth largest sector in the Indian economy. The retail market in India is estimated to reach US$1.1 trillion by 2020 from US$672 billion in 2016. The urban segment (which accounts for a revenue share of around 40 percent) is the largest contributor to the overall revenue generated by the FMCG sector in India and recorded a market size of around US$52.75 billion in 2017-18. However, in the last few years, the FMCG market has grown at a faster pace in rural India compared to urban India. Semi-urban and rural segments are growing at a rapid pace and FMCG products account for 50 percent of total rural spending.

1.2 DiagnosticsIndian consumer goods/FMCG distribution has always been a dynamic and complex affair due to multiple tiers in the structure with carrying and forwarding agents, dealers/distributors, wholesalers and end retailers spread across the entire country with different states/geographies having unique characteristics.

In the FMCG sector, a retailer typically works with 50 or more distributors/suppliers; each distributor receives an order, manually, around four to 16 times a month depending on the size of operations. The brand to distributor processes and payment flows are largely digitized; however, cash plays a huge role in the distributor to retailer transactions (approximately 85 percent of the transactions) which are operationally heavy in terms of payment collection.

1.3 Pain-points • A significant amount of the

distributor’s or supplier’s capital (around 50 percent or so) is locked in extending credit to retailers. Distributors offer free credit to select retailers from anywhere between a week, a fortnight or a month in the post-delivery cycle.

• The distributor's cash collection processes are human resource-intensive, amounting to a cost in the region of 0.50 to 0.75 percent of the overall transaction or invoice amount, which is significant given the FMCG distributor's thin margins of 4-6 percent. The cost includes delays due to check errors, manual reconciliation, collection misuse, pilferage, and time taken to digitize payments. Depending upon the size of the distributor network used by the brand and type of product involved, each cash collection agent of the distributor might be handling daily cash totaling up to INR 8-10 lakh (~US$11,012 to 13,765 ).2

• Manual ordering and reconciliation at the retailers’ end is a tedious, error-prone and time-consuming activity, which results in productivity and monetary losses.

• The lack of recorded/summarized order histories often restricts the availability of formal credit to retailers at a reasonable rate.

Given FMCG’s reach to small retailers, almost every small retailer in India would be part of the distribution network of FMCG companies. Digitization of retailer to distributor payments in FMCG is a significant opportunity to accelerate adoption of digital

payments in the small merchant ecosystem. The business to business (B2B) payment solution required for this to happen must address the challenges mentioned above and bring a strong value proposition for the distributor and retailer for it to be viable and scalable.

Based on an assessment of the FMCG supply chain and key stakeholder pain-points, CATALYST designed a retailer-to-distributor B2B payments pilot in Jaipur along with a payment provider and distributors.

1.4 Stakeholder Analysis

In order to study how the FMCG supply chain can be digitized, CATALYST worked with different stakeholders such as distributors, a payments service provider (PayBee), and retailers. CATALYST’s role was to develop the project design, analyze and assess the solution, make recommendations and provide operational support to the service provider, help the service provider create a marketing pitch and collaterals, assist/facilitate initial retailers’ onboarding/sign-up process, record qualitative (e.g., reason for denials) and quantitative (e.g., successful conversions) insights during interactions with retailers, and develop a tracker to monitor the project.

The other key stakeholders involved in the experiment and their areas of contribution in the pilot are shown in Table 1.

2USD to INR exchange rate is taken as 72.65 (http://dollarrupee.in) as of November 13, 2018.

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Table 1: Roles and responsibilities of stakeholders

Stakeholder Roles and Functions

Payment Provider

(PayBee)

• Partnership with the distributors and onboarding on their platform

• Onboarding retailers of the distributor

• Training of CATALYST’s and the distributors’ Feet-on-Street (FoS) teams on application usability

• Providing a single channel for troubleshooting and grievance redressal

• Resolving onboarding and payment-related issues (retailers/distributors)

• Creating digital invoices

• Providing payment transaction data to CATALYST for internal tracking, monitoring

• Based on pilot learnings, developing scalable and sustainable models for large-scale roll-out

Distributors • Providing a list of retailers in the network for onboarding

• Influencing retailer adoption through communications and through provision of their sales team’s support

• Providing invoices to PayBee for creation of digital invoices

• Evaluating PayBee’s solution during the pilot and adopting a commercial/sustainable business model based on pilot success

• Post pilot, nudging/onboarding retailers on the PayBee solution platform and provide training on payment/usage

Retailers • Downloading and onboarding the payment platform with help from the PayBee team

• Business and payment registration on the app

• Making payments based on digital invoices raised by PayBee

• Providing feedback on solution features, value-added services, and ease of use

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Figure 1: FMCG pilot stakeholder overview

FMCG PILOT STAKEHOLDER OVERVIEW

CATALYST

BRAND

PAYMENT PROVIDER

DISTRIBUTOR

RETAILER

• No real pain-point• Lack of record of payment• Record keeping for all distributors

Multiple Distributors Deals with 50+ distributors

ResearchOperational support

Knowledge & partnership hub

Non-participant in the pilot

• Mobile-based app• UPI-based technology• Bank-to-bank transfers• Digital invoice

• Cost of cash - .5%• Cost of credit• Reconciliation process• Lack of real-time monitoring

70% cash

30% cheque

Pain-point

Payment Frequency Weekly

Payment Mode Cash

Pain-point/Value

Current Transactions

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PROJECT DESIGN AND IMPLEMENTATION

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2.1 Theory of changeProblem definition: Retailer-to-distributor payments collection is a time- and resource-consuming activity.

Hypothesis: A digital solution that enables remote payments3 can ease the pain in payment collection and accounts reconciliation and will create an organic pull for consumer to business (C2B) payments.

A learning plan was constituted for the pilot which included the hypotheses to be tested or addressed through this activity and the reasons why these hypotheses are pertinent to the overarching objectives of CATALYST. Key areas of interest include the viability of Unified Payments Interface (UPI), a real-time payment system to facilitate inter-bank transactions, as an effective solution for B2B payments and whether distributors or their sales agents would be willing and effective influencers to nudge retailers to accept and use digital payment solutions. The detailed learning plan is shown in Annex A.

2.2 Scope2.2.1 Objectives

The key objectives of the proposed pilot to digitize retailer to distributor payments for the FMCG business were:

1. Evaluate a UPI-based solution as a viable B2B payment solution for the FMCG sector, based on the adoption of the solution by the distributors and retailers, usability experience,

validation of solution features, payment flows and digital invoices;

2. Evaluate the business model of payments in the FMCG supply chain as well as cost vs. benefit; and

3. Identify a go-to-market strategy to influence and drive initial adoption by the retailer, testing various mechanisms such as distributor influence and incentives.

2.2.2 Partnerships

The pilot was conducted in partnership with two distributors: DB Distributor (Proctor and Gamble – P&G) and Sharma Distributor (Hindustan Unilever Limited – HUL). The distributors helped PayBee reach out to their retailers through their sales team channels. They also supported the pilot by sharing transaction data and invoice information for the retailers who were a part of the sample. Sharma Distributor currently distributes HUL, Patanjali, and Idea Cellular Pvt. Ltd. products to

retailers across Jaipur. It has been operating in the FMCG space for 25 years, works with around 5,000 retailers in Jaipur, and has an annual turnover of about INR 100 crores (~US$13,764,151).

DB Distributor, a state distributor for P&G, currently distributes products to retailers across Rajasthan. It has been in the distribution business for 30 years, works with around 50,000 retailers across Rajasthan and has an annual turnover of INR 350 crores (~US$48,174,529).Apart from these distributors, PayBee also engaged with a few other distributors such as Ma Lakshmi4 and Singhal Associates in the FMCG sector at later stages of the pilot. Since the gestation period is long and the distributors were dependent on the brand for approval of the engagement, PayBee focused on building relationships with the brand during this period.

3We define remote payments as payments made from a distance, without the payer and payee being present at the same physical location.

FMCGbrand distributor endorses the benefits of digitizing payments across the supply chain

Critical mass of merchants comes on-board and adopts digital payments to distributors

Retailerbehavior shift induced by offering value from efficiency

Network effects created to increase C2B digital payments

Institutionalization of a successful business model and scaling solution across other brand distributor supply chains

Figure 2: Theory of Change

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2.2.3 Target Group

• Target distributor base: 2 (P&G and HUL)• Target merchant base: 500 retailers sweep• Target outcome: 30 percent adoption and 50 percent payment by adopted retailers; distributors adopting the payment solution on commercial terms 2.2.4 Methodology/Activities

The ideal scenario in terms of digitizing the B2B supply chain in the FMCG sector (as elaborated on Figure 3) includes setting up remote and automated invoicing, payment and reconciliation processes as well as making credit available to retailers based on their digital history. However, because of operational challenges, we decided to focus on invoice reconciliation and payment automation under this pilot. Step 1: Product review and assessmentThe CATALYST team reviewed and assessed PayBee’s payment solution. The payment solution

was tested on several features such as bank-to-bank instant payment, UPI setup process, invoice management, grievance redressal, team background, and market connect.

Step 2: Product testing with retailersAfter the review and assessment of the solution, the PayBee and CATALYST team conducted a product testing exercise with around 40 retailers, without support or information from the distributor. The exercise was aimed at understanding the retailers’ outlook on payments and the likelihood of them using an app for payments.

The summary of recommendations from retailers after product testing included:

• A majority of the retailers found the app interesting, easy to understand, and useful for their businesses. The ‘schedule payments’ feature was appreciated as it mimicked their current payments behavior.

• A majority of retailers pay 60 to 90 percent of their payment to the distributor in cash and the

remaining amount is generally paid in check (which is the only non-cash payment to the distributor).

• Currently, distributors provide discounts to retailers for early payments ranging from 1 percent to 2.5 percent. The credit period on bills varies from five to 15 days and a majority of retailers wait until the due date to make the payment. Retailers liked the bill discounting feature in the PayBee app, since it is a regular feature in their payment process.

• A majority of retailers did not indicate the real need for a loan against invoices, as they seemed self-sufficient in paying their dues to the distributor.

• Only five of the 40 retailers owned a debit card on their current account (critical to activate UPI payments through the PayBee solution).

Step 3: Distributor onboardingAfter conducting product testing with retailers, the CATALYST and PayBee team interacted with three distributors. PayBee played a major role in bringing

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4We have monitored data received from Ma Lakshmi post active engagement in the pilot which is included in the metrics reported. However, Sharma Distributor had concluded engagement with PayBee post pilot and hence was not monitored thereafter.

Digitizing the supply chain between distributors and small retailers creates efficiencies & allows for disbursal of credit

Deliver goods

Web/mobile-based B2B solution to distributor

Faster realization of payments, resulting in lower working capital

requirement

Mobile-based app for retailer to pay

Upload invoicesReduced cost of payment collection

Retailer payment through BHIM-UPI

(Directly and instantly to distributor bank account)

Automated invoice reconciliation

Seamless payment tracking and avoidance of manual

error and cost

Retailer raises loan request through app

Potential to reduce working capital for distributors by enabling retailers to avail

early payment discount

Loan offer based on digital historyImproved credit quotient for retailers through digital footprint

Retailer

Digital Lender

Invoice pushed to merchant

Figure 3: Ideal transaction flow across the supply chain

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the distributors onboard because of their existing relationships in other geographies.The distributors were given a detailed presentation on the payment solution, previous experiences with it, its functionality, and its benefits. They were also informed about product testing with retailers and their positive feedback. Of three distributors, two (one for P&G and one for HUL) agreed to pilot test the payment solution. No commercials were discussed at this point and; for the pilot testing phase, PayBee waived the payment charges. Commercials were drawn up post the pilot period.

Step 4: Area mapping and route plansArea mapping and route plans were developed after procuring the list of retailers from the distributors.

Step 5: Training of Feet-on-Street teamThe Feet-on-Street (FoS) team (i.e., the team engaged directly in the field) was trained by PayBee representatives on the payment product, its features, sales/marketing pitch, how to download, registration of business, and setting up the UPI PIN. The three-day extensive training included field visits.

Step 6: Content/collateral creationCollaterals were created for the retailers with cobranding of the distributors and CATALYST. They were published in Hindi and were aimed to be an informative guide for retailers on the PayBee app.

Step 7: Retailer onboarding; outreach campaignAfter the FoS team training, retailer onboarding was initiated. The first phase was entirely carried out by the PayBee and CATALYST team without the support of the distributors’ sales teams. The retailer onboarding process was carried out through

shop-to-shop visits by the FoS and other team members. This was a continuous and ongoing process. There were four major steps in onboarding:• Business registration• Adding bank account• Setting up of the virtual payment address (VPA) and PIN• Linking the VPA to business

Step 8: Creation of digital invoiceAfter onboarding the retailers, manual invoices from the distributor were converted into digital files and sent to retailers for payment. Initially, this was a time-consuming and tedious process which involved getting the physical invoices from distributors; it was later eased by creating a web portal for the distributors to upload an excel file directly and maintain a dashboard online for the payments. Once the digital invoice is created, it is pushed into the retailers’ app. Retailers get a notification on the app, where they can check the invoice details. Step 9: Payment of digital invoice by retailerOn receiving the digital invoice, the retailer can view it and make an instant payment from the app. The payment history along with the invoice is saved for future record and would be available with the retailer. Money is debited from the retailer’s account and credited into the distributor’s account directly and instantly.

The PayBee team worked with retailers in the initial stages, prompting them to make payments using the app and following up with them. Step 10: Incentive design for retailers and sales forceThe CATALYST and PayBee team designed retailer and sales force incentives during the course of the pilot period. The incentives were related to both onboarding of retailers and number of payments. They were used to push the initial traction aimed at promoting adoption and usage.

Incentive SchemeMerchants: INR 250 for onboarding and 1 percent per invoice; it was revised after three months of implementation in January 2018 to 0.5 percent for every third invoice; and

Distributor’s sales executive: INR 250 per retailer after onboarding and five digital payments.

Step 11: Feedback exercise A continuous feedback exercise was planned with retailers, distributors, and their sales force in order to identify operational and technical issues.

The distributors were asked twice a month for feedback on grievance redressal, progress of the project and technical issues with the app.

The sales team was asked twice a week during team meetings to provide inputs from the field, such as retailers’ perspective on the app and inputs for improvement in app design to make it more retailer-friendly and develop lean go-to-market strategies. Step 12: Monitoring After the period of active engagement from September 2017 until July 2018, CATALYST monitored the organic progression of the digital payment uptake through PayBee in the FMCG supply chain. During this period, one of the engaged distributors (Sharma) dropped out since there was a misalignment with the brand but another distributor (Ma Lakshmi) was onboarded onto the payment platform and commenced active engagement with PayBee.

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OBSERVATIONS AND INSIGHTS

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Figure 4: The conversion funnel

3.1 Metrics3.1.1 Conversion funnel

Overall during the pilot and monitoring phase of the experiment, 2,129 retailers were engaged by PayBee across FMCG and pharma supply chains. However, since there was no segregation between the FMCG and pharma retailers by PayBee while recording engagement, the conversion from engaged to adopted is not clear for the period post March 2018.5 Until February 2018, the retailers engaged were 296 and out of these 108 retailers adopted the application showing a conversion rate of 36 percent.

The number of invoices sent is 4,491, and number of invoices paid is 691 (15 percent) from September 2017 to September 2018.

Reasons for the drop: From engaged to adopted• Retailers could not be

onboarded on PayBee due to lack of smartphones. Also, a few retailers using a lower version of android phones could not be onboarded since the PayBee app works only with android version 6 and above.

• Around 10 percent of small retailers had their current accounts in cooperative or regional rural banks which are yet to be included in the list of banks under UPI.

• As a part of the 2FA (2 Factor Authentication) for UPI, users must share a mobile number linked to the bank account to be used. Some retailers had

current accounts but these were not linked to the mobile numbers in use.

From adoption to paying• Technical challenges with UPI

onboarding such as issues with PIN generation and detecting current accounts on the PayBee app were a major bottleneck in fully onboarding the retailers.

• Challenges in integrating with distributors’ Enterprise Resource Planning (ERP) software and receiving timely invoices caused a communication gap between the distributors’ sales teams and PayBee team, resulting in retailers making payments against invoices in cash.

• The solution being tested was not the best fit for cash-and-carry stores (stores with no supply credit) as payments for the supply will occur with delivery of goods at the counter.

Overall, 71 percent of ready-to-pay retailers have made digital payments to their distributors. Around 15 percent of digital invoices raised were paid using the payment platform. Around 60 percent of payments has been witnessed in the last five months of the pilot suggesting a long gestation period in the FMCG sector. A total of INR 18.57 lakh (~ US$25,563) was transacted through the payment platform.

96%

79%

47%

60%

Paying - 84

Retailers engaged - 392

Bank accounts added -235 

VPA linked to business - 226

Ready to pay - 106

5March 2018 was the month the incubation program was launched at CATALYST and PayBee started to target the pharma sector.

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Figure 5: Number of FMCG retailers onboarded on digital invoicing and payment platform

Sep-18Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18

140

1217 18

514

25 24

36

52

122

1625 26

120

100

80

60

40

20

0

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Figure 6: Percentage of FMCG distributor invoice payments by payment mode

Table 2: Number of distributor invoices paid by UPI payment mode

There were two main reasons for the spike in digital payments in March 2018: • Due to March being the last month of the financial year, many of the bills that were due earlier were settled in that month; and

• Since PayBee started targeting the pharma supply chain in March, more retailers adopted the solution and started paying for FMCG products as well.

Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18

Total number of invoices raised by distributor

31 65 162 185 247 254 301 339 448 479 600 575 805

Total number of invoices paid digitally

3 12 21 31 25 16 134 47 46 46 104 102 104

Total value of invoices paid digitally (INR)

2,761 45,923 50,668 96,733 47,427 24,412 3,69,682 1,29,989 1,52,695 96,515 3,36,442 2,67,111 2,36,790

3.1.2 Challenges in adoption and payments

The primary reasons for retailers to adopt but not pay digitally were identified as:• Lack of debit cards: 40 percent of the retailers do

not have a debit card for their current account. The debit card is an essential part of the 2FA to register on the UPI app.

• Lack of supply credit: A large percentage of retailers operate as cash-and-carry stores with the retailer paying to the distributor at the time of supply of goods. Hence, establishing the need for using the PayBee app became difficult.

Some other challenges included:1. Current accounts do not commonly come with a

debit card, which is essential to register on UPI. The process to get this enabled is long drawn out.

2. Onboarding new FMCG distributors is a slow and time-consuming task. Distributors who wish to be onboarded on the PayBee platform are mandated to get approval from the FMCG brand which usually takes six months.

3. The majority of customers pay retailers in cash; hence if they need to pay digitally to the distributors, they will have to face the additional burden of digitizing their cash.

120%

100%

80%

60%

40%

20%

0%Sep-18Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18

90% 82% 87% 83% 90% 94% 55% 86% 90% 90% 83% 82% 87%

18%13%

17%10%

6% 45%14% 10% 10%

17% 18%13%

% of Invoices paid digitally % of Invoices paid by cash

10%

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6USD to INR exchange rate is taken as 72.65 (http://dollarrupee) as of November 13, 2018.

Activity Break-up Cost (INR) Purpose

FoS(by CATALYST)

4 surveyors for 6 months 360,000 Capacity building, onboarding retailers, data collection

Incentives(by PayBee)

5 distributor sales executives won incentives for successfully onboarding 10 retail outlets and ensuring 5 payments each

2,000 Test the role of financial incentives in distributor sales executives onboarding retailers to digital payments

Cash backs(by PayBee)

At the rate of INR 250 to 36 retailers for installation, and INR 5,447 against 103 payments

9,000Test the role of cash backs on installation and on successful transactions for adoption and usage of digital payments

Grand Total 371,000

Table 3: Cost of resources invested

3.2 Cost-benefit Analysis 3.2.1 Project investments

There was no direct payment made to PayBee as part of this pilot.

3.2.2 Outcome

The invested resources led to certain positive outcomes in terms of uptake and quantitative conversions:

• Total value of payments digitized: INR 18,57,148 (~ US$25,563)

• Total invoices digitized: 691 (15 percent) Apart from this, there is a potential to significantly release distributors’ capital (around 50 percent or so) which is locked in extending credit to retailers. In addition, as mentioned earlier, the distributors’ cash collection processes are human resource intensive, amounting to a cost in the region of 0.50 to 0.75 percent of the overall transaction or invoice amount, which is significant given the FMCG distributors’ thin margins of 4-6 percent. Depending upon the size of the distributor network used by the brand and type of product involved, each cash collection agent of the distributor might be handling up to INR 8-10 lakh (~ US$11,012 to 13,7656) cash daily which is a huge risk. Digitizing the supply chain can possibly bring down both the operational cost and associated risk of cash handling.

Overall, the numbers are not very positive in terms of building a business case based on a cost-benefit analysis as there are too few retailers transacting on the payment platform to provide a value proposition in terms of cost saved to the distributors. However, commercial adoption by a FMCG distributor highlights the right product fit and value proposition for distributors. By the end of the pilot, a HUL distributor commercially adopted the PayBee solution after learning about the pilot and the effectiveness of the solution. The onus of onboarding retailers still lies with PayBee as the solution partner, though the distributor will continue to share his sales team for onboarding retailers. With no upfront cost for setup, PayBee will be charging 25 basis points per transaction to the distributor for payments made on the platform.

3.3 Key LearningsRetailers’ perspectiveApp: The majority of retailers found the app interesting, and easy to understand and use. They appreciated the digital invoices, UPI banking features (such as 24x7 payments, direct bank-to-bank transfer) and the bill discounting feature, since it is regularly used in their payment process.

Credit: Most retailers indicated that they had no real need for credit against invoices, as they seemed financially capable of paying their dues to the distributor. The assumption that digital invoice-based credit could be strong lever to promote digital payments was not validated, especially in the FMCG sector where retailers already get up to 15 days’ credit from distributors.Lack of debit cards on current accounts: A key reason for the wide gap between retailers who linked their bank account on the app but were not ready to make payments on the app was that banks do not issue debit cards with current accounts. About 70 percent of retailers did not have debit cards (on current accounts) and were unable to make payments as UPI requires a debit card for the one-time setting up of the UPI PIN.Incentive for digital payments: Many retailers stated that the making of digital payments should be linked to incentives, however minimal. PayBee also realized that incentives would probably hold the key to persuading retailers for the first year or so. According to PayBee, retailers are quite enamored of cash back incentive programs, and it helps to initiate trial. However, cash back incentive programs are not sustainable. The trick is in getting the design of the

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incentive program right so that it encourages the right behavior. The second issue is to identify and provide all relevant stakeholders with the right incentives, which may not necessarily be in the form of cash backs. It is not enough to incentivize one stakeholder and not the other.

PayBee has experimented with a couple of incentive structures, but has yet to find the right combination that works. It moved from a percentage structure cash back to a flat structure cash back. PayBee, however, believes that managing expectations is the key.

Distributors’ perspectiveThough distributors advised retailers to adopt PayBee, they did not seriously push them to adopt the payment platform; in fact, distributors have not proved to be effective in influencing retailers to adopt digital payments. The volume of payments realized under the pilot was too limited for the distributor to fully realize the potential and push it aggressively.

Distributors do understand the importance and utility of digital payments, both in terms of processes and cost saving but this realization is not evident in the field. However, they have not given up entirely.

Sales force incentives failed to bring any traction in terms of adoption and digital payments from retailers. PayBee and CATALYST designed incentives for the distributor sales force to boost the adoption rate, but the results were not very encouraging.7

Despite the low traction on payments and adoption, distributors are continuing with the payments solution and have shown faith in the solution by signing a commercial contract with PayBee.

Comparison with the pharmaceutical sectorPharmaceutical retailers belong to a regulated industry and

retailers need to be educated and qualified to run their stores. Also, pharma retailers are younger than FMCG retailers. PayBee and CATALYST field teams have seen an easier conversion of pharmaceutical retailers from cash to digital. Pharmaceutical shops also carry FMCG products. The current scenario is that a pharmaceutical retailer has three pharmaceutical distributors and two FMCG distributors onboarded onto PayBee. Hence, the value proposition for these retailers to go digital is relatively higher than that for FMCG retailers. One FMCG retailer usually buys products from 25-50 different FMCG distributors and, hence, having only two such distributors on the PayBee platform is not as beneficial and will not provide economies of scale. The increase in digital transactions since March occurred partially because of pharmaceutical retailers being pro-digital.

Unlike the pharma sector where the distributors have great control on the processes and systems and are able to decide independently, FMCG distributors are highly dependent on the principal/brand for decision making both in terms of pricing as well as online integration.

The gestation period for the FMCG sector is very high vis-a-vis the pharmaceutical sector. Greater competition ensures that the pharma distributors are swift and nimble. FMCG distributors have fixed territories and hence no competition for supply of a brand’s products.

Technical aspectsDuring the pilot and post-pilot period (12 months in total), neither distributors nor retailers faced serious technical issues with the app nor payment-related issues such as money debited from the retailer but not credited to the

distributor; funds stuck in the system; server downtime; etc., which shows that the platform is robust and UPI instant bank-to-bank transfer technology can be an appropriate and effective solution in the FMCG supply chain. Integration with the distributor Management Information System (MIS) is critical for streamlined creation of digital invoices withoutmanual intervention, and auto reconciliation with payments. However, the distributors use MIS provided by the brands and integration cannot take place without brand approval. Mass retail collect (a newly developed product feature which allows the payee to pull payments from a payer by pushing an SMS with a link to pay on any UPI app of choice) emerged as one alternative for the shop-by-shop retailer onboarding exercise. The maximum energy and time is spent on onboarding the retailer on the payment platform. To avoid this, integration with the distributor MIS is critical wherefrom mobile numbers of all active retailers can be gathered and SMSes can be pushed all together from one location. Other observationsThe FMCG sector, on the whole, is moving away from the trade credit arrangement to the cash-and-carry arrangement. Therefore, online integration is a critical factor for ensuring digital payments in order to provide timely digital invoices to retailers and enable them to pay digitally. In addition, this also helps to avert communication gaps between the PayBee team and the distributor’s sales team. The involvement of the FMCG principal in promoting digital payments is key for uptake and traction. Brands are actively scouting for a payment solution, and are starting to experiment in that space. They sense that digital collection is the way forward, however, the approach is still evolving.

7Three months’ incentive program for DB Distributor sales executives only, as part of which seven sales executives received incentives for onboarding 20 retailers.

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As a result of this pilot, PayBee has been approached by a major brand to engage in a cross-country pilot of their application for the FMCG sector. This is an encouraging development pointing towards scaling of the FMCG B2B digitization initiative across India.

3.4 SWOT Analysis Based on the FMCG B2B pilot conducted in Jaipur, we have identified the strengths, weaknesses, opportunities and threats for a UPI-based solution such as PayBee as a means to encourage digital payments among small merchants. They are: Strengths• Direct account-to-account: both

retailers and distributors prefer the convenience of payments being transferred directly to the bank accounts.

• Instant anytime anywhere payments and reconciliation.

• Pull payments feature in UPI acts as a trigger reminder for retailers to make periodic payments.

• Multiple user login for the retailer and salesman/manager with different access credentials enables

streamlined business management.

• Mitigates the risk and charges of cash handling for the distributors and their sales teams.

• B2B transactions occur in a more controlled environment; hence, the gestation period required for achieving critical masses is much shorter.

Weaknesses• To link the bank account to

the app, the requirement of an associated debit card discourages retailers who do not have a debit card.

• Technical issues in generation of the OTP to register on the app.

• A daily transaction limit of INR 2 lakh which is a deterrent

to high ticket size B2B payments.

• Weekly/monthly payments in the FMCG sector fail to create habitual behavior change among retailers.

• Extensive handholding to execute transactions is required to encourage retailers who are in the early stages of digital payment use and adoption to try the technology.

Opportunity• Regular digital payments

through such an app can help the retailer create a digital footprint, thus potentially opening better avenues for formal credit.

• Regular B2B payments can create an organic pull for C2B digital payments at these active retail outlets.

• With the Good and Service Tax (GST) and stricter guidelines on business registration, more businesses will enter the formal economy creating a fresh market for B2B players in payments and invoicing market.

Threats• With the advent of openly

available solutions such as UPI 2.0 also incorporating

invoicing as a part of the solution, plain vanilla invoicing and payment solutions will need to reinvent to stay in the game.

• Brand dominance in the FMCG sector acts as a major deterrent for seamless scaling of digital solution uptake down the supply chain.

3Wholesalers and top 10 percent of retailers based on the transaction amount have a ticket size higher than INR 2 lakhs. However, since they already use checks to pay invoices, they were the low hanging fruit or probable early adopters which PayBee could not exploit due to the UPI transaction limit.

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RECOMMENDATIONS4

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There is a significant demand for low-cost instant payment solutions in the B2B retail supply chain in an urban locality such as Jaipur. The need is to identify the best fit based on the appetite of the target segment (in this case the small retailers) and tweak the solution features to accommodate these specific requirements. Some key recommendations for digital payments solution providers who plan to target this specific market, based on our learnings from the pilot, are:

4.1 Solution and business model relevancy• UPI, through features such as

pull payments, 24x7 availability and direct transfer, becomes a good fit for retailer to distributor payments as long as the ticket size is under the prescribed limit.

• A customized onboarding process with respect to the current banking infrastructure available with the target retailer is crucial.

• A distributor-focused pricing is more effective as the value leakage is higher for the distributor in the collection cycle.

• An easy-to-use mobile app for bookkeeping and ledgers and an ERP dashboard for the retailer to push and manage orders with payments collection would be relevant

4.2 Go-to-market model• Due to low entry barriers in the

FMCG sector, strong distributor agreements are key to gaining traction.

• Asset light sales through established channels such as distributor sales are a cost-effective alternative to reach out to the retailers.

• Incentives for the channel partner on adoption show better adoption patterns than incentives to retailers for adoption.

• Though the FMCG sector has the highest penetration in the retailer network, it is a tough market to enter due to razor thin margins and the retailer profile (lower education and digital readiness levels). Hence, extensive handholding and retailer onboarding is required initially to engage the retailers and selection of low-cost solutions is crucial. Brand level buy-in is most

important to enter this supply chain.

4.3 Drivers for sustained usage• Frequency of invoice payments

in a use case is a crucial factor for developing stickiness. In the FMCG sector, the payments are weekly so ensuring repeat usage of the digital method of payment will promote habit formation among the retailers.

• Grievance redressal is the most crucial feature for customer retention.

• Incentives to retailers might have a negative nudge to sustained usage behavior.

• Drive significant adoption and usage within a geography to drive network effect.

• Assess a model with retailers as change agents to influence and drive consumer usage.

• Focus on leveraging existing payments apps to test scalable use cases that can spur widespread adoption by retailers and create an enabling ecosystem for service providers to innovate in.

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Hypothesis to test

Why is this question important for CATALYST to answer?

Measurement metric Data collection Target/threshold Limitation(s)

1/ To test if UPI is a viable and effective solution for B2B payments in the FMCG sector

Viability of the PayBee solution depends on the following: solution features and usability fit for end user, benefits of value-add services, end-users’ interest to use the value-added services offered, operational efficiency offers to end users

Currently, retailers make weekly cash payments to the distributor and it is a fairly operationally heavy model for distributorsGiven the reach of FMCG to small retailers, this can help largely digitize the supply-chain ecosystem

If retailers adopt and use the solution, it implies that the solution meets the needs of the end user (i.e., retailers)

Adoption and usage:

1) Number of retailers who onboard and get activated on PayBee interface

2) Number of UPI payments made by the retailer against distributor invoices that are generated weekly

3) Retailer experience and mprovement in operational efficiency due to the solution

1) Adoption will be captured during survey

Method: quantitative

2) Usage will be captured on PayBee’s transaction download

3) Conversation with retailers method: in-depth interview with sub-sample of retailers who adopt solution

Phase 1:

(i) Adoption target: At least 50 retailers

(i.e., 30% conversion out of ~170 retailer touch-points} (ii) Usage target: At least 15 (i.e., 30% of 50 retailers) digitally pay at least 2 invoices a month to the distributor

Phase 2:

(i) Adoption Target:

At least 148 retailers (i.e. 30% conversion of 493 retailer touch -points)

(ii) Usage target: At least 74 retailers (i.e., 50% of adopters) digitally pay at least 3 invoices through the PayBee platform in December & January

Subject to distributors influencing for retailers' solution adoption

Annex A – Learning plan

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Hypothesis to test

Why is this question important for CATALYST to answer?

Measurement metric Data collection Target/threshold Limitation(s)

Solution needs to result in operational improvement for a distributor for it to be a viable solution

Distributor experience and improvement in operational efficiency due to the solution

1) Conversations with distributors who adopt and use the solution

Method: in-depth interview with distributor

N/A Subject to distributor’s cooperation in the interaction

2/ To test if distributors would be willingly and effective to influence retailers to drive adoption and solution usage

To evaluate if distributors can be effective change agents to influence adoption for the solution to scale

1) Number of retailers onboarded when directly nudged by the distributor or PayBee’s FoS team

2) Post solution activation, number of retailers who needed to be nudged by the FoS team to pay through the solution on a periodic/weekly basis

Data collection method:

1) PayBee onboarding data

2) FoS/retailer feedback info and PayBee weekly data output

N/A Subject to retailer's cooperation in the interaction

3/ To test if the distributor's sales team will be effective influencers to nudge retailers to adopt the solution and ensure sustained usage

To evaluate, if post pilot, the distributor’s sales team would effectively nudge retailers to adopt and use the solution and it will be a sustainable/efficient acquisition model for B2B solution providers

1. Number of retailer conversions/adoption driven by the distributor’s FoS

2. Number of active retailers (retailers demonstrating at least 3 payment transactions in a month)

Data collection:

1. PayBee provided retailer sign-up/adoption download

2. PayBee provided

retailer payment transaction history

N/A Distributor’s FoS team well-trained on app-usage

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Annex B - Collaterals

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Integrated Credit for RetailersAdopt Cashless collections with PayBee and increase your margins by ~15%. No more pilferage and delayed payments

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PayBee's seamless workflow for retailers to make payments.

PayBee helps you to

Upload your invoices

Reconcile immediately with PayBee reports (Direct status update in DMS possible)

Retailer receives invoice on his PayBee app

Retailer makes a payment from his phone directly into your bank account

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