Why investors prefer large players in the online payments sector

With the established players capturing a large part of the user base in the online payments space, investors, naturally, have preferred to place their bets on these companies.

Payments is a low-margin, high-volume business, says Manish Jain, Partner, KPMG in India. So, though the large players have been making losses, investments continue to pour in because the priority initially is to increase the scale of operations.

“The potential winners have been identified and the capital is going behind them,” confirms Ramakrishnan Kalyanaraman, Senior Managing Director, Strategic Relationships, Spark Capital Advisors (India) Private Limited, a Chennai-based mid-market investment bank.

In 2017, the total equity funding in the online payments sector stood at $1,581.05 million. Of this, Paytm received 88 per cent, or $1,400 million, in its Series F round, from Softbank group.

Similarly, in 2018, the total funding in the sector stood at $680.79 million. But here again, Paytm cornered 52.73 per cent of the money — $359.02 million. Pine Labs, a company that offers PoS software solutions for offline retailers and brands, grabbed another 30.4 per cent ($207 million). The rest went to three other companies: MobiKwik, Mswipe and Razorpay.

“The digital payments market is entering into a consolidation phase as large players look to further consolidate their bases,” says Mahesh Makhija, Leader – Emerging Technologies & Digital, Ernst and Young.

Perhaps it is not surprising then that Paytm is the only wallet that is a unicorn in the online payments sector. BillDesk, the other unicorn, is a payment gateway.

UPI and KYC impact

The emergence of UPI (Unified Payments Interface) has also disrupted the sector and it has become increasingly difficult for standalone wallets to survive. The RBI’s move to achieve interoperability between wallets and bank accounts through UPI has eased digital transactions for customers. But it has also pushed wallets to embrace UPI as part of their applications.

“The introduction of UPI threatened the core business model of wallets,” says Jain.

“Why would I want to put money into a wallet, when I can simply seamlessly link to my bank account using UPI and pay,” asks Kalyanaraman. Left with no choice, even well-established wallets such as Paytm have been forced to embrace UPI.

The share of digital transactions through UPI and BHIM (Bharat Interface for Money) has shot up to ₹8,770 billion in FY19 from a mere ₹69 billion in FY17. Some of the highest UPI volumes are being seen on certain wallets, says Makhija.

Wallets also require customers to comply with KYC (Know Your Customer) requirements in order to perform transactions. “How many KYCs would a customer want to fill,” asks Kalyanaraman. People would move towards those wallets they use regularly, adds Makhija.

The slowdown in investments could also be because most companies are pivoting their business models, and investors are being cautious, says Sampad Swain, CEO & Co-Founder, Instamojo.

The way forward

So, what lies ahead for companies in the online payment space? Is this the end of the road for smaller and newer companies that are just making a beginning?

Not really. “There are still niches in various aspects of digital payments that fintech players with the right product-market fit can exploit,” says Makhija. These companies will, in all likelihood, continue to see growth as new “high-frequency, low-value” requirements become more common, such as hyperlocal retail, food delivery, ticketing, etc, he adds.

Meanwhile, well-established firms such as Paytm, PhonePe and MobiKwik will continue to see growth, not just in metros, but also in tier-3 and -4 cities. They will continue to keep transaction volumes surging, says Jain.

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