 |
| Image By: Jonas Leupe on Unsplash |
A year like 2021 has never been witnessed in the Indian financial environment. Paytm, Pine Labs, Policy Bazaar, and MobiKwik are among the seasoned players preparing for IPOs, while a bullish venture-capital crowd is spawning new unicorns.
The increase in user growth is fueling this excitement. UPI, QR codes, and other technologies have combined to create an irreversible shift in transaction behaviours. The increased digitalization of SMEs, aided by GST and Covid, has created a slew of new business prospects for fintech firms.
Some questions remain unanswered as Paytm, PhonePe, Google Pay, Amazon Pay, and MobiKwik compete for a larger slice of the payments pie.
● How do companies that deal with mobile payments make money?
● How can they profit when most of these payments are made without any fees or commissions?
Here's a chat between our fake tech junkie John and his virtual assistant, Dr Prime (DP as John loves to call him). The duo aims to deconstruct the mobile payments industry. Let's get started.
John: Good day, DP. I hope everything is going well for you. It's great to be back on track. You said in our previous conversation that buy now, pay later (BNPL) schemes are an excellent method for fintech companies to make money.
(With a straight face) Good morning, John, says Dr Prime. Please don't use words that I don't want to hear. I just stated that some of these businesses earn a tiny commission on their facilitated BNPL transactions.
John: So, how do all of these payment processors generate money? Since Paytm and MobiKwik are planning initial public offerings, this one question has been troubling me for the past few days. I can't even concentrate on my virtual golf instruction right now.
Dr Prime: (After a long, contemplative pause) Oh John, that is a difficult question for me to answer. It's complicated for the simple reason that it's complicated. We'll use Paytm as an example throughout the presentation because it's the oldest surviving and growing mobile payments startup. Paytm's mobile-recharge business began in 2010, while Google Pay, a UPI-payments service, debuted in late 2017. Because the former is older than its competitors, it has more revenue and multiple revenue streams. Paytm realised it couldn't make much money on payments as it grew to a sizeable scale. As a result, it has expanded into a variety of businesses. Of course, comparing PhonePe and Google Pay to their younger competitors is unfair, but it will help you understand how their businesses will evolve in the future.
John: I recall that we had previously discussed the fact that the payments industry is unprofitable. I'm aware that they serve tens of millions of clients and process billions of transactions annually.
Dr Prime: Of course! Traditional payment providers — point-of-sale (PoS) corporations like Pine Labs, payment-processing technology firms like Visa or Mastercard, and banks – paid a tiny commission on every transaction they handled before these mobile payments startups were around, or even a decade ago. They still do, but India's merchant discount rate, or MDR, is already significantly lower than that of any other comparable economy. Even that is dwindling as businesses choose smaller point-of-sale companies that provide these services at a lower cost, or to payment technologies like UPI, which have zero MDR.
John: (With a sigh of frustration) DP, I believe you've lost your bearings.
Dr Prime: Sorry for going off on a tangent. In the payments business, I was attempting to address a wider issue. Because of the low MDR, mobile payment businesses have had to look for alternative ways to generate income. They currently sell anything in the fintech business that you can think of on their platforms. Every rupee had to be earned via hard labour. This, I believe, will make them bigger and more successful in the long run.
John: When it comes to fintech, you're quite the optimist, DP.
Dr Prime: That's right, John. The commissions they earn from billers such as mobile, internet, DTH, and utility payments were one of the key sources of revenue for these mobile payments companies, if not the primary source. Because mobile-payments providers have direct relationships with major corporations, commission money might be substantial.
With the introduction of the Bharat Bill Payment System (BBPS), the commission will be significantly reduced if payments are made through the BBPS channel. However, this is mostly for new billers being onboarded at the moment, such as cooking-gas booking, municipal taxes, and school payments. The majority of mobile, broadband, and DTH recharges are still done with billers. As a result, once the cashback is lowered to the bare minimum, it will be a sizable portion. The refund is frequently recorded as a marketing expense rather than lost revenue in the accounting books.
John: (Taking the last sip of his second round of morning coffee) I believe we're all too accustomed to paying bills through these platforms, and it's tough to envisage any other options, even if cashbacks are no longer available.
Dr Prime: The competition is fierce and won't let up anytime soon. So, these days, payback comes in the form of a discount code for a future purchase. This is done to entice the customer to return to the site. For example, if you pay a bill on the platform, you'll receive a 5% -10% discount on your next purchase at a clothes showroom or a coffee shop. That is only available if you pay with the same payment method again. This offer could be sponsored by the brand in order to increase product sales.
John: Interesting, Instead of a cashback high, you'll get a coffee boost! On these apps, I've also seen brand certificates and gift cards.
Dr Prime: They frequently work with brands to offer discounts on gift cards ranging from 5% to 10%. For example, if you purchase a Shoppers Stop gift card for INR5,000, you will receive INR500 in cashback. Because they are shared or sponsored by sponsors, the payment applications do not lose money. Remember that mobile payments companies profit when customers use any payment method other than UPI. The cashback is frequently applied to the app's wallet, which encourages customers to return to the app for future purchases. Paytm Mall, the company's e-commerce section, sells bikes and cars from local dealers. I'm not sure how many people buy cars like way, but the payback on such purchases can be as high as INR5,000. It's not a little chunk of money.
John: Oh, yes, I've looked at Paytm, Flipkart, and Amazon for pretty much everything.
Dr Prime: Yes, Movie tickets, event tickets, and even aircraft, rail, and bus tickets are all available on Paytm. While both Flipkart and Amazon offer these ticketing options, Paytm stands out due to its direct relationships with cinema exhibitors, airlines, and the Indian Railway Catering and Tourism Corporation (IRCTC). This is accomplished by Flipkart and Amazon partnering with MakeMyTrip, Cleartrip, BookMyShow, redBus, and Yatra. As a result, the commission is split amongst the parties, with Paytm receiving the lion's share. All of these will assist the organisation in becoming successful sooner than anticipated.
John: It appears that this is a win-win situation for brands, mobile payment apps, and customers.
Dr Prime: As I have stated, these players have protected themselves against any revenue loss from payment transactions. Paytm and MobiKwik, for example, have a small but growing payment gateway (PG) industry. On their apps or websites, small local retailers and digital firms like Uber and Ola needed a plug-and-play payment-checkout option. As a result, these startups filled a niche in the market at a time when larger players like BillDesk and PayU were focusing on major merchants and desktop websites. Large PGs, as well as mobile- and SME-focused startups like Juspay and Razorpay, compete with mobile-payments apps. In this case, the PG is supplied as a monthly service for which a fee is charged. This ensures a steady stream of revenue that is unaffected by the ups and downs of the cashback world.
John: On these apps, I've seen Spots and other brand icons...
Dr Prime: These apps make purchasing things from the brand's microsite easier. They offer a digital storefront, which is similar to a plug-and-play format, where merchants can add products to their catalogue. After that, mobile-payments apps can link their PG to the brands'. These businesses receive a commission for sales made through this channel, regardless of the wallets or payment methods used.
Major businesses, for example, have partnered with Google Pay through Spots and Nearby Stores. PhonePe's Switch platform and Paytm's Mini App Store both have listings for these businesses and merchants. Some of the catalogue services are now free, but once merchants see significant sales via these apps, they can earn a monthly recurring revenue. Google Pay, on the other hand, prohibits the use of any other payment method throughout the checkout process. All of these mobile payments companies also provide a ledger for the money that merchants receive, which is currently free but may be charged in the future.
John: Isn't it true that Paytm also has a payments bank?
Dr Prime: This is a little more in-depth when it comes to Paytm. All of these Paytm merchants could use Paytm Payments Bank as the account where they deposit their money. For creating and managing UPI handles, UPI payment apps must pay their backend banks. This is handled by Paytm's payments bank, thus the revenue stays within the larger company.
(After a long period of listening to DP, John adjusts his couch pillow) I've heard that these mobile apps are going overboard on lending.
Dr Prime: In the fintech industry, everyone is. In the long run, this will be the primary motivator for practically all industry actors. MobiKwik now relies on BNPL as its principal revenue source. Third-party lenders using Google Pay and PhonePe's systems provide various types of credit to clients and businesses. For the month-end BNPL scheme, Paytm offers a "postpaid" offering. Because these platforms cannot lend, they must be backed by a bank or an NBFC. Depending on the size of the credit, they receive a commission for each loan they complete.
John: They are similar to any other financial institution, not simply loans. These days, they sell insurance and mutual funds...
Dr Prime: (With a big grin) John, it appears that you have completed your homework.
Selling insurance, gold, and mutual funds appears to be the firms' second-largest revenue source. For those who view gold as an investment rather than an ornament, digital gold is an intriguing choice.
Paytm is a unique example in the insurance sector, as it has acquired an insurance-broking licence. This industry is similar to that of Coverfox or Policy Bazaar. It has even bought Raheja QBE, a general insurance company, and can now create new insurance products. It is both an insurance firm and an insurance broker in one.
(After a brief pause to gather his thoughts, John asks) Are you saying that fintechs are growing more powerful than banks?
DR. Prime: No, is the quick response. However, the long answer is that we have no idea what will happen if these applications become the major financial interface for a significant portion of the population.
One thing to remember is that, with the exception of the State Bank of India, these payment companies have more customers. More than 100 million people utilise the top four payment services: PhonePe, Paytm, Google Pay, and Amazon Pay. These apps have rich, useable data, unlike banks, which just have the customer's address and phone number. Where you spend money, how much money you spend, how much money you spend, how much money you spend on credit cards, what items you use, where you vacation, how much money you spend on EMIs, and so on.
Let me ask you a question. Have you used your bank app to pay your cell bill, broadband bill, or utility payment? It was merely a rhetorical query. I am aware of the solution.
John: There appear to be a plethora of ways to make money, all of which are unseen to ordinary people like me. Are there any additional options that you didn't mention?
Dr Prime: (Smiling sheepishly). Yes, of course. In these companies' marketing and advertising divisions, there is a lot of innovation going on. They aim to take advantage of their massive customer base.
Last but not least, there is advertising, which is an important but minor component at the moment. Google and Facebook, two of the world's top tech corporations, rely heavily on advertising revenue. Amazon's ad revenue has been increasing rapidly, reaching nearly USD7 billion in only one quarter.
But, DP, all of this is already taking place. These businesses are still in the red.
Dr Prime: Haha, it takes a lot of effort, engineers, and money to design and integrate these products and systems. In a large economy like ours, forming alliances and enrolling merchants is also a tremendous undertaking. Thousands of new merchants and customers are still being onboarded.
However, when the companies begin to list on the stock exchanges, I expect them to minimise their cash burn and focus on profitability in the coming years. Paytm cut its marketing costs in half last fiscal year, and others are expected to follow suit.
John: That was fantastic. Even as we mock these companies for their ridiculous cashbacks and bottom lines, they have put in a lot of effort to lay the groundwork for a successful business.
Dr Prime: Yes, and this field is still evolving at a breakneck pace. Companies must be aware of competition from all directions.
John: Thank you, DP, for taking the time to explain things. I'm hoping to catch up as soon as possible.
Dr Prime: It is a joy to serve you. Have a wonderful week ahead of you.
John: And you, as well!
(Source: Economic Times)
0 Comments