Razorpay Payment Gateway: India's Second Half of Payments: "Meat Battle" in Ground Promotion

BharatPe, along with other B2B payments companies, is quickly coming into its own. However, capturing the payments high ground is just the beginning, not the end goal.

"I'm probably the 'dumbest' of all payments company founders," Ashneer Grover, CEO and co-founder of BharatPe, has said many times. "I'm not sharp and always focus on what others don't want to do."

In November 2016, the Indian government announced the abolition of 500 and 1,000 rupee notes, rendering the 861 TP3T of cash (by value) in circulation null and void. Since then, the Indian government has encouraged the public to use mobile wallets or other digital payment methods.

Companies around consumer payments, such as Paytm, Flipkart-owned PhonePe, and Amazon Pay, all aim to limit payment behaviour to their ecosystems. For example, Paytm users can only transact with merchants that accept Paytm. As a result, merchants need to have QR codes from multiple companies to cater to different customer preferences.

Grover's vision for payments is to develop an open ecosystem based on the Unified Payments Interface (UPI), which allows merchants to have users of any payment app pay them with just a QR code, and Grover wants BharatPe to be the provider of this QR code.

However, the reality is that Paytm has about 13 million QR codes, of which only about 1 million accept UPI payments, with most accepting payments only from its own app wallet.

Over the past year, BharatPe has tagged 1.5 million merchants with QR codes in 20 cities across India. The company expects to complete 21 million transactions a month with a value of 600 million to 700 million rupees (about $8.4 million to $9.7 million) starting in August.

Such transaction volumes could make BharatPe the leader in the Indian payments market.

Grover declared, "We have a 50% share of the offline UPI payments market."

Rivals are sceptical about Grover's comments.

PhonePe processed 80 million offline merchant UPI transactions in July 2019 and expects to exceed 90 million in August, said Vivek Lohcheb, head of offline business at PhonePe. "BharatPe claims that they completed 18 million transactions in July, but their market share is less than 151 TP3T," Lohcheb said.

A person associated with Paytm succinctly stated that they process more transactions than BharatPe.

The confusion about market share stems from the fact that the National Payments Corporation of India, which operates UPI, does not share official data on business transactions. However, industry insiders confirm that of the more than 800 million transactions per month, more than 275 million are UPI payments from offline and online merchants.

A year ago, there were only about 100,000 UPI QR codes in India. Industry estimates show that the reach of QR codes in India has increased significantly this year and there are now nearly 9 million QR codes.

While the fight for the top spot seems to be unresolved, the growth in UPI transactions is evident. With 754 million transactions in June 2019, UPI transactions were 86% higher than debit card usage at POS terminals and 4.4 times higher than peer-to-peer transfers at instant payment services (IMPS), according to NPCI data.

With more and more users getting used to UPI transactions, competition for offline merchants has become a top priority for every payment company.BharatPe wants to benefit from any consumer-facing payment app.

Currently, amongst the major players in the industry:Paytm came into existence four years ago with 13 million merchants and 350 million users (wallet and UPI users); PhonePe is three years old with 6.5 million merchants and 100 million registered users.BharatPe is only a year old with 1.5 million merchants but aims to attract its competitor's 70 million closed UPI users due to their incompatibility.

For UPI mobile real-time payments in India, a market that is only three years old, one year is enough for a company to grow from obscurity to a significant market player.

In 2016, PhonePe had just entered the market and witnessed Paytm's transformation from disruptor to leader. Now, the threat of BharatPe seems to be repeating history.

Revenue is not a key metric in the payments market, especially since the finance minister has stated that merchants no longer have to bear the cost of accepting digital payments. Companies are now chasing market share.

So far, BharatPe has completed five rounds of funding in just two years, raising $67.8 mn, with each round accompanied by an increase in market share. When the company had just 70,000 transactions, it was able to raise $10 million from Sequoia Capital and Bee Next for a valuation of $40 million, and when it reached 700,000 transactions, it was able to raise $50 million from Ribbit Capital for a valuation of $275 million.

Market share and valuation are interdependent.BharatPe believes that QR codes are the ideal path. However, the ultimate goal is transactional data. Having the data allows it to offer other products such as working capital loans, credit cards, insurance, etc., which were previously only offered by banks.

Now, BharatPe has emerged as one of the leaders. But to maintain or even enhance its position, it needs to dominate the QR code battle.

Meanwhile, other payment companies and banks are preparing for a head-to-head battle.

QR Code Battle

For any payment system to achieve ubiquitous status, it must compete for consumers and merchants. Expanding the consumer base can be achieved through cashback, but attracting merchants is a different story. The only way to do this is to knock on doors and convince merchants to use your payment platform.

Each company is targeting the same merchants, which makes it a street fight.

"It's a business that requires hard work," said one payments company founder discussing the QR code business.

BharatPe has deployed 2,000 people on the streets and has been targeting all of Paytm's merchants. Since Paytm has already done the job of convincing merchants to accept digital payments, BharatPe's job is much easier.

A former Paytm executive said, "For years, Paytm did nothing to deepen its relationship with merchants or offer other value-added services, which opened the door for others to take over merchants."

Grover admits that today, BharatPe's business base overlaps with Paytm 100%. unlike POS, QR codes aren't expensive and just need to be printed. When BharatPe takes over a Paytm merchant, the QR codes are replaced.

Sales agents for payment companies reportedly use a variety of tactics to ensure that their QR codes dominate the cash register. One tactic is to tell merchants that one payments company has acquired another. Some are even encouraged to tear off competitors' labels, according to Grover.

The pressure on each merchant to retain QR codes is obvious. While UPI QR codes are interoperable, having your own QR code in the shop encourages users to take out their respective apps for UPI payments (NPCI only records transactions from consumers, not those received by merchants). Moreover, Paytm's QR codes support both e-wallet and UPI payments. Similarly, PhonePe's QR code supports card payments. Thus, having their own QR code means that they support all other payment methods as well.

However, if Paytm wallet or PhonePe wallet users want to scan BharatPe's QR code, it is not possible.

Grover has had discussions with companies like Amazon and Google that don't have extensive business ecosystems. He proposed highlighting their logos so that users would be alerted when using these payment apps and in exchange they would pay a fee. But the offensive offer didn't work, and the discussion was inconclusive. Amazon and Google did not respond to the claims.

"There is a conflict between these acquisitions and the issuing companies themselves," Grover said. When they launch QR codes, they may be paving the way for competitors, particularly the entry of WhatsApp, which has 400 million users in India. While WhatsApp's payment service has been embroiled in a legal dispute for more than two years, its anticipated entry could reshuffle the deck.

"With WhatsApp coming in, we should focus on the consumer business. It's a natural monopoly," said Grover, who is set to buy the merchant debut business of companies like PhonePe. "They are now burning money at both ends, investing to attract consumers and merchants."

However, PhonePe's Lohcheb disagrees, "We believe that digitally connecting Indian consumers with local shops and service providers can unlock tremendous value in the Indian economy." Interoperable UPI is a key driver, not a threat.

"For pure B2B payments companies, whose business model is based on merchant discount rates (MDRs), UPI could pose a real threat," Lohcheb added.

For all companies, offering payment options to merchants is just the first step. Everyone is trying to build deeper connections and target merchants.

Payments are not the real business

Building credit through transaction data, making money with capital and making money with money is what every fintech company dreams of and BharatPe is no exception.

BharatPe is in the process of applying for an NBFC licence to lend money on its own.BharatPe has about five lending partners and started its lending operations in April this year. Out of 1.5 million merchants, BharatPe has pre-approved 50,000 loans based on transaction volumes and has disbursed about Rs700 million (about $9.76 million). By the end of the current financial year, it aims to reach 1 billion rupees ($139 million) in loans.

Such loans are stressful and risky for collections, but Grover is considering bigger numbers.

If the merchant repays their initial loan, he plans to increase the loan amount and extend the repayment period. Currently, the average loan amount is about Rs 35,000 (about $4,882) for a three-month term, and BharatPe charges a monthly interest rate of 2%.

The rate is attractive to merchants, who typically borrow at 3-4% from informal lenders, which banks have historically not been open to.

However, BharatPe's visibility among merchants is limited as it lends based on UPI payment records, which account for only 101 TP3T of the total payments made by the merchants.Further, only 501 TP3T of the merchant base is active. Seasoned professionals are not interested in this kind of lending based on transaction data.

Rajeev Agrawal of Innoviti Payments has been in the business for more than a decade and specialises in providing value-added services to merchants who accept card payments at POS terminals. One of their BharatPe-like services is lending. But even after a decade, their loan account does not exceed $20 million per year.

In order to make these loans, they do not rely on merchant data. Instead, they get data from the merchant's suppliers, such as Walmart.

"You need a certain amount of data and consistency," says Agrawal, "and ultimately, you're lending based on consumer behaviour." Right now, consumers use UPI for cash back, which doesn't guarantee they'll stick with merchant payments without an incentive.

In addition, BharatPe has no related business for merchants offered by other payment companies.

PhonePe has a merchant app that allows merchants to control the payment process end-to-end, including transaction confirmation and reconciliation. Similarly, Paytm has a similar business that allows merchants to accept payments, borrow money from partners, become resellers of any Paytm service (such as flight and train tickets) and even order products online. "It's a significant revenue stream," said a Paytm source familiar with the matter, without disclosing the exact revenue from this channel. Amazon, which has about 500,000 offline merchants, has similar products.

"Soon, all merchant supply will be commoditised as well," said a payments executive at an e-commerce company. When that happens, having consumer apps will also help unleash the energy and customers of their merchants.

Banks are also accelerating the deployment of QR codes

However, Grover doesn't think his company needs this as he ultimately wants to turn BharatPe into a bank for merchants.

BharatPe plans to launch a range of products for merchants such as insurance, credit cards and even bill discounts. In its product roadmap, the company hopes to launch bill discounts in the next three months. Essentially, this is still about providing loans to merchants so that they can settle their accounts payable with vendors before the payment due date. For this, they charge merchants 1%.

Grover is also planning to launch merchant credit cards with banks this year. However, with BharatPe starting to offer banking products to merchants, banks too want to join the QR code battle.

Traditionally, banks have stuck to providing payment solutions to large retail chains. Acquiring POS from smaller merchants simply isn't profitable, but with fintechs vying for QR codes, banks don't want to miss out.

Deepak Sharma, head of digital banking at Kotak Bank, is also acquiring merchants with QR codes. In fact, Kotak Bank's QR code penetration is higher than its POS penetration.Sharma said Kotak Bank has around 40,000 POS merchants, while its QR code penetration has reached 50,000.

It's not just small banks like Kotak that are taking action. Banks like HDFC are also accelerating their deployment of QR codes, a payments company executive said.

As of June 2019, there are 50 million merchants in India, of which only about 3.9 million have POS devices. Earlier, the government had set a target of adding 2 million POS terminals in the fiscal year ending March 2019. However, by January 2019, only 441 TP3T had been completed.

However, with banks bringing QR codes to small merchants, BharatPe is also going after the banks' target group. Merchant discount rates are attracting large retail chains and Grover has put together a team to serve them with plans to add 400,000 merchants per month.

Grover said he spent only $1.1 million of the $67.8 million raised by BharatPe. If this is true, BharatPe could be a thorn in the side of other payment companies, giving them continued cause for concern.

"I can afford to be able to wear others down and BharatPe can handle it with ease," Grover says confidently.