Everything, everywhere, all at once.Walmart-owned PhonePe is looking to take a leaf from Paytm’s super app playbook
Everything, everywhere, all at once. Forgive us for mangling the name of this year’s Oscars sensation, but that’s a fitting way to describe fintech apps in India today. At least for Paytm, PhonePe and even some national banks that harbour super app ambitions.
In many ways, it’s Paytm’s lead that’s being followed by other fintech unicorns and banks, and Walmart-owned PhonePe is the prime contender to take a leaf from the Vijay Shekhar Sharma-led company’s super app playbook.
With its massive scale and diversity of services, Paytm is considered the OG fintech super app in India, but it has not capitalised on this to prove profitability yet. Can PhonePe replicate the Paytm playbook and add profits to sweeten the mix?
We look to answer after these top stories from our newsroom:
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- BYJU’S AI Play: At The Makers Summit 2023, BYJU’S cofounder Divya Gokulnath revealed how the company is prioritising AI and ML for its product lineup. Read more about BADRI project
PhonePe’s Multiverse Dreams
The total addressable market for fintech in India is expected to reach $2.1 Tn by 2030, with a CAGR of 18% from 2022. The sector has attracted over $24 Bn in investments since 2014 and is home to 22 unicorns and 33 soonicorns. Paytm and Policybazaar have gone beyond and listed publicly.
Now PhonePe wants to join these two fintech frontrunners with its own listing sometime around 2024. But before it gets there, it needs to align various individual financial products within its app.
Funding is not a problem for the fintech decacorn. It has already raised $650 Mn since the start of 2023 and is expected to add another $350 Mn in the coming months.
The plan is to scale new businesses such as insurance, wealth management, lending, stockbroking, ONDC-based shopping and account aggregators — does that remind you of a Delhi NCR-based fintech giant?
Moreover in recent weeks, PhonePe also received a payments aggregator licence, so its path down the super app highway is set. But why even go this route when it has not worked for others? And when this multi-funnel business model is not very well understood, as Paytm’s Sharma himself has claimed.
Beyond The World Of UPI
The answer lies in the monetisation problems in UPI, where PhonePe has set the pace.
PhonePe retained its top position, processing the biggest number of UPI transactions in the month. It processed 46.71% or 351.9 Cr UPI transactions in February 2023, amounting to INR 6.2 Lakh Cr during the period under review. In terms of percentage, it accounted for 50.18% of the value of UPI transactions.
PhonePe UPI payments are also available to merchants in the UAE, Singapore, Mauritius, Nepal and Bhutan. With the capital raised this year, PhonePe is looking to add UPI features such as UPI Lite and Credit on UPI.
But UPI is a revenue sinkhole. While it has revolutionised payments, the profitability of UPI apps has been caged by schemes like zero merchant discount rate. There is potential for UPI payments to become a real revenue source for fintech apps if the zero MDR regime is eliminated.
The recent announcement of a wallet-like UPI Lite feature is likely to be a step in this direction, with higher value UPI transactions likely to attract an MDR in the near future. Of course, this is merely a speculation among those watching the fintech ecosystem.
But in the meanwhile, PhonePe is forced to add lending, insurance, wealth management and other services to its repertoire. Will this even pay off?
Banks Ape Fintech Unicorns
Incidentally, the super app approach has become a crutch for digital-first operations of legacy banks too. As detailed below, SBI’s YONO and Kotak 811 are examples of how banks are approaching this race.
But analysts contend that banks are missing a beat by venturing into areas that are outside their core business. And especially ones that don’t offer any value to the customer. “As a customer, to me it doesn’t matter if Kotak or PhonePe has a link for an ecommerce website or flight booking. These are not strong enough reasons to stay within the walled garden of an ecommerce app,” a Bengaluru-based early-stage investor says.
An executive at a Big Four auditor who primarily focuses on fintech adds that there are spaces that are fintech adjacent that have not yet been tapped by banks, so these super app ambitions are misplaced, and do not move the revenue needle in a meaningful way either.
“Just like startups cannot survive on lending and insurance commissions alone, banks do not get any real revenue from these ecommerce tie-ups or expensive product development. Banks have the full stream of data that startups do not, which is an opportunity that has not yet been explored.”
The analyst added that banks in the west such as Barclays have become interventionist when it comes to new services. “When you have personal finance management and real-time cautions on discretionary spending, you are offering real value to the customer. Indian banks are way behind the curve, and that’s where maybe startups could find some room to grow.”
Oh, and banks and startups will also have to contend with Jio Financial Services. Reliance Jio is taking the super app strategy to the very extreme by integrating pretty much everything into the MyJio app. This includes telecom service management, shopping, banking and finance, payments, entertainment, cloud storage and a lot more.
There’s little doubt that Jio’s entry will ruffle the feathers of the existing ecosystem. For instance, brokerage firm Macquarie believes Jio will instantly become the fifth largest financial services provider in India with this play.
The Mukesh Ambani-led giant plans to step into the insurance sector first and also has a payments bank licence similar to Paytm. It’s already one better than PhonePe, and as we will see next, that’s an advantage (to some degree).
No Banks For Startups
“Fintech apps face two major headwinds. One is of course that they are not banks, and the other is that revenue growth will continue to be slow under the current rules for MDR in digital payments,” added the investor quoted above.
The unsaid headwind is of course regulations. Adding bank-like services is risky for startups and it’s also not operationally feasible in many cases.
Startups cannot take full advantage of the transactional data that banks have at their disposal. Unlike Silicon Valley, financial technology innovation in India has to stay within the RBI’s guardrails, given the state of financial literacy in India.
Fintech startups have burnt their fingers by cutting corners in the past two years. We can see this in the way RBI cracked down on PPI-based BNPL operations last year, or the digital lending guidelines, crypto startups or indeed other grey areas such as crowdfunding, peer-to-peer lending etc.
So payments apps have to monetise their user base through ancillary services such as lending or insurance broking that are fairly easy to implement, but are not revenue boosters. How much can commission revenue be scaled up after all?
What would bring a real revenue bump would be a banking licence and directly lending from deposits and investing these deposits in other assets. Paytm has a payments bank licence, which comes with certain restrictions as compared to a small finance bank or a universal banking charter.
Besides, while Paytm has been able to capitalise on its payments bank licence for payments efficiency and other services, it has also seen regulatory action. Paytm Payments Bank has been under regulatory scrutiny since March 2022, when the RBI issued an order barring it from onboarding new users, subject to an audit of the payments bank’s accounts.
So a banking licence of any kind is not a way out of the revenue hole, but instead just adds a brighter regulatory spotlight on the operations. In any case, this is a moot point right now with only BharatPe being handed a small finance bank licence for the Unity SFB.
As for PhonePe, it recently redomiciled to India from Singapore and paid a hefty INR 8,000 Cr tax for the same. But to get a banking licence, Walmart has to sell its majority stake to an Indian promoter and then the promoter has to meet the banking licence criteria.
That seems like a long way away. In the meanwhile, PhonePe and other fintech companies are being forced into the super app pigeon hole. For instance, CRED is eyeing the same destination using a different (some would argue more scenic) route.
But analysts added that this is just throwing random darts in the dark and the market conditions are not conducive to this push at this moment as far as profitability is concerned.
Super App Highway To IPO
While the banking piece holds PhonePe behind, one could argue that the Bengaluru-based company is better placed than Paytm in one way. It does not seem to have any pressure from Walmart to go public, yet PhonePe is eyeing a listing in the medium term.
Paytm, as one may recall, was under SoftBank’s deadline to list publicly before 2023. But PhonePe is not under the clock, and has time to prove its profitability before it hits the public markets, a luxury that Paytm did not have.
Earlier this year, PhonePe revealed its plans to move its registered entity from Singapore to India, in line with the company’s plans to list on Indian stock exchanges.
But PhonePe is still deep in the red. The super app is its big bet. The company registered a 133% year-on-year (YoY) jump in revenue in FY22 to INR 1,692.7 Cr, but net loss rose 16.4% from FY21 to INR 2,013.7 Cr.
It remains to be seen how the move from Singapore to India will impact its bottomline in FY23, but one expects a huge chunk of the revenue growth will be nullified by the redomiciling tax.
The company might be able to show some positive movement in profit and EBITDA margins by FY24 and beyond when it plans to list publicly. And when that time comes, we will get a clearer idea of whether PhonePe’s plan to become Paytm was the right move.
The Best Of The Makers Summit 2023
And there’s a lot more. Check out Inc42 Academy for a recap of all the sessions
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And that’s all for this Sunday. Till next week, when we are back with another highlight and a deep dive into startups that have grabbed the headlines.