India's Three-Party Payment Channel: PhonePe: India's Largest Third-Party Payment Platform

Founded in 2015, PhonePe has emerged as a third-party payment platform backed by retail giant Walmart and its Indian e-commerce subsidiary Flipkart. With its deep integration with e-commerce, undisputed market share, and strong financial backing, PhonePe has emerged as one of the active third-party payment platforms in India, and has long maintained its position as an industry leader. However, with Indian regulators progressively implementing new antitrust regulations to promote fairness in the payments space, maintaining a leadership position poses a significant challenge to PhonePe's future growth.

[China Financial Case Centre, written by Hu Pan, edited by Xie Bingbin]

1.1 Corporate Overview

PhonePe, India's leading payment technology company, was founded in December 2015 and is headquartered in Bangalore, Karnataka, India. Based on the Unified Payment Interface (UPI) standard, PhonePe offers basic payment services including online/offline payments, collections, mobile phone recharges, utility bill payments, ticket bookings and hotel reservations. In addition, the platform expands to financial brokerage services, including fund investment, insurance and gold trading.

PhonePe is a product of retail giant Walmart and its well-known Indian e-commerce subsidiary Flipkart. With a strong background in online and offline commerce and strong financial backing, PhonePe has grown rapidly to become India's largest third-party payment platform. As of October 2022, it had a market share of 47.21 TP3 T. With strong financial backing, deep integration with e-commerce, and solid market share leadership, PhonePe is expected to become the Alipay of India.

On 23 December 2022, PhonePe repurchased all of Flipkart's equity holdings, sold stakes to Flipkart Singapore and PhonePe Singapore, both of which are incorporated in India, and repurchased $700 million worth of Employee Stock Ownership Plans (ESOPs). Notably, the deal makes PhonePe an "Indian company" and Walmart remains the largest shareholder in both Flipkart and PhonePe after the deal.

1.2 Introduction of the Founder

[Image 1: The three founders of PhonePe]

[Image source: Official PhonePe website]

Sameer Nigam: Sameer Nigam has a Masters in Computer Science from Arizona State University and an MBA from the Wharton School of the University of Pennsylvania, where he won the Wharton Business Plan Competition in 2009. He founded and served as CEO of PhonePe in 2015.Prior to PhonePe, Sameer Nigam's earlier digital media distribution platform, Mime360, was acquired by Flipkart in 2011, where he then joined Flipkart as SVP of Engineering and Marketing. Additionally, Sameer served as Director of Product Management at Shopzilla, where he built the company's proprietary shopping search engine.

Rahul Chari: Rahul Chari holds a Master's degree in Computer Science from Purdue University and a Bachelor's degree in Computer Engineering from the University of Mumbai and has over 20 years of experience in embedded systems, enterprise software development, e-commerce platforms and applications. He worked in the Data Centre business unit of Cisco Systems, a leading networking equipment company, where he was involved in the development of the market-changing MDS 9000 series of SAN switches and holds several patents in storage virtualisation. Later, Rahul Chari joined Mallers and was involved in the creation of Mime360 as CTO. After the company was acquired by Flipkart, he joined Flipkart as VP of Engineering and was responsible for building e-commerce supply chain systems.

Burzin: Burzin holds a master's degree in computer science from the University of Southern California and has been involved with Mime360's network services, internal IT, application engineering, storage networking and configuration services. Since joining the PhonePe team, Burzin has built the network infrastructure and led multiple projects including operating and building PhonePe's web services layer, cloud systems, networking, storage and CDN as the company's Chief Reliability Officer (CRO).

1.3 Development history

PhonePe was founded in December 2015 and was acquired four months later by Flipkart, which had acquired payments startup FX Mart in September 2015 for around $6.8 million, obtaining a prepaid wallet licence from the Reserve Bank of India (RBI). With this acquisition deal, PhonePe also acquired FX Mart's prepaid wallet licence.

It is worth noting that Flipkart, co-founded by two former Amazon employees in 2007, is India's largest e-commerce retail company.In 2018, Walmart acquired a 77% stake in Flipkart for $16bn and became its subsidiary.

In August 2016, PhonePe partnered with Yes Bank, India's largest private bank, to launch a mobile payments app based on government-backed UPI, marking the beginning of its rapid growth and expansion. Three months after the launch of the app, over 10 million users downloaded the app. By June 2018, PhonePe had served over 100 million users, making it the fastest growing payment app in India.

In 2019, PhonePe launched its Tax Savings Fund to help customers reduce their tax burden by investing in savings plans. In the same year, PhonePe also became the first payment app to allow customers to participate in IPO bidding through the UPI platform.

On 5 March 2020, insolvent Yes Bank was suspended by the Reserve Bank of India and a temporary withdrawal limit of Rs. 50,000/account per month was imposed.The crisis at Yes Bank had a severe impact on PhonePe's normal operations as it relied on the bank's UPI platform to process user payments, rendering the PhonePe app unavailable for nearly 24 hours. In order to restore user services as soon as possible, PhonePe quickly entered into a Memorandum of Understanding (MoU) with ICICI Bank, one of India's "Big Four" banks, for UPI transactions.

In the same year, PhonePe announced plans to become an independent entity. Flipkart will reportedly no longer enter the consumer payments market. The split could affect the valuation of the Indian e-commerce retailer.

On 23 December 2022, Flipkart and PhonePe completed their shareholding separation, with PhonePe completing all procedures for transferring its registration from Singapore to India. According to reports, PhonePe's shareholding restructuring was done to prepare for future external investments. Earlier this month, it was reported that PhonePe was trying to communicate with potential investor General Atlantic as well as existing investors Tiger Global Management, Qatar Investment Authority and Microsoft for follow-on investments. The funding round is expected to value PhonePe at $13 billion.

1.4 Financing and mergers and acquisitions

[Table 1: History of PhonePe financing]

As can be seen from the financing history, PhonePe's operation before 2021 mainly relies on unilateral investment from parent company Flipkart Group, a single source of funding. According to Indian media outlet Entrackr, after the completion of the financing in August 2021, Flipkart Group became the largest shareholder of PhonePe, holding 87.3%; Walmart held 10.3%; Tiger Global held 0.6%; and Temasek held 1.8%.Since Walmart is the controlling shareholder of Flipkart Group (holding 77%), PhonePe is effectively a subsidiary of Walmart.Flipkart's shareholders include significant shareholders such as Tiger Global Management, in addition to its controlling shareholder Walmart.

In a bid to diversify its financing sources and attract more investors, PhonePe underwent a major shareholder overhaul at the end of 2022.Flipkart sold all its stake in PhonePe back to PhonePe, while Walmart's Flipkart Singapore and PhonePe Singapore bought its stake. Meanwhile, PhonePe plans to raise $1bn from new investor General Atlantic and existing shareholders including Tiger Global, Qatar Investment Authority and Microsoft. If the round is successfully completed, PhonePe could be valued at close to $13bn. Moreover, PhonePe's main business in 2022 is to shift its domicile from Singapore to India in preparation for its IPO in 18-24 months.

2.1 Business overview: payment services, supplemented by insurance brokerage and fund investment services

Payment services are the core business of PhonePe. Common payment needs in daily life, such as mobile phone top-ups, utility bill payments and transport card top-ups, can be fulfilled on PhonePe. PhonePe has also partnered with other popular consumer apps to allow consumers to use PhonePe to make payments when placing an order, further increasing its business penetration into the UPI payment space.

[Image 2: UPI-based UPI payment process]

[Image source: geeksforgeeks.org]

According to PhonePe's disclosure, the platform has partnered with about 35 million merchants, apps or websites to deeply bind customers through a variety of services, including gateway services, embedding PhonePe Payments on the merchant's platform (PhonePe Express), listing the merchant's products on the PhonePe app (PhonePe Switch), offline cash collection and advertising on the PhonePe platform for advertising and promotion.

In addition to the diversified content of payment services, PhonePe has also laid out its insurance brokerage and fund investment business. The insurance business covers life insurance, health insurance, travel insurance and auto insurance, with a wide range of products, such as a special health insurance product for the recently popular COVID-19. In the fund investment field, PhonePe also provides users with a wide range of investment products, such as money market funds, stock funds, bond funds, balanced funds, tax savings funds and precious metals (gold).

In 2020, PhonePe entered the InsurTech space with a 'Corporate Agent' licence, which at the time was limited to working with three insurers per category, and in August 2021, PhonePe was granted an Insurance Broker's Licence by the Insurance Regulatory and Development Authority of India (IRDAI) and is no longer subject to the above restriction. In January 2021, PhonePe filed an application for a fund management licence with the Securities and Exchange Board of India (SEBI) and in May of the same year, it established its investment business by acquiring WealthDesk (stock and ETF trading) and OpenQ for $50 million and $25 million respectively.

2.2 Financial situation

The financial year in India begins on 1 April of the previous year and ends on 31 March of the following year. However, as of 31 December 2022, PhonePe's official website is yet to publish its financial report for the fiscal year 2021-2022. According to a Business Standard report in October 2022, PhonePe's revenue in FY2022 grew by 1,381 TP3T to Rs 16.46 billion. On the cost side, its marketing costs grew rapidly, reaching about Rs 8.66 billion in FY2021-2022, mainly for advertising for its new insurance distribution business. Additionally, in order to build new product lines, including insurance and wealth management services, PhonePe hired a large number of new employees, leading to an increase in staff costs of Rs 16.2 crore. Excluding ESOPs (Employee Stock Ownership Plans), PhonePe's net loss narrowed by 151 TP3T to Rs 6.71 crore in the same financial year, Inc42 reported. However, PhonePe's ESOP increased by 401 TP3T in the same year, leading to a significant increase in the company's total costs, and ending up with a loss of Rs. 201.4 crore, an increase of 16.41 TP3T over the previous financial year.It is evident from the financials that the ESOP is becoming a heavy burden for PhonePe.

3.1 Industry landscape

In recent years, the third-party payment market in India has formed a relatively stable oligopoly pattern. According to the National Payments Corporation of India (NPCI), as of October 2022, PhonePe had a market share of 47.2% in the Indian payments market, followed by Google Pay at 34.1% and Paytm at 13.6%.There are also dozens of smaller payment platforms, the largest of which has a market share of no more than 1%.

[Image 3: Payments Market Landscape in India (as on 31 October 2022)]

[Note: Data from NPCI]

[Photo credit: The Economic Times]

In 2020, NPCI issued new guidelines for digital payments applications to promote equitable development of India's fast-growing digital payments industry. The guidelines require that no payment platform should have a market share of more than 301 TP3T of total UPI transactions.The NPCI said that the new regulations will come into effect from the quarter beginning January 2021, with a two-year grace period for existing players to comply. That is, by 31 December 2022, PhonePe's market share in India should fall below 30%. However, in reality, PhonePe's market share continued to grow and volumes surged after the NPCI issued the "30% cap" requirement.

3.2 Competitive advantage

Deep integration with e-commerce

PhonePe is actually a third-party payment platform founded by e-commerce giant Flipkart and has become Flipkart's preferred UPI payment method. According to DFD News, Flipkart's market share in the Indian e-commerce market exceeds 30% in 2021, creating excellent customer acquisition opportunities for PhonePe that Google Pay and Paytm cannot match.

Strong financial support

In March 2020, the Reserve Bank of India (RBI) issued a new set of guidelines stating that all Payment Aggregators (PAs) have to be authorised by RBI and can provide payment acceptance and payment services to merchants only after obtaining a PA licence. Banking regulators are not required to apply for this PA licence.RBI directed non-banking companies offering PA services to apply for authorisation from RBI with a deadline of 30 June 2021. This deadline was later extended to 30 September 2021.

More than 185 fintech companies have reportedly submitted applications for PA licences. However, as of end-July 2022, many applicants were rejected for failing to meet the eligibility criteria set by the RBI, including failure to meet the minimum net worth requirement of Rs. 15 million (approx. USD 1.8 million) by 31 March 2021 (Phase I criteria).The RBI said on 28 July 2022 that it would again extend the grace period for applications from such institutions until September 2022 30th. However, the requirement of Phase II criteria remains unchanged, i.e., a minimum asset requirement of Rs 25 million (approximately $3 million) by 31 March 2023.The RBI has also indicated that it will extend the grace period to 30 September 2022 for such institutions.

PhonePe has strong financial backing from Walmart as compared to its weaker competitors and its strong financial resources will not be an obstacle for it to get a PA licence. It is also worth noting that PhonePe's key competitor Paytm, despite its strong capital backing, received a notice from the RBI on 26 November 2022 rejecting its PA application and giving it a 120-day deadline to reapply.

Strong brand influence

Focusing on online payments through deep integration with e-commerce, PhonePe has captured nearly half of the market share of UPI's payments business in India, making "PhonePe" a household name. The leading market share has boosted PhonePe's brand influence. Previously, PhonePe relied on external gateway services, but in September 2022, it launched its own payment gateway. A strong brand presence will undoubtedly have a positive impact on the aggregated payments business, helping PhonePe enter the offline payments scenario and compete more fiercely with Paytm.

3.3 Challenges

Limited partnerships

In 2020, PhonePe was affected by a sudden financial crisis at its partner bank, Yes Bank, which was banned from certain transactions by the Reserve Bank of India (RBI) and imposed a temporary withdrawal limit of Rs. 50,000/account per month.The crisis at Yes Bank severely impacted PhonePe's normal operations as it relied on the bank's UPI platform to process user payments, rendering the PhonePe app unavailable for nearly 24 hours. In order to restore user services as soon as possible, PhonePe quickly entered into a Memorandum of Understanding (MoU) with ICICI Bank, one of India's "Big Four" banks, for UPI transactions.

The single bank partner model made PhonePe's payment services heavily dependent on Yes Bank when it had problems. In fact, PhonePe had already started trying to partner with ICICI Bank before the outage, but a final agreement was not reached until after the outage. in June 2020, ICICI Bank became PhonePe's second UPI payments partner bank. in February 2021, PhonePe extended its 'multi-bank UPI model' to a third bank, Axis Bank. In February 2021, PhonePe extended its 'Multi-Bank UPI Model' to a third bank, Axis Bank.

Impact of anti-trust policies

At the beginning of 2021, the National Payments Corporation of India (NPCI) issued new guidelines aimed at promoting equitable growth of the digital payments industry in India. The guidelines require that by the end of 2022, the UPI transaction volume of any third-party payment platform in India should not exceed 30% of the total market volume.Based on the actual situation of the third-party payment market in India, the spearhead of this regulation is undoubtedly directly aimed at PhonePe, whose market share far exceeds the 30% cap and occupies a dominant position in the oligopoly.

However, from the beginning of 2021 to the end of 2022, PhonePe's UPI transaction business, both in terms of actual volume and market share, did not decrease, but rather increased, capturing nearly half of the Indian third-party payments market. Based on the actual situation, NPCI extended the deadline for the 30% cap provision by two years to the end of 2024. This compliance grace period has temporarily eased PhonePe's urgency, but the "policy threat" to its market share remains, and it will be interesting to see how PhonePe fundamentally addresses this challenge in the future.