Dhruv Sharma: Hey there listeners, it's Wednesday, September 16. This is Stream 139 and today Utsav and I are talking with an old colleague and friend, Jivraj Sachar of Indian Silicon Valley. Let's welcome him to the show.

Jivraj Sachar (Indian Silicon Valley): Thank you so much, Dhruv. It's such a pleasure being here and especially chatting with both of you. I was telling Utsav yesterday, I credit so much of where I am today to Utsav Prakhar, the early team at AngelList and Dhruv and I had such a great time. So always a pleasure chatting with you both. Thanks for having me.

Dhruv Sharma: Good times, good times. Fantastic. What is happening? What are you up to these days?

Jivraj Sachar (Indian Silicon Valley): I'm up to building Indian Silicon Valley. The way we're thinking about it is, I've been fortunate to have started the podcast now four and a half, five years ago. So it's been a really long time while the podcast continues as the center of excellence where we believe, and we were chatting briefly right before this stream started, right, that in a world where so much of it is AI, we actually like this charm of long conversations, not being super instant in terms of dopamine and going deep. So I think that is where the podcast is this aspect of where younger founders can learn, hopefully experienced founders can also learn and we can go deep into business building. Simultaneously, we've also had the privilege of building this thing called Indian Silicon Valley Capital, which is a micro venture fund. It runs like a syndicate where we have a dedicated pool of LPs. Most of them we ended up hosting on the show and that's how we built a relationship with them. And we believe there that we now have to step it up. We built a team, we've deployed capital close to $10 million now, so that's been very interesting over the last three, three and a half years. And yeah, a lot of action in the consumer deep tech AI world. And so we are the epicenter of it, hoping to meet great founders and every day gets spent there. So these are the two things that keep me busy.

Utsav Somani: Dude, super young and on the way to become becoming the Harry Stebbings of India. I mean, was that the vision when you started ISV?

Jivraj Sachar (Indian Silicon Valley): Honestly, I hate to admit it, but I did not know of Harry Stebbings when I started the podcast. But soon after I realized the incredible person and what he's built, professional he is rather. I don't know him personally, unfortunately. But as that playbook became evident with Harry doing what he does and a bunch of other folks who've done it. Well, I think Lenny has a small micro-fund as well. Invest like the best. Patrick has a fund as well. I think it became evident that, hey, there should be investors of all shapes and kinds. And this distribution leverage can be a value add that other investors may not be able to provide. And if enough founders appreciate what you bring to the table, you could build a differentiated firm. And I think that's the path we've treaded on. And yeah, I love that reference because I'm in admiration of Harry. And if we can do even a fraction of the work that he's done in India, I think we'll be really successful. So that is the hope and objective.

Dhruv Sharma: Fantastic. There's this term they use in the valley called narrative capital. Yes, that's right. I'd love your thoughts on how relevant, how applicable it is to India. And alongside that, if let's say we assume that you have a GPC within that framework of narrative capital. What are the advantages for the founders you work with and the LPs you're able to bring along with you into into opportunities? Talk to us about that.

Jivraj Sachar (Indian Silicon Valley): Sure. I think narrative capital is interesting. In fact, you know, internally, we were looking at some of the transitions outside. In fact, TBPN was acquired by. But the person used to run this newsletter called The Generalist is now a partner at Hummingbird. Eric, who used to run his own podcast, is now leading new media at a16z. So a lot of transitions within venture of, you know, acquiring folks who championed narrative capital have also been super successful in the West. I think the way we think of it is that a lot of highly technical founders, which is especially true in the age of AI, irrespective of whether or not you're technical, building is only becoming significantly easier, as we all know. But distribution is still a very treasured asset that everybody's trying to fight for. I think the advantage of having built the podcast is that we have a certain eye for distribution, consumption, what people really want. And I think if you can bring that lens to the cap table, it becomes helpful. In fact, over the last couple of quarters, we've actually heard from some founders further that hey, we're building a B2B product, but we want to understand your thoughts on that. We are building, you know, a financial finance AI product, but we want to understand how do you get to the relevant stakeholders? Do you know some people? In the consumer world, it's even more interesting, right? If you think of today building a D2C company, everybody is trying to, it's become super simplified on a supply lens because of the contract manufacturing ecosystem in the country to start something, but significantly difficult to scale something. And therein also having this pseudo creator understanding, right, becomes massively advantageous for portfolio when you're sitting across them, because our conversations are very interesting from a lens of, hey, have you tapped onto this creator? Have you tapped onto this trend? Do you know this marketing agency? Do you know that brand and design firm? Do you know how to optimize performance ads? And this is how UGC will work. And I think we see a lot of this in practice now. And it has helped us also carve this space because I think when I started investing, the correlation was more challenging in practice than in theory. And now in practice, what's coming out is, especially with consumer sort of brands, where there is a direct correlation to the consumer and within our B2B companies, where there is some role of brand distribution, we are able to add a definitive unique perspective. How helpful that will say things have to compound, we work with, continue to listen from our founders to understand how more we can help them. But I think, yeah, if you can own the narrative, I think narrative capital, I think of it as distribution capital within the context of India, which also gives us a unique space within the Indian VC landscape. I think Indian VCs are incredible at, you know, backing generational companies, being on their boards, guiding on corporate governance, financial structures, and much more, P&Ls. I think this is a part where we can be uniquely differentiated and add significant value and have a seat at the table.

Utsav Somani: Awesome. Let's get a little bit more specific. So some of the best venture investors come from all kinds of backgrounds. You're now running this podcast, turned into a syndicate, now a micro fund. Give me two examples where you think having the podcast actually helped you win allocations or win deals.

Jivraj Sachar (Indian Silicon Valley): Sure. I'd say one is this company that we back called Asaya. Asaya is this a personal care company. We started by the co-founder of Paper Boat. He built Paper Boat for 10 years. He was coming out of the business, figuring out what to build next. And I remember that we actually invested some little shot of 100K in their angel round. This is before they raised institutional capital from OTP and Huddle. And it was all exhausted. So firstly, I discovered Neeraj because of his father, because I was there, because of a podcast I was hosting at IIT Kharagpur. So that was one point of touch from a discovery lens. Had that not been the case, I probably wouldn't have ever met Neeraj unless Social Circus would have collided or after he would have raised. So that was one. Second was, I think, when he was starting, being the co-founder of Paper Boat, one of the most generational consumer companies already, capital was not the constraint. And he had this decision to make whether or not to have Jivraj. And the reason he went with us is to hold. At the time, we had hosted a bunch of interesting personal care founders on the show. Think Varunath Mama or think Surya Ashok Dinkar. And that insight was translating in a small fragment to in our conversations. And the second is, I think because of the podcast, I'm now with this brief network of creators, influencers and other sort of influential people who actually have a point of view, right, on what works, what does not. And that network was interesting. In fact, to date, some of my most interesting conversations with Neeraj and Mandeep are, hey, have you worked with this creator? Can I connect you to this creator? They'll probably work at a discount. Their sort of CPVs are really justified. You will have a great conversion on their rights. So I think that there were multiple spillover advantages of the podcast to turn Asaya and really make it work. I think the second one, which is more recent, is a company that will soon come up. It's called Delta and Sleep Supplements. I think there too, the way we were able to win allocation is because we showed this display of saying that, hey, I have these seven, eight friends who are from the wellness world. They are influencers. They are seeing sleep as a big category on ground lens. These are two ex-P&G senior folks, very experienced. They know supply chain, product, customer very well. Where they're actually trying to brainstorm more with us is actually the founders doing founder content. Now we brainstorm with her once in a while. In fact, right after this, I'm on a meeting with her where we're going to chat on, hey, this is what GTM looks like because it's a relaunched company. But I think both these examples and in many conversations now, the edge is that, hey, we will fulfill this distribution edge for you and people are liking it as of now.

Dhruv Sharma: Jivraj, one thing your story has demonstrated is that you don't have to be at a bench of investors. So for a lot of young people who would like to be doing what you've done, what advice do you typically give them? There's one other thing I'm super curious about, which is when all the stars align, when a Gen Z VC like yourself invests in a Gen Z founder who's building a youth-focused or Gen Z brand, what happens that other people can't even get away for?

Jivraj Sachar (Indian Silicon Valley): Yeah, no, absolutely. I think when that the latter is actually a situation we're going through and we're super excited. We're a bunch of these like late 20s where we are leading the round. There's a late 20s founder and they're building for this very young audience. But to your sort of how do you enter into venture as an early person? I think the best answer is probably borrowed is figure out how you can be valuable to a founder uniquely. I think what founders really value beyond the capital is genuine moving the mountains for them. Right. And it could mean anything. Right. It could mean a simple thing as, hey, can you get me a packaging vendor that can reduce cost by three bucks? Can you get me an introduction to a partner at another venture firm as opposed to, you know, an associate? Because that helps me bypass certain aspects of the ladder and, you know, get to a faster conclusion. Can you get me an influencer at ₹1 lakh less? Because that will save me cost. Or can you, you know, just introduce me to somebody who can save one hour of my you can in one hour of my time, save me a month. Right. I think if you can do any of these and there are so many things founders need. I mean, there are some capitals where I'm, I don't know, ₹5 lakh check, which may not be major for companies which are these ₹40–50 crore. But I remember having this conversation in which there is Unilever, et cetera, on the cap table, Unilever Ventures. And at dinner, we were all talking just about, hey, I made five introductions for that founder after the dinner because he's like, hey, I just want to learn. And these are the three things that are top of mind. I'm not being able to figure it out. Can you just connect me to the relevant people? And I think that became slowly a strength as well. I know both of you do this incredibly well too. But over a period of time for us also, just being able to have access to some of the best founders in the country by virtue of hosting now 230-odd podcasts, right? That is also such a, the ability to be curating human connections has become so valuable, which is truly curated to say that, hey, if you have a packaging problem, which is a website promotion problem, which is an influencer strategy problem, which is a supply chain optimization problem, which is a channel optimization problem, I know whom to chat with. And this is the person that you should go to. So I think that's been where I found most joy as a young person. If you can figure out a way to be valuable and useful and save time or cost or grow revenue for a founder, either of these three, you'll probably do a really good job and you'll get into venture.

Utsav Somani: All right. And a lot of people think, and we were discussing this yesterday also from the outside venture investing seems exciting. I mean, you get to spend time on Twitter, make all these Gyan posts and stuff. But what is the reality?

Jivraj Sachar (Indian Silicon Valley): Yeah, I think venture investing is not the easiest. I think even in fact, contrary to the previous response, if you are definitely keen and sure that you want to be in venture only, then should you do those things? If you are getting attracted to venture because of how sexy it is from the outside, because you get to like be a capital provider to the next generation of great companies. I think that's misleading in many ways. I think especially if you're new to the asset class and if you're trying to build your own collective, I think realizing that you're not going to be the one executing, realizing that, hey, you can do very little to impact the outcome and realizing that beyond a point, you're a capital provider and you're an asset manager and that's all you're doing right is very core to the job. If you overhype any other parts of what you're trying to accomplish, it will only mislead you to try to do other fancy things which may not necessarily compound. Anything else that compounds to this flywheel, which is gives you better access, helps you invest larger pools of capital and helps you increase odds of success for returns for your LPs are all worthwhile activities. But anything beyond that is just, I mean, a grain in the overall sort of ocean, right? And you must take it with a pinch of salt. Also, as a youngster, the biggest advantage is you can get to a spot which is very high and quick feedback loops, which venture absolutely is not right. So knowing the principles before you dive deeper into it is very helpful. I think I've also taken my time and try to accustom myself. It's going to be three years. It's been more than three years, rather, for me in investing. And now I've sort of gotten used to some of its space. And for us till date, I think in the brief attempt that I'm trying to make a team, we have an analyst and associate. Now, I think every meeting starts with, hey, we are in the founder servicing sort of profession, right? Anything that we're doing that does not compound to serving our founders is not time well spent, even if it's a peer VC conversation. But yeah, that's how I think about it.

Dhruv Sharma: Fantastic. And Jiv, as a creator, as a conversationalist, I'd love your learnings on what it takes to start asking the right questions and producing and then packaging a very information-dense episode. You're at 230. By the way, we're at 139. So slowly, slowly catching up in different formats.

Jivraj Sachar (Indian Silicon Valley): Yeah, no, not that far at all. No, I guess about conversations, I've over a period of time tried to figure a better packaging system, especially when you're trying to explain things that you practice on a day-to-day basis, because considering that there is so much embedded context and natural language that enters when you are deep in the trenches doing something, you have to really take a step back and be like, okay, can you bring a beginner's mind to a particular conversation? Can you be clear about what you are trying to think? Because you are, at the end of the day, the voice of the consumer, right? Or the listener or viewer, whatever you may call it, especially in a podcast-like format, right? Like I can't comment on other formats. But I think for me to be able to reinforce that this is what my audience wants, being in touch with them, and this is a learning from founders, has been very cool. Second is not bringing baggage and context that I already have to a conversation, unless it requires it. And maybe the third is the sense of figure out what your style is. I think this is something that I've kept to heart. I remember Sanjay Swami of Prime told me on my 20th episode that Jivraj, remember, people will come to the episode once because of the guest, and you're young right now, maybe that's the appearance you have. But they will only come back the second time because they really like you, because that guest is going to come back anytime soon. But they will like your style of questioning, conversation, listening, cross-questioning, and summarizing, right? That was such a pivotal moment where I tried to really own and hone my skills. I remember, funnily enough, for the first 50 episodes, which were audio only back in 2021 end, I used to actually listen to all of the edits myself. And I used to curse myself with every edit because I used to think, how could I be so stupid to ask such meaningless questions? But that was such a great feedback loop for me. So yeah, these are three things that come to the top of mind.

Utsav Somani: Amazing. Wishing you all the best on this journey, Jivraj, and kudos to you for putting together such an awesome package of content and capital. I mean, kudos. And always good to see ex-AngelList India alum doing so well. Thank you for coming on our show.

Jivraj Sachar (Indian Silicon Valley): And my absolute pleasure. Thanks for doing this. Thanks for having me. And kudos to all the great work with this and overall that both of you do. I'm always very grateful. Cheers. Bye-bye.

Dhruv Sharma: All the best, Jivraj. Keep shining.

Utsav Somani: Moving on to our next guest. We've got Venkatesh from Jeh Aerospace. Venkatesh, welcome to the show.

Venkatesh Mudragalla (Jeh Aerospace): Hey, thanks. Thanks also. Hi, Dhruv. Thanks for having me here.

Utsav Somani: Awesome. So let's start off with your time at Tata Lockheed Martin Martin. Do you want to describe how the 10 years went? What were you doing there? And what led you to building Jeh Aerospace?

Venkatesh Mudragalla (Jeh Aerospace): Yeah. So again, in a way, I feel I've been both fortunate and lucky to be at the right place at the right time. As you might be aware, India was not very open to the private sector till late 2000s. And at that point of time, I was actually graduating in aeronautical engineering. And right after I graduated, I was picked up from campus by Tata. Then I spent a little more than 10 years with them doing multiple roles across the JVs, had experience of working in different functions, almost all the top global OEMs. So I've been fortunate to build India's aerospace growth story being right at the front and center of it.

Dhruv Sharma: And what's happening at Jeh Aerospace today, Venkat?

Venkatesh Mudragalla (Jeh Aerospace): So, Dhruv, I think just to give you a little bit of context, why did we even start Jeh Aerospace, right? So back in 2018 timeframe, if you look at, there's been a lot of turbulence in the aerospace industry. There was crashes of two 737 MAX aircraft. At that point of time, 737 used to be the largest selling aircraft in the world. So with that, a lot of supply chain who were supplying to 737 MAX went into turbulence. At that point of time, when all of us thought nothing worse could happen, that's when the COVID hit, right? As you know, along with hospitality industry, airline industry was one of the most affected industries. And with that, there's been a huge slump in the demand. And post-COVID, as you all know, travel has come back with a vengeance. But the demand went up with the V-shaped recovery, but the supply never caught up to it. So today, if you look at, I think we are seeing a historical backlog in the airline industry. I mean, there's a backlog of more than 17,000 aircraft in the world, and both Airbus and Boeing put together deliver little more than 1,500 aircraft a year. So we are looking at about 12-15 years backlog. When we looked at all of this post-COVID, we thought probably this would be the right time for us to build something in this particular industry because there is a huge demand. In fact, demand is secular. There's so much supply crunch. And we're also seeing a lot of tailwinds in India. If you look at, India has been growing in terms of airlines. If you look at the last two largest orders that were ever placed in the aircraft industry were actually placed by both Air India and IndiGo. So looking at all of that, we probably thought this would be the right time. And we had the right pedigree to do it because we spent the last 10-15 years in the aerospace industry with the Tata Group. So that's how we started Jeh Aerospace.

Utsav Somani: And you don't supply to Airbus and Boeing directly. You're a tier one, tier two supplier. So what kind of parts are you supplying to them?

Venkatesh Mudragalla (Jeh Aerospace): So we manufacture very high precision flight critical components also. So these are the parts that eventually go into aircraft engines, landing gear components and various subsystems. And there's also a reason why we have actually chosen to be a partner for Tier 1s and Tier 2s. Today, if you look at while Airbus, Boeing and GEs and Rolls Royce of the world are faced with this industry, more than 70% of value added is actually done by Tier 1s and Tier 2s. They didn't have any meaningful exposure to countries like India, where we had abundance amount of talent and capacities and capabilities that we can offer. So we have chosen that segment of customers where we wanted to deliberately work with Tier 1s and Tier 2s.

Dhruv Sharma: In the context of commercial aviation, Venkat, can you explain to us the value chain of the supplier ecosystem and then the aftermarket sort of MRO ecosystem?

Venkatesh Mudragalla (Jeh Aerospace): Yeah, yeah, sure. So it's like a pyramid, right? If you look at the airplane manufacturers like the Boeings and the Airbus, and to an extent, I would consider engine manufacturers also as the OEMs. So Airbus, Boeing, GE, Rolls, these are at the top of the pyramid. They are like the OEMs. And then you have Tier 1s. Tier 1s are very large integrators, generally who are the ones who make major component assemblies like fuselages, wings, large subsystems within the engine. Those are basically your Tier 1s. And then your Tier 2s are component manufacturers who actually manufacture detail parts, which actually go into the major component assemblies. And below the Tier 2s, you have raw material suppliers and hardware suppliers, consumable manufacturers, all of them. So that's basically the chain. But the supply chain is a little complex. Here, the challenge is there are many instances where Tier 2s directly work with OEMs. Tier 1s sometimes work with Tier 2s. Tier 3s directly supply to OEMs. So it's a little complex supply chain.

Dhruv Sharma: With an example, if you could also explain the margin structure to us. I think just commercially, some of our listeners might be interested.

Venkatesh Mudragalla (Jeh Aerospace): Yeah, no, actually, strangely, one interesting observation that we had was the lower the tier you go, the better the margin is in this industry. Generally, the OEMs make about single-digit margins, but also they have a lot of scale. And like I mentioned at the beginning of the conversation, a lot of their value-add is actually bought in a way. That's why their margins are generally high single digits. At Tier 1s level, it plays anywhere between, let's say, 10% to 15%. Tier 2s do anywhere north of 16%, 17% in terms of revenue. We don't have any companies that have scaled to a sort of a billion-dollar kind of top line in this particular industry. What I think we are really good at is doing things once and doing them at a smaller scale. How do we learn to build scale and still continue to deliver that quality and consistency is what will make the real difference. That's what will help us grow in this particular industry and moving our shareholding from 1–1.5% to close to about 10%.

Dhruv Sharma: Venkat, I believe you guys were the debut investment out of IndiGo Ventures, which is the venture arm of Indigo, the airline. What's it like to work with a venture firm that's affiliated to the world's largest airline?

Venkatesh Mudragalla (Jeh Aerospace): Yeah, no, absolutely. I mean, we were very fortunate to be their debut investment, Dhruv. I mean, partnering with somebody like Indigo who commands about 65% market share in the country and one of the largest airlines in the world. And of course, one of the largest customers for Airbus. It's a kind of a moment of pride for us. But what we also learn from Indigo is running a very tight ship. I mean, this kind of quality that Indigo delivers and continue to make money in this very tough industry is something that we really learn every passing day from our investors. And we have imbibed some of those qualities while we are very early in our journey. We are also a profit-making, financially healthy organization.

Utsav Somani: And in terms of your focus, I mean, most of what you make or your efforts are purely exported right now. What do you do? Why not focus on defense or MRO in India?

Venkatesh Mudragalla (Jeh Aerospace): No, we'll be very proud and very happy to partner on a defense program in India. So what we are right now looking at is building capabilities that are required for manufacturing in aerospace and defense industry. The capability that we make are actually applicable to our defense programs as well. If and when we get an opportunity to do, we'll be happy to support one of our Indian defence programs as well.

Dhruv Sharma: Fantastic. And now what are the next six odd months looking like for you Venkat?

Venkatesh Mudragalla (Jeh Aerospace): So we have been growing tremendously. If you were having this conversation probably a year ago, we were a team of about 60-70 people. Now we are a team of over 250 people. We are growing almost at 3x every year. So we'll continue to maintain that trajectory. I think very excited about the times to come. They have been maintaining very healthy pipeline for growth as well.

Utsav Somani: And I want to stick with that defense, I mean, line of thinking once more, like, I mean, compliances, regulations, all of this stuff and getting approved for like, I mean, you mentioned some crazy names like SpaceX, Boeing, like how do you get approval at that level but unable to clear it in India if you want to focus here?

Venkatesh Mudragalla (Jeh Aerospace): I think also what has been an advantage to us and our team is, I mean, we are not doing this for the first time. We have spent last 15-20 years in this particular industry and we know what good looks like. See, I mean, when you are making a component for an aircraft, nothing can be more critical than that. At the end of the year, you are carrying 300 humans in the air. It's a very, very critical industry and for the right reasons. What's very important is how you are building the process which can scale as you are doing it. And that's what something that we are doing the right way. Another thing that we have been able to very successfully do is we are a digitally native company. Right from the time when we receive an order from our customer till we deliver a component, everything happens on a digital stack. Whether it's an MES, PLM and all of that is in a digital stack, which means that we are capturing all of this data digitally. We are able to build in digital tools and we are running a software-defined manufacturing facility rather than a traditional hardware facility where your hardware kind of determines the ceiling of what you can do.

Utsav Somani: Awesome. Venkatesh, thank you so much for coming on our show. This is exciting stuff what you're doing.

Venkatesh Mudragalla (Jeh Aerospace): Thank you. Thank you so much and Utsav and Dhruv for having me here. Lovely chatting with you guys. Pleasure. Thank you.

Utsav Somani: All right, listeners, we've got Osborne joining us as our last and final guest for today. Osborne, welcome to the show.

Osborne Saldanha (Fintech Inside): Finally, a guest. Thank you.

Utsav Somani: No, no. I mean, this is sort of our version of a mini roundtable. Stuff was announced yesterday. There's a lot of back and forth on both pros and cons of what was announced. So I think we're going to break it down. But for our listeners who are hearing about Osborne for the first time, what do you do? Why are you important and why are you relevant for FinTech?

Osborne Saldanha (Fintech Inside): Sure. So my name is Osborne. I've been a venture investor for about 13, 14 years, largely focused on the FinTech space. I've invested in companies like M2P, Jar, Bureau and a bunch of others and currently running my own investment practice. Sorry, along with that, I also write two newsletters. One is called This Week in FinTech and the other is FinTech Inside and also host a bunch of offline meetups for the FinTech community. So I do a whole bunch, basically.

Utsav Somani: Solid mixers hosted by you. And I think AngelList India also partnered with you for one of them as well, I think, right?

Dhruv Sharma: We did. Yes. April 25, we did. Osborne has been a busy week in FinTech, right? Between GFF and this news in MDR. There's a saying in the FinTech space that there's never a dull week in FinTech.

Osborne Saldanha (Fintech Inside): And so this news with the MDR being introduced has been teased for a bit. But now, as of last night, the Ministry of Finance has finally put it in as a regulation. And so it has been introduced effective 15th of October. For those who don't know, the MDR is being introduced on transactions above 2000 rupees in value and the MDR, which is a merchant discount rate, which is a fee that is charged to merchants for accepting payments. The merchant discount rate for UPI payments will be about 40 basis points on transactions above 2000 rupees with a cap of 300 rupees, which is about 75,000, if you think about it. But yeah, that's broadly what happened last night.

Utsav Somani: There are some carve-outs as well. Certain industries don't get affected by this.

Osborne Saldanha (Fintech Inside): Yeah, there are some carve-outs. I think for the capital markets, there is a transaction fee or an MDR of only about 2 basis points. Similarly, with petrol pumps or payments for petrol and things like that as well, there are a bunch of carve-outs. But yeah, there are a bunch of these things.

Utsav Somani: I mean, for our listeners who are not aware of the finance world, 0.4% is what he's referring to when he says 40 basis points and 0.02% when two basis points are being referred to. And I mean, I think the key thing is that person-to-person transactions still remain free. I think that's the key thing to take away. This does not affect majority of the volume, right? Still passing through the UPI network. Around 96% remains unaffected by these changes.

Osborne Saldanha (Fintech Inside): Yeah, I think in terms of number of transactions, there are some 25 billion transactions that happen on the UPI network a month. The transaction that will be now chargeable are barely about 4%, which means that 95% of UPI transactions, 96% of UPI transactions continue to remain free. In terms of value, there is a bit of a skew over there. About $310 billion worth of transactions happen on the UPI network a month, at least as of August. And about 20% happen in person-to-merchant transactions. And only about 20% of the overall UPI payments is for value above 2000 rupees, which roughly translates to about $60 billion worth of transactions will now be charged. And only about 1 billion transactions will have a fee on them. So it's a very small percentage, basically.

Dhruv Sharma: It's a small percentage. Osborne, why has this news triggered a debate? And also, what are the two sides of the debate? We don't have to take a position or pick a side, but what are the two sides of the debate right now?

Osborne Saldanha (Fintech Inside): Yeah, the two sides of the debate, one from the payment gateway or payment industry side of things, they believe that this UPI fee, or rather the UPI ecosystem, maybe to take a step back, the UPI ecosystem has been surviving on the back of government subsidies. When UPI was launched, we've seen UPI had a MDR or a merchant discount rate of about 65 basis points, or 0.65%. But then when it was officially launched in 2016, around the time of demonetization, the government made it free, or said that there will be no merchant discount rates to be imposed on UPI transactions. But from a backend perspective, for UPI to be doing 25 billion transactions a month, there is a lot of server costs, there is compliance cost, there is fraud costs, fraud mitigation, rather. There are a whole bunch of fees that the banks pay, the payment gateways pay, all of these guys pay to just ensure that UPI uptime is high enough. And so from the payment industry perspective, they're saying that, man, we need to earn a much higher revenue for the kind of services that we are offering. So that is one side of the equation where the value that is being given to the industry, to the ecosystem is not commensurate in the payment gateways, payment industries perspective to the revenue that they are earning. So that is one side. The second argument is that small merchants don't have the margins to be able to pay for that. That's one. And second is that small merchants also don't, will stop accepting UPI, and therefore derail our entire digital payments wave that we've seen for the past 10 years in India. Bring cash back into the economy. Yeah, that's the whole other side of the debate that saying that cash will be brought back into the economy and merchants will just stop accepting digital payments as a method for users to pay. And so that's broadly the two sides of the equation.

Dhruv Sharma: I believe you've actually worked the math on this. Do you think it'll be possible for you to maybe do a screen share and walk us through it?

Osborne Saldanha (Fintech Inside): Yeah, I was trying to understand what this math will exactly look like for a small kirana store. The values that I was referring to earlier are basically from the NPCI's website itself. But I just thought I'll keep that up from the math perspective. Yeah, I hope it's visible and it's not too small. If it is, please let me know.

Utsav Somani: Clarity. Like, I mean, when you were using a RuPay credit card or credit on UPI, MDR was already there, right?

Osborne Saldanha (Fintech Inside): So MDR on RuPay debit cards was not there and I think will still not be there. But there are other credit cards on a Visa or a Mastercard network. There are debit cards, again, on a Visa and Mastercard network, which are completely charged still. And that also the MDR on those transactions is like almost 2%, right? One and a half to 2% roughly, which is like almost three to four times higher than what the current UPI MDR is. Also, the other thing to note is that there are a lot of similar payment systems in other geographies as well. But for real-time payments, India's recently introduced MDR of 0.4% is still the lowest in the entire world, right? And so that's that. But I was trying to do a little bit of a simulation to try and understand.

Dhruv Sharma: We're going to have to zoom in a little more, Osborne. Sorry to interrupt you, but we're going to have to zoom in a little bit more. I hope this is visible now.

Osborne Saldanha (Fintech Inside): Yeah. So for different ticket sizes, I've assumed a few different ticket sizes. The effective cost for transaction is between 12 rupees to 300 rupees, 300 being the cap, assuming there was 0.4% MDR that is being charged, right? Now for different, to arrive at a blended average ticket size for the merchant, I've assumed different split of transaction values for a smaller merchant. Let's say their average ticket sizes are much lower, less than 2000 rupees, which means they end up paying zero. This is about 85% of transactions will be completely free, right? The rest of the 15% will be charged, which helps us arrive at this average ticket size of about 2250. And I've taken it all the way up to no transactions are less than 2000 rupees. Majority of them are on the higher side with an average ticket size of 25,000 rupees, right? For each of these different values, a merchant doing, let's say even 10 lakhs in revenue or sales a year, the average MDR cost that will be borne by this Kirana store annually is between ₹2,500–4,000, right? That's very significant.

Utsav Somani: Yeah. So I think there's a lot of hue and cry, but I think, I mean, I'm part of a bunch of fintech groups where the discussion was raging and I mean, some of the top fintech founders are there. So I think the commentary, I mean, most of them are celebrating this move. And I think one of them even said that it's impressive that the payment industry has been able to lobby for this and get this approved, even though in the grand scheme of things for the full network and the ecosystem at large, it's not big revenue, but for a populist government to actually accede to something like this, where affects such a small percentage of the pie, but actually the public perception against this was so negative because now people are, I mean, the government will have a task at their hand where they have to educate people that, Hey, it doesn't affect your transactions. So in a country where misinformation and WhatsApp University is abundant, I think people are worried that, Hey, should I send money to my relative and will I get charged on that? That's what I think the perception problem needs to be solved here.

Osborne Saldanha (Fintech Inside): Yeah. I think unfortunately we'll have to go through maybe a quarter or so of this misinformation, but when merchants start realizing the actual impact on the business, I think things will settle. And unfortunately there's just the kind of age of social media that we're living in, that all of this will happen, misinformation campaigns, et cetera. But you're right. But I think it's very impressive that the government actually has introduced this. Personally, I think the 40 basis points or 0.4% is very surprising to me. I thought it would be more like 0.1% or 10 basis points, but it's very impressive. This actually, I mean, even though the actual payment revenue on this UPI MDR will be minuscule, again, it's a, I mean, it's not minuscule for the payment industry. It will be, there are, there are views from different payment companies saying that this will bring in between ₹10,000 crore to ₹25,000 crore of annual revenue to the payment industry from this MDR. That's the whole range that people are talking about. It's not, not insignificant. It's impressive. But I think it's always obviously a welcome move and it's left to be seen what the actual benefit will be to the, to the payment industry, what the benefit will be to the merchant. And I think the consumer will be the deciding factor in all of this because I think the argument that the merchant will move to cash, I don't think has legs because the consumer is the one that will demand which payment method they want to use. And post COVID, I think the consumer has made a decision to start using this UPI and their mobile phone. I made a comment on social media that a user will forget their wallet at home, but will never forget their phone at home. Right. And so I think it's, it's important to know that I think in all of this, the consumer is the one that will decide whether UPI gets to stay or not. I don't think the merchant will get a say and you users and the consumers will automatically gravitate towards merchants that are accepting the payment network that the user wants to pay with, not what the merchant decides they want to accept at the end of the day.

Dhruv Sharma: Also, cash doesn't grow on trees. You have to go fetch it from the ATM. And now there's also a cost to withdrawing too much cash. I think just maybe one closing.

Utsav Somani: Can I ask you a question then, Osborne, because of this?

Osborne Saldanha (Fintech Inside): Sorry, I didn't get you.

Utsav Somani: Next year, because of this now, finally.

Osborne Saldanha (Fintech Inside): Yeah, I think this will look because UPI has had concentration in terms of the payment values for the past few years, both with PhonePe and Google Pay. I think PhonePe will be directly among the most, the largest beneficiaries in this whole space. And I think PhonePe's IPO hopefully will be better received next year. Obviously you can't time the markets and I hope that PhonePe actually decides to go public, but markets will guide that.

Dhruv Sharma: But I think let's stay with this for a minute, right? I mean, when a hundred rupees are paid out in MDR, I mean, a hundred rupees of MDR are not going to go solely and wholly to PhonePe, right? I mean, the UPI architecture has three or four players where that hundred rupees is going to get divvied up. Do you think it's possible for us to just very quickly go over the UPI architecture and who gets to keep how much of that a hundred rupees?

Osborne Saldanha (Fintech Inside): Yeah, I think there's the split that has been defined that about 28 basis points will go towards the acquiring bank. The acquiring bank is the bank which is acquiring the merchant, right? So a large chunk of the transaction revenue ends up going to the merchant, the bank effectively. You will see from banks like HDFC Bank, ICICI Bank, all of these will be beneficiaries of this and it's always been free so far. Then the payment gateway itself accrues some level of the transaction value as well. And the issuing bank to some extent is also doing it. But the large portion of this three-fourths of it is almost going to be the acquiring bank.

Dhruv Sharma: Are bank stocks up today?

Osborne Saldanha (Fintech Inside): Not sure. I'm an early stage investor in private markets, not a public investor.

Utsav Somani: All right, guys. I think Osborne, thank you so much for giving us this primer on MDR on UPI. Thank you so much for coming on TON.

Osborne Saldanha (Fintech Inside): Thanks for having me.

Utsav Somani: Yes. All right, listeners, that's it from us. We'll see you on Friday to end this week. Thank you so much for tuning in. Have a wonderful rest of the week ahead. Bye-bye.