The digital payments ecosystem was still dominated by wallet players such as Paytm, MobiKwik and Freecharge when the Unified Payments Interface or UPI was launched in 2016. For the past four years, putting behind everyone else in the fintech space, Google Pay held the top spot in terms of monthly UPI transactions, largely driven by peer-to-peer payments. In October, PhonePe toppled Google Pay and climbed to the top spot with a market share of 40 per cent in terms of volumes. The company said it processed 835 million UPI transactions in October out of the total two billion for the month. Google Pay was around 816 million, Paytm around 250 million and AmazonPay over 125 million, according to industry sources. In a zero-MDR regime where transaction fees can hardly be a business model, PhonePe aims to reach half-a-billion users in the next couple of years.
But where is the revenue model? It reported a net loss of Rs 1,905 crore, the latest available, on revenue of Rs 246 crore. Even though in onboarding more customers, the odds in its favour have just got stronger. On December 3, Walmart-owned Flipkart announced plans to spin-off PhonePe into a seperate entity, with the former as the majority shareholder. Walmart has infused $700 million in PhonePe at a valuation of $5.5 billion. This will allow PhonePe to raise resources on its own balance sheet and fuel its growth as well as IPO ambition.
The UPI Game
Starting out as a UPI-first fintech, PhonePe has come a long way from just around 50 million installs in 2017 to over 250 million registered users on the platform. In October, the company said it processed 925 million transactions (its highest so far).
"It's a dead heat between us and Google Pay right now," says Sameer Nigam, Founder and CEO, PhonePe. Overtaking someone with the world's largest distribution channel may not be a small feat. "Competition is always a good thing for any player... Customers find value in experience, better success rates and security," he adds.
Google did not respond to request for comment.
Demonetisation was a game-changer for the digital payments industry. It triggered a surge, especially in UPI transactions, which climbed in volumes from 2 million in November 2016 to over 2 billion as of October 2020. For PhonePe, Covid-19 has had a similar impact, with customer acquisition at an unprecedented level over the last six-eight months. Nigam recalls that during the first couple of months during the lockdown, digital payments were soaring. But as soon as the lockdown ended, there was a resurgence of offline transactions. According to the company, it overtook the January numbers in July itself and did over 600-million transactions. "The silver lining was, we were scheduled to go on air with IPL as title TV sponsor in March, with the hope of ramping up consumer acquisition, especially in Tier-II cities and beyond. Covid-19 had the exact same effect without that spend," says Nigam.
The numbers speak for themselves. On a year-on-year basis, registered users grew from over 150 million to over 250 million in October 2020. Total number of merchants (offline+online + in-app) doubled from 7 million to 13 million, and total transactions from 440 million to 925 million.
Whats In It?
UPI payments in itself is not a business model and following the government's mandate to scrap merchant discount rates, it has added to the cost for fintech companies . Then why is it a big deal?
Vivek Belgavi, India Fintech Leader, PwC India, says for any large fintech player in the mass segment, UPI is a fairly secure, low-cost alternative to anything for customer acquisition. "UPI being a public infrastructure is the building block. Effectively we can argue that it is almost the cost of doing business and the revenue or what the customer is going to pay me for is going to be different for each fintech player."
And in this journey to figure out growth revenue, the shift from online to offline is the new battleground for companies. While native digital users constitute only a small chunk, the thrust on acquiring offline merchants is a double whammy. One, it opens up avenues of growth in the payments segment. Second, it formalises users. "When formalisation happens, they (users) are more aware of the benefits they can derive out of the digital ecosystem. For example, collateral-free loans, insurance sales and many other such avenues open up," says Belgavi.
Launching its aggressive offline merchant acquisition drive in the summer of 2018, PhonePe has penetrated over 500 cities. "We entered Covid with 11 million merchants. During Covid we did partnerships with telecom networks, government agencies in rural areas to acquire on the last mile," says Nigam. PhonePe launched 'Switch' (web-apps platform) in March 2018, and has over 260 live apps, which has also played a significant part in the merchant partnership story. 'Switch' allows a customer to move seamlessly between PhonePe and his/her favourite food, shopping and travel apps from within the PhonePe app itself.
While the target was to reach around 20 million merchants by the end of 2020, the company expects to do around 15- 16 million by the year-end. PhonePe's assets increased from Rs 477 crore in FY18 to Rs 1,893 crore in FY19.
At a time when wallet transactions are shrinking in the digital payments space with UPI and other fintech companies diversifying into product selling, PhonePe says it is betting big on financial services, advertisements and offline as the revenue growth engines.
The company has aggressively doubled down on its product offerings during the last months of 2019, and especially in 2020. Today, it offers financial services such as tax-saving funds, digital gold, mutual funds, and insurance products, including car and bike insurance, domestic travel insurance, dengue and malaria insurance, personal accident cover and international travel insurance.
Despite most fintech players foraying into similar verticals, there are still differentiators. "We are taking a sub-category or product view," says Nigam.
With deep investments in tech and product side of financial services and partnerships, Hemant Gala, Vice President and Head of Payments and Financial Services, says, "PhonePe became the fastest-growing insurance-tech distributor in India, selling 5 lakh policies in the past six months. It is also leading the digital gold business with 35 per cent share." Mutual funds, which was not that big a category for the company till the beginning of 2020, has grown to over Rs 100 crore in assets under management.
"We work with reputed insurers to solve customer issues around insurance, right from category understanding, product structures, pricing for risk, simplifying journeys, offering adequate choices, allowing easier modifications and safe and convenient post-purchase experience," says Gunjan Ghai, Vice President and Head of Insurance.
Walmart is not hung up on PhonePes short-term valuation. "Over time, everybody will understand just how valuable that business is in India, whether its the Flipkart portion or the PhonePe portion" Douglas McMillon, President and CEO of Walmart had said during the company's earnings call. Recently, NPCI on-boarded several fintech companies as shareholders, including PhonePe , but capped transaction of each player at 30 per cent. PhonePe has two years to comply. But the bigger question not just for PhonePe, but even other fintech companies is whether they can turn payment users to buy /use other product offering?
Belgavi believes India will be a multi-player market. "People with focus on experience and value and solid operational economics to sustain their businesses."
While it remains to be seen how well companies pivot around these challenges, industry observers say experience, coupled with safety, will weigh on users' mind more than anything else as more and more Indians embrace digital payments solutions.