Yes, I Accept Cards!

When you think of card payments what typically comes to mind is Customer to Business (C2B) payments – for dinner at your favourite restaurant, at Point of Sale (POS) terminals at your nearest Mall or at that E-Commerce sites that you now buy everything from. However, Jack Dorsey, Twitter Co-founder, is all set to change this, through his new venture – Square.

Square is an application, that let’s individuals accept card payments through their iPhones/iPads or android-phones. It consists of a small square-shaped dongle and an app that virtually converts your phone or tablet into a POS terminal. All that needs to be done is to swipe the card through it, enter the amount and wait and watch as the money is transferred to your Bank account!

The best part of all this is, the dongle and the app are absolutely free!

Wait, free is it, then how do they make money?

Like in any card payment transaction, there are 3 major parties involved  – the payer’s bank (issuer bank), the payee’s bank (acquiring bank) and the card scheme (VISA/MasterCard/AmEx/Discover). The typical process flow is shown in the diagram. What Square does, is it acts as a link between the payee’s phone and the payer’s card scheme. In return, it charges a fee(called a Merchant discount rate or MDR) – typically 1.5 -3 % of the total transaction amount.

Source: UniBul Merchant services

So these can let me split my bills with friends, what else can I do with it?

When Dorsey decided to go beyond the 140 characters and set up square, he ushered the world into a new era – that of C2C payments! The possibilities are endless –

  1. For individuals:
    For people already reliant on their cards for most payments, these systems are going to make their wallets even lighter – by reducing the dependence on cash even when one is paying their friend. Cash is getting obsolete, especially in certain circles of tech-savvy consumers as online transfers, mobile wallets and now Square are dominating their payment modes.
  2. For businesses:
    This can work wonders for businesses, especially new or small entrepreneurs. Rather than investing in a Point-of-Sale machine (rental costs around $20 -$100 a month), they can let their phone do all the business. With features like advanced payment analytics and tracking, it reduces the need to keep accounts!
    In fact Strabucks – the US coffee giant has invested $25 million in the company, and now accepts payments through Square!
  3. Third party providers:
    There lies a huge opportunity for third party developers that incorporate payments into their apps. Companies like BillMonk can develop a lasting revenue stream by partnering with Square or Paypal for this service. Analytics softwares and services can tap this opportunity to churn out apps related to payment tracking and control.

This sounds complicated, is anyone even using it?

Yes indeed, this application has become quite popular in the United States, where it is currently based. IncWire stated that around 40,000 businesses used Square by February 2012

There are a number of reasons why such payment applications are flourishing

  1. Increasing reliance on cards:
  2. Even though the number of cards has been fairly constant over the past decade, card spends have increased exponentially over that time. This reliance on cards for payments of all sizes has fuelled the need for a C2C system.

    Source: US government Census report

  3. Growth of SmartPhones:
  4. In the US, smartphones have outnumbered other phones for the first time this year with a 50.4% market share. Android and iPhones account for almost 80% of this market. This phenomenal growth is also a driver for increased acceptance of mobile payments mechanisms.

    Source: TechCrunch

  5. Growth of Social Media:
  6. Apart from bringing the world a little closer, Social Media has changed one more thing – it has made technology acceptable – to the masses! By increasing awareness about newer payment mechanisms, it has ensured that they are adopted quickly

It seems that card payments through smartphones are here to stay. More proof comes in the form of competition – two major players in the E-Commerce and online payments space – Groupon and Paypal – have come up with their own versions of this product. In fact, both of them are aggressively pushing for share in this ever-expanding market by offering lower MDRs than the others. It is difficult to identify which companies will succeed in the attempt, but customers are the clear winners in the game.

So, do you STILL pay by CASH?

– Sahil Patwa

Sahil is a PGP 1 student at IIM Ahmedabad and member of the Consult Club. As an Associate Consultant at Ernst & Young, he was involved in the launch of India’s first domestic debit-card system and other projects in the electronic payments space. He is passionate about technology, new business development and Web 2.0. Sahil holds a B.Tech in Mechanical Engineering from IIT Bombay. 


Storing up Treasures

“Do not store up for yourselves treasures on earth, where moth and rust destroy, and where thieves break in and steal.” – Matthew 6:19

Actually, most people do store up their treasures on Earth, so much so in fact, that quite a few people are filling up their own treasure chests by renting out storage space.

Self-Storage is an industry in which storage space is rented out to tenants, usually on a monthly basis. The storage space is usually in the form of a room, container or locker. Access to the space is usually secured by the tenant’s own lock and key.  Clients include individuals, who usually store household goods, as well as businesses, which use the facilities for storing inventory or archives. As of 2009, there was approximately 2.3 billion square feet of rentable storage space in the US.

The first modern self-storage facilities appeared in the US in the 1960s. The self-storage business was meant to provide individuals with space to deal with “life events”: moving, marriage, divorce etc. American workers have always been quite mobile, and the end of the 20th century, with its increasing divorce rates, and rush of transitions to 2nd or 3rd homes, saw a significant increase in the number of life events.  However, by the end of the 1990s, demand was growing at a faster rate than explained by these factors.  From 2000 to 2005, the number of self-storage facilities almost doubled, with 3000 new facilities built each year. Since the 1990s, demand was increasingly driven by the accumulation of goods, fuelled in part by increasing real disposable  income. Individuals accumulated durables that did not rot or rust, and contrary to the mainstream economic assumption of “free disposal”, they preferred to pay to store the things they did not need, rather than throwing them away. Storing things “temporarily” was considered thrifty. Once stored, a sort of “psycho-financial inertia” took over; if individuals felt they could afford to pay for the storage of stuff, then human laziness would ensure that stuff intended to be stored temporarily would remain in storage for extended periods. By 2007, 50% of the renters were simply storing what wouldn’t fit in their homes, 15% of the them claimed that they were storing items they “no longer need or want”.

The financial crisis significantly reduced this non-economic usage of storage facilities as customers were forced to cut their expenses. The number of customers renting the most popular medium sized units decreased, as these customers either left or downsized to smaller units. However, there was an increased demand for larger units, by customers wishing to store the contents of foreclosed properties. Businesses forced to shut down also used the facilities for temporarily storing physical assets.

Occupancy rates fell by 2% to 3% from 2008 to 2009, from 91% to around 88%, and some businesses were forced to cut prices and offer promotion schemes to maintain demand. As of 2009, around 80% of facilities were offering free rent for a month or more to attract cash strapped customers. However, beyond that, self-storage firms proved remarkably resistant to the recession. Structured as Real Estate Investment Trusts (RIETs), which pool cash and invest in property, self-storage firms invest mostly in commercial property. Property values fell during the recession, but profits and cash flows remained stable or have grown since then.  In February 2011, 73% of self-storage owners reported revenues as stable or growing from the previous year. The success of the industry is also reflected in the market performance of publicly traded self-storage firms like Public Storage, Extra Space and Sovran, which were up between 30% to 140% since August 2007.

As a business, self-storage takes advantage of the high recession-resistant long-term demand. Self-storage firms can afford to rent out space on a monthly basis, knowing that, while contracts are short-term, the usage of the storage space is not. According to big yellow, a UK firm, 37% of their storage space is occupied by the tenants who have been using the space for over 3 years. The high demand also means that finding new tenants for an empty space is usually not a problem, so the contracts do not require any prior notice from the tenant while vacating the unit. Security deposits are also not required. Damage to the storage unit is unlikely. Self-storage firms can also recover losses due to non-paying tenants by auctioning the contents of their storage units when lien is imposed for non-payment. This depends on the relevant lien laws in the jurisdiction. In the US, this practice is common enough that it has given rise to two reality T.V. shows, Storage Wars and Auction Hunters, on lien auctions at self-storage facilities.

Self Storage (2006 data)

Number of  Facilities Rentable Area (sq. feet)


1.6 billion



22 million



20 million

The self-storage industry is based primarily in the US. Of the 58,000 storage facilities as of 2009, 46,000 were located in the US. However, the industry is growing in other countries as well. The number of facilities in UK grew by over 8% last year. Increasing income levels in emerging economies has also prompted development of self-storage facilities in places like Shanghai and Delhi.

In Delhi, Noida based StoreMore has launched a mail-storage service. Mail storage is a type of self-storage in which customers can mail-in the items they wish to store in boxes provided by the company. Most mail-storage services, including StoreMore, allow customers to call or order the boxes online. The boxes are delivered free of charge, and once filled, are collected free-of-charge by the company. Customers pay a monthly fee per box for storage; in case of StoreMore this is Rs 60 per cubic-foot-sized box. When a customer wishes to retrieve his box, he can order the box online or over phone. The presence of such a service in a relatively thrifty country like India is indicative of the universal appeal of self-storage, at least amongst those who can afford it. As a recent Economist article pointed out, investing one’s treasures in a self-storage facility might just be more lucrative then storing them inside one…

– by Anubhav Bhattacharjee

Note: Lien is imposed when a creditor obtains the right to sell the mortgaged or collateral property of those who fail to meet the obligations of a loan contract. In case of self-storage, the property stored in the unit serves as the collateral for the contractual payment obligation of the renter.

Consolidating the Cement Industry – Brick by Brick

It was recently announced that Irish specialist CRH is to acquire a controlling 51% stake in the two 2.4 MT plants in Gujarat of the Jaypee Group, the country’s third-largest cement producer, the deal reportedly valued at an enterprise value of Rs 4,200 crore. CRH had earlier acquired MyHome Industries in 2008. This foreign direct investment signals renewed consolidation in the Indian cement industry which had reached its peak in the last decade. This is a fresh respite from the ongoing concerns among global buyout firms about investing in India since returns have gone down due to rupee depreciation, increasing costs of production and policy paralysis and hence the prospects of the Indian cement sector were on the verge of a downtrend.

Indian cement industry – an overview

Driven by domestic GDP, cement demand in India has grown at a CAGR of ~9% in the past decade. Demand for cement is closely driven by the construction sector which in turn is correlated to growth in GDP. With growing Indian GDP, there has been an increased focus on infrastructure development along with a growth in demand in the housing and industrial sector.


Demand-supply is typically balanced in all regions of India i.e. North, South, East, West and Central. The West is a net importer of cement followed by East which imports some cement. South and North are the both the biggest consumers and producers of cement. They account for 49% of the total consumption and 55% of the total production of cement in India.

The Budget this year removed a 5% duty on coal imports (cement makers import 25% of their coal); there is no import duty on cement. Cement will gain from rationalization of taxes and duties and a simpler excise duty regime. There is increased pressure on the government to completely remove the import duty on gypsum which is an essential product for the cement industry.

Consolidation – History

Globally, most cement markets have witnessed significant consolidation. After the dismantling of government controls for the cement industry in 1989, the rate of growth in capacity addition in the cement industry increased. Due to the increased production and the lack of matching consumption, there was excess capacity in the market which resulted in companies struggling to remain viable. Entry of foreign players resulted in the consolidation of the fragmented industry. Though the industry has seen consolidation by domestic players starting in the mid-1990s, it was only in the late 1990s that foreign players entered the market. Holcim entered India by investing in Kalyanpur Cements in 1990 and Lafarge commenced its Indian operations by acquiring Tisco’s cement plants in 1999.

Consolidation – Last decade

In the past decade, there was a wave of consolidation in the Indian cement industry. A number of large mergers and acquisitions were witnessed. In most cases, global companies have acquired regional players. In the period of high growth, large players, in order to increase their market share and establish pan-India presence, have followed the inorganic route of acquiring small and regional players. Grasim as a part of Aditya Birla Group (ABG) acquired a controlling stake in Ultratech Cement from L&T in 2004. In the same year, Holcim acquired 40-45% stake in Gujarat Ambuja Cements and ACC. Recently, Grasim merged into Ultratech to create a single entity. Other than these major mergers and acquisitions, Heidelberg cement acquired Mysore cements (2006), Italcementi acquired Zuari Cement (2006) and Vicat acquired Sagar Cements (2008).

As a result, currently, there are only 2 pan-India players – ABG & Holcim, together accounting for ~38% of the capacity. Top 19 players account for 87% of the capacity. The Eastern reagion enjoys the highest level of consolidation in the industry with the top 5 players occupying over two-thirds of the total market share.

In spite of the rupee depreciation, Indian cement industry is an attractive option for FDI primarily due to its size and growth prospects. India is the second largest cement producing country in the world. During 2007-12, the cement capacity in India almost doubled to around 300 MTPA. As per projections in the 12th Five Year Plan, the cement sector would need to raise its capacities to 470 million tonnes by 2017 to meet the rising requirement for the commodity. Entry into the market is relatively easy since there are some loss-making companies which can benefit from the infusion of funds.

The advantages of consolidation have been witnessed for over a decade now since sustained merger and acquisition activity in cement has led to much improvement in profitability and valuations in the sector. First of all, consolidation reduces sprinkling of capacities and boost competitive pressures. There is a better opportunity to tap in economies of scale which is likely to control cement prices. With the demand in the cement sector poised to grow over 9% in the next two years, increase in prices is a huge concern. Thus, consolidation amy help in stabilizing prices.

Secondly, the top 5 players after consolidation enjoy a better cost structure, driven by higher level of vertical integration and locational advantage with respect to sourcing of raw materials and market access. Most other players have a weaker cost structure and moderately high leverage levels.

Thirdly, the financial strengths of the acquiring companies could help rescue assets which are loss making at present.

However, cartelization remains a possibility since the top five players control half the total capacity. Recently, the Competition Commission of India (CCI) has slapped 11 cement companies with a fine of Rs. 6,304 crore for price cartelization, the highest penalty ever imposed by the fledgling, but increasingly assertive, anti-trust regulator. It is predicted that the levy of penalty will lead to further consolidation in the industry. Considering the long term growth story, fair valuations, fragmented structure of the industry and low gearing, another wave of consolidation would not come as a surprise.

– by Kirtika Sharma

Kirtika is a PGP-1 student at IIM, Ahmedabad and a member of the Consult Club. She graduated from IIT, Delhi in 2011 with a B.Tech in Textile Engineering and has worked for AT Kearney as a Business Analyst for an year