Hi,
I recently came across four fascinating stories that I wanted to share.
The first one is about how payment processors are struggling to make money.
The second one explains the intricate workings of airline frequent flyer programmes.
The third one explains how policy making should be viewed.
And, the fourth is how boiling his buttocks led Amit Varma to an epiphany.
Do consider forwarding the newsletter to others who might find stories about economics, public policy, and business interesting. It helps the newsletter grow!
Let’s get started.
The unintended effects of zero MDR
Merchant Discount Rate (MDR) is a fee charged to merchants for processing payments. For example, if you go to a mall and buy a pair of Levi’s jeans, and swipe your debit card, Levi’s pays a fee to your bank for processing the transaction.
In 2020, MDR was scrapped for all United Payments Interface (UPI) transactions. UPI is the network powering a massive chunk of digital transactions in India.
In 2021-22, payment transactions worth more than a trillion dollars were carried out on the UPI network. But how were payment processors going to make money if they can’t charge the customers?
The payments industry expects a loss of Rs.5,500 crore due to the zero MDR regulation. What incentives do they have to build, invest and maintain the financial infrastructure powering these transactions?
The Ken explores this topic in depth.
Read it here→ Payment apps will do just about anything to make money
Airlines and Frequent Flyer Programs (FFPs)
FFPs are loyalty programs run by airlines.
Loyalty programs are a major chunk of what makes the business of flying viable. This is because FFPs are not exposed to the cyclicality that airlines are vulnerable to. FFPs enjoy high profit margins, have low capex requirement and are strong cash flow generating businesses.
This has led to Delta’s loyalty program being valued at a whopping $26 billion, which is higher than the company's market capitalisation. Meaning that some FFPs are worth more to shareholders than the assets of the company.
There are network effects in play here, that make airlines and FFPs more valuable as they grow. However, this works in the converse way too. If a route is dropped by the airlines, then the value of the FFP for the customer drops significantly.
How does this complex balance work?
Read about the working of FFPs here→ Why the Survival of the Airlines Depends on Frequent Flyer Programs
A framework for understanding policy trade-offs
Understanding which policy will help people and which policy will only help a certain section of the people is our responsibility as citizens.
Pure intention is not enough for a good policy. You must consider opportunity costs; will the government be able to enforce it and what the unintended effects might be.
Pranay Kotasthane gives us a four-step heuristic for demystifying public policy.
Read it here→ A Framework a Week: Confronting Trade-offs
I’ve written about it previously here as well:
I Boiled My Buttocks for a Week and why that makes YOU a bad citizen
I think the title is reason enough to give this article a read. It talks about the apathy we have and how we have normalised the flaws in our country.
Amit Varma’s thought process and view of the world is unique. Do give this article a read.
Read it here→ I Boiled My Buttocks for a Week
Currently pondering
I hope you enjoyed this edition of Filtered Kapi. Do let me know if something struck a chord with you.
Filtered Kapi #29 Someone sent you this?