Monday, March 8, 2010

Two-Sided Markets

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SAATH is a non-governmental organization that utilizes market-based strategies to create inclusive societies by empowering India’s urban and rural poor.


Visa is a global payments technology company that connects consumers, businesses, banks and governments in more than 200 countries and territories.

What does that mean? Okay, if you take nothing else away from this please understand this. Visa is not a credit card company. They have absolutely no say over what your credit card limit is, what your interest rates are, or what kind of non-Visa rewards your bank gives you (However use Visa, you’ll be better off all around =)). Therefore, please, please stop asking me or any other former or current Visa employee to fix these issues for you, you will only find our answer frustrating. Instead, go find your friends at CITIBANK, BAC, or ICICI and ask them to deal with your credit card woes.

Visa is first and foremost a technology company. They use technology to support payment transactions between those who want to buy with those who want to sell. Visa gracefully capitalizes on the notion of a two-sided market, allowing it to make more than $6 Billion in revenue in 2008.

By now you are thinking, what does this have to do with SAATH…

Two Sided Markets:

As soon as I walked into the door at Visa, my mentor (Chris Sweetland) handed me a book called “Paying with Plastic.” Although the notion of two-sided markets is all around us, it wasn’t till this book that I internalized the power of the two-sided market - two or more customer groups that receive value only if all sides are actively engaged. It’s the notion of the greater good. If we collaborate we will all be better off. The issuer brings the cardholders, the acquirers bring the merchants, and Visa brings the network to be able to connect any combination of issuing and acquiring institutions.

Let me break this down less technically with the help of “Paying with Plastic” for those of you who are still like: what the heck.

This is a classic example used to explain two-sided markets, I’m just going to put my own spin on it.

Let’s rewind to 2002. You’re waiting in line to enter the “hottest” nightclub in Philly – Transit (Penn, please laugh). When you approach the door, you realize it’s free entry for ladies “AWESOME”, and $20 bucks for the gents. The club is the “network.” Men are one side of the market, and women are the other side of the market. To bring men and women together, the nightclub (network) decided to charge the men, but not the women. Why?

A nightclub is a great destination to meet the opposite sex (assuming that is what you are into). If that is the case, women for some reason are harder to come by in nightclubs, therefore to attract women, and meet the opposite sex’s demands, nightclubs offer their services (a forum for meeting others) free to one side of the market. Genius (and extremely convenient for me =))!

And there you have it: Bring the women and many men will come, and pay to come.

Two-sided SAATH:

SAATH applies the same logic, except to the Bottom of the Pyramid (BOP). SAATH’s Urban Resource Center (URC) serves as a network hub, physically, instead of electronically. It connects service providers in Ahmedabad, to those who need or want it, specifically those in underprivileged communities. The URC offers more than 130 services from acquiring a ration card, to finding a driving instructor. It charges a membership fee to get users to sign up and then allows them to access all of the URCs different services (again for a fee). It helps service providers like the government, other NGOs, and private companies to access this relatively untapped market who is willing to pay for goods and services, but who currently don’t have exposure, access, trust or the knowledge to use them.

The Gap:

Currently, SAATH runs the URC on an NGO model as opposed to a social enterprise. This is where my skills (expertise?) come into play. How can the URC be revamped into a social business which still meets the needs of the bottom of the pyramid, but become self-sustainable (with a surplus) in the process?

The Solution:

Visa charges both sides of the market, why can’t SAATH? Instead of just charging the customers to be linked to services, SAATH should charge private institutions, NGOs and the government to leverage its network platform. Its ability to connect the customer to the supplier is just as or even more valuable to the service provider as it is to the customer. Therefore this linkage, and capitalizing on it, is what will help the URC be sustainable and more importantly scalable. If a service provider had to build its own center or outlet in each underprivileged community, just as if every bank had to build its own payment network, the service provider would make less progress, and so would the bank. The banks realized this in the early 70’s and formed NBI and IBANCO, the predecessors of what is now VISA Inc. SAATH realized this and formed the URCs, and now needs to capitalize on its value proposition.

The Takeaway:

If you want to reach the bottom of the pyramid, tap the URC. If you want to purchase things GO World, GO Visa.

Fun Fact:

Until Early 2008, Visa was a not-for-profit organization, which then successfully converted into a corporation with a p/e multiple of 38.9. The URC currently runs in a not-for-profit status… think of the possibilities.

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