India's online payments are in a golden age, Cashfree founder's startup story: a native Indian awakening

On 8 November 2016, Prime Minister Narendra Modi announced the abolition of 500 and 1,000 rupee notes, ushering in the golden age of online payments in India.

The previous year, two entrepreneurs decided to leave their e-commerce company and start their own venture. Their new project, called [company name], aims to encourage more Indians to adopt online payment methods.

Co-founder [name of co-founder] and [name of co-founder]

However, the fallout from the abolition of banknotes has made India one of the most active regions in the global online payments industry. Despite the dominance of giants such as Alipay and WeChat Pay, there is no monopoly in the Indian market, and the payments ecosystem is becoming increasingly complex, with a variety of payment methods such as wallet payments, Pay payments and UPI payments springing up.

In the mobile internet era, the rapid growth of e-commerce has led to fragmentation of payment systems, making it difficult for merchants to collect payments. As a result, payment aggregators like [company name] were born. Within five years, it has emerged as one of the top three internet payment gateway companies in India, serving more than 55,000 merchants as of March 2020.

In 2015, the two founders were introduced to each other by a mutual friend from college to discuss using technology to solve the pain points of cash payments in e-commerce in India.

The app was prototyped as a link to a payment page. At the time, despite the existence of e-commerce and food delivery platforms in India, most orders were not paid for online in advance, but rather cash was collected by delivery personnel when the customer signed for it. This required delivery personnel to carry cash for change, adding pressure on cash flow and exposing them to the risk of robbery at night.

In August 2017, the company successfully graduated from Y Combinator with a $120,000 seed round.

The initial "seed customers" were nightclubs that had replaced cash payments with web links, establishing the basic "online, cashless" payment model. Later, it expanded to become a payment gateway. Unlike the Indian payment giants, it has always focused on B2B users and maintains partnerships with major payment wallets.

In April 2019, on the back of several consecutive quarters of doubled trading volume, solid cash flow and profits, the company closed a $5.5 million Series A round led by the investment arm of a South Korean gaming company.

Recently, [website name] conducted an interview with the two co-founders, which is transcribed below.

1. From e-commerce to payments

[Website name]: How did the two founders meet? What were you doing before and who suggested this company?

[Co-Founder's Name]: [Co-Founder's Name] is a graduate of the International Institute of Information Technology, Hyderabad (IIIT-H). He is a software engineer and has worked in product development for Amazon and a bank.

I am a graduate of IIT [Branch] and have worked in real estate and marketing at Fab, an online furniture retailer, and in business analysis at ZS, a consulting firm.

We both had entrepreneurial experiences during our college years. [co-founder's name] created a social media site for businesses, and I worked on a small team advising high school students on college admissions. While these projects were not profitable, we learned how to build and sell products from scratch.

In 2015, we were both working in e-commerce companies and met through a mutual friend. [Co-founder's name] was interested in AI-based cheques and I had some ideas about logistics, so we discussed what could be done in the Indian e-commerce space. After many discussions, we identified the pain points faced by local merchants collecting payments. [Co-founder's name] was good at programming and I knew marketing, so we developed a web-based model that later became our company.

[Website name]: How did you apply to the famous incubator YC?

: We submitted our application to YC in mid-May 2017, six weeks before the deadline, just to try our luck. However, 10 days after submitting our application, we received an invitation to interview with YC in Mountain View, CA.

We later learnt that YC usually conducts interviews before inviting applications, so we skipped the interview process. However, due to visa delay, we had to reschedule the interview. Eventually we arrived in Mountain View. A few days later, we received our acceptance letter and we were the last startup in that cohort (S17) to be accepted.

[Site name]: How did you use the seed money?

: In August 2017, we secured a seed round of Rs 835 crore ($120,000) from YC, primarily to expand the team. Before going to YC, we had less than 10 people. After securing the funding, we made some hires in our technical and sales teams and invested in product development, marketing and strengthening our partnerships with banks.In 2017, we became profitable for the first time.

Expanding the team

[Website name]: In your Series A funding round that closed in April 2019, we noticed that the lead investor was a subsidiary of a Korean gaming company. How did you guys become acquainted with them?

: They contacted us directly through our website, without going through any middleman. They sent us a message on our website and at the time we thought they were there to talk about business - we didn't have any overseas clients at the time. We later learnt that they were interested in investing and researched us thoroughly.

[name of investor] is very diversified in terms of the types of investments they make and they are 'industry agnostic'. They are optimistic about the growth of the fintech industry in India and chose [Company Name] after a market assessment because our strong revenue growth and lean team appealed to them.

2. Meeting real needs is an effective way to promote science and technology products

[Site name]: What was your initial digital payment model? What's the story behind it?

: At that time, most local merchants used cash and cash on delivery. There were very few digital payment channels. So we thought that providing merchants with digital payment options where customers could pay using credit cards, debit cards or online banking would greatly improve the efficiency and transparency of payments. Our first idea was to move the cash-on-delivery model online and eliminate cash transactions, which is how we got our name.

Our "seed users" are mainly nightclubs that provide food deliveries until 3am. However, if deliverers carry cash late at night, they may be at risk of being robbed.

In April 2015, we launched a beta version of our mobile payment website. When a customer's food order is delivered, they receive a link to a webpage. After clicking on the link, customers are taken to our payment site where they can enter their card or e-wallet details to complete an online payment. Once the payment is complete, the delivery person receives a text message informing them that the payment has been received.

Over the next six months, the prototype payment page was gradually improved and eventually developed into a payment gateway.

At that time, there were only three of us: me, [name of co-founder] and a salesman. We expanded our business only in Bangalore and partnered with over 200 brick-and-mortar shops.

[Website name]: In 2015, there are already digital payment companies in India with very low transaction rates. Why would customers still choose you?

: Because not everyone knows how to use Alipay, which is very different from the situation in China. In fact, India has a very small percentage of wallet transactions. Most people still prefer to use bank cards, and there are a lot of banks in India. Some people prefer to use Pay and Pay. what we have done is to offer multiple payment options, even a simple web link to make a payment. No matter which payment method is used, our clients (B2B merchants or companies) can manage their collections at one place. We offer this solution.

[website name]: What were the biggest challenges you faced after securing seed funding in 2017?

: At the time, the Indian payments market was affected by a strong spillover effect from the abolition of banknotes (after the abolition of banknotes in November 2016, online payments in India surged). We no longer had to educate the public about mobile payments, so we focused on providing more segmented services that enhanced the user experience.

We found that many of the automated collections products on the market could not be fully automated, for example, when the amount was insufficient, the system would report an error and the business would have to collect the money manually. We created an automated solution that allows businesses to collect and make payments on a single platform. We launched this integrated collections automation operating platform in 2017. Since then, our core competencies have begun to emerge and the business has grown.

[Site Name]: Why did you choose temporary employee payroll payments and instant refunds as your main service highlights?

: The decision to offer payroll payments for temporary staff was made when we attended YC. At the time, YC asked us: why do customers use our products? In our initial presentation, we didn't communicate the value of what we were doing.

We wanted our product to cater for scenarios where a delivery person could click on our app to receive their paycheck at any time. This story resonated with YC, so we decided to go ahead and develop this feature.

This example also teaches us that telling real-world scenarios is an effective way to promote technology products. We should describe our products using specific scenarios so that the audience can repeat the story in the same way.

The Instant Refund feature was launched in September 2019 and is the first payment company in India to offer real-time refunds and instant account settlement. Whether a customer pays using a bank card, e-wallet or UPI, e-commerce platforms integrated with our services can return funds to the customer's account within 20 seconds, compared to the industry standard of 4-5 business days. By automating the entire refund process, we increase customer trust and satisfaction, which is our strength.

3. Our first Chinese client

[Website name]: You have just launched a payment service in India with over 40 million active users. What impact do you think this will have on the Indian industry?

: With over 40 million monthly active users in India's payments market, this new feature is sure to attract users.

We believe that many companies operating in the digital payments space must invest more to compete with Pay. As a B2B customer-focused payment platform, we offer merchants over 100 payment options. We believe the corporate payments market is growing rapidly and there is a lot of room for innovation. From a broader fintech perspective, if money transfers can be as simple as sending a message, it is expected to increase the number of digital financial transactions in India and accelerate the growth of the digital economy.

[Website name]: How do you see Chinese fintech companies?

: We've worked with several Chinese fintech companies and have been impressed with the speed of execution and the sheer volume of transactions. We have been to China several times and interacted with Chinese startups. The Indian market is very different from the Chinese market and has its own challenges, but the ability of Chinese fintechs to execute quickly is important and worth learning from.

Chinese companies often have a strong product culture and development mentality, and our products are designed for today's emerging industries, which fits with the spirit of globalisation of Chinese companies.

[Website name]: What kind of co-operation do you have with Chinese companies?

: We provide payment infrastructure. Our platform helps Chinese companies conduct Internet business in India, including e-commerce transactions, loans, crowdfunding, in-game money transactions and remittances. Because we can automate a large number of payment transactions, we provide for the rapid growth of Chinese companies. Club, a China-founded OTA platform and Hangzhou-based cross-border e-commerce company, was one of our early Chinese clients. We also work with Chinese cash loan companies.

[Website name]: Now some Indian fintech companies are also starting to offer loan services such as [company name] and [company name]. What is your role in this?

: There are about 10,000 lenders in India, of which there are about 120 large players, including listed companies. While this is a large market, there is still a problem of bad debts in online lending. If this problem can be solved, we will see more players coming on board and we can work with more cash lenders.

We are a payment gateway and our strength lies in providing reliable and fast payment services, supporting as many payment methods as possible (from MasterCard, Domestic Indian Bank Cards to various e-wallets) and ensuring the success of payments and collections is our focus.

[Website name]: How do you see the trend of third party payments in India? Will it be like China where only two giants will be left in the end?

: I think it is possible in the consumer (C-end) market. However, the number of B2B payments players in India is not going to decrease quickly because there are currently over 500 banks in India and it would be too difficult to centralise them all. So, payments aggregation will happen, but not quickly and not with just two giants. I think at least 7-8 third-party payment aggregators will emerge.

If more payment methods are "aggregated", the payment gateway will change significantly, but we will have enough time to adapt to the pace of the market and make adjustments.

[Site Name]: What is your vision? Do you plan to venture into the C-suite product market in the future?

: In the long run, we want to improve the fintech and banking infrastructure in India and promote cashless payments. In the short term, we will remain focussed on B2B and have no plans to venture into the C-suite at this point in time. Last year, we reached $10bn in transaction volumes and we aim to increase this by at least 2-3 times by the end of this financial year.

India still has a 50-60% share of cash payments and we want to drive the growth of the cashless payments market by promoting digital transactions.

On the other hand, we will continue to improve our solutions and introduce new products by addressing customer pain points, while building trust and establishing a good reputation in the industry.