Payments Strategy Shift | Fintech Inside - Edition #57 - 06th Mar, 2022
About shifting strategies among payment companies, BharatPe's impact on fintech startups, US stock trading via NSE IFSC and Southeast Asia round up.
Hi Insiders, Osborne here.
Welcome to the 57th edition of Fintech Inside. Fintech Inside is the front page of Fintech in emerging markets.
There's been a slow shift in payments business models in India. Noticed how all payment companies are looking more like "Fintech Super Apps"? This week's post is about that shift in strategy and what we can expect from payment companies in the future.
You'll also find details on:
BharatPe-Ashneer's impact on fintech startups.
US Stock trading from India using NSE's newly launched platform.
Southeast Asia fintech round up.
Aside: The economic sanctions on Russia by most of the world has it's implications not just on Russia. As an investor and builder, it's important to understand those implications. This week, I listened (several times) to this *excellent* podcast by Capital Allocators featuring Marko Papic. I cannot recommend this 37min podcast enough.
Fintech Happy Hour: I plan to host a fintech community happy hour on Wed, 16th March 2022 in Bangalore. Sign up here to get notified about this event and future ones as well.
Note: There will be no edition of Fintech Inside next week i.e. 13th March, 2022. Will resume on 20th March, 2022.
If you're building in fintech or have an idea that you'd like to riff on, I'd love to speak with you. Write to me at firstname.lastname@example.org.
Enjoy another week in fintech!
If you’re an early-stage fintech startup founder raising funding, I'd love to speak to you - reach out to me at email@example.com
🤔 One Big Thought
Consumer Payments Strategy: The Monetisation Shift
Note: Today's post was originally published on Unit Economics by Prince Jain. Prince writes well and explains trends we often miss out on. This post is an example of that. Go subscribe to his newsletter!
The last few months have quietly changed the questions investors ask of payments. Traction and scalability of businesses remain important factors for success. But with retail investors occupying a larger part of the table, and critics getting more material to build their arguments on – the private investors have reacted with tough, traditional business questions to founders.
How do you plan to make money? And once you do, when and how would you breakeven?
The murmurs of this shifting investing focus are more pronounced in South-East Asia given how some of the IPOs have progressed. But, what do these developments mean for the industry?
Primarily, this adds weight to a filter for investors when evaluating companies, which lowers the chances of a startup at the median to get funded.
The bag of private capital chasing payments is, however, hardly lighter. This directly implies that the same money would now be chasing fewer companies that would belong to the top-bucket, which should result in more aggressive funding rounds and larger cheque sizes for the few.
Moreover, the investor attitude has a domino effect on how companies approach their business strategy. This, I imagine, would make P&L discussions a much higher priority for many a business heads.
Lastly, with the P&L in focus, we can also expect a relative deceleration in aggressive customer acquisition, which should perhaps open up discussions on smarter and more innovative forms of creating similar acquisition viral loops.
These implications put across an interesting challenge for the industry, especially given the standard for the last decade.
The 2010s: Cashbacks, discounts, and mass-market focus
In India, the latter half of the last decade was highly influenced by digital payments. And with UPI, the likes of Paytm, PhonePe, and Google Pay tussled in a continuous battle for customer acquisition over this period.
Gimmicks of scratch cards and other little games aside, at the most fundamental level - all the B2C payments apps relied on merchant discounts and transaction-based cashbacks for customer acquisition, spending more than a billion dollars on advertising, marketing, and promotional expenses annually.
Over time, the products had all gained feature parity and appeared commoditized, which meant that as users multi-homed, i.e. users used multiple competing apps – not only the acquisition, but even the daily engagement of activated users relied on cashbacks and discounts. Some of this standardization of features was no doubt due to certification requirements, but the lack of strategic focus on differentiation had an equal role to play.
The commoditization put increased focus on distribution as the only strategy to win. As years went by, the competition switched from acquiring a million to hundreds of millions of users. Consequently, spending on discounts and cashbacks continued to grow in high double digits year-on-year for all those competing.
Since the investors agreed with the business focus on acquisition, the money continued to pour in despite little to suggest long-term sustainability of the strategy. The cashback and discount-heavy culture also put some of the traditional business principles in the shadow, with the companies going mass-market for acquisition, offering almost uniform rewards across user cohorts.
Now, with the questions being asked, the strategy seems to be slowly drifting away from the rewards and mass-market culture.
Slowly, payments apps had diversified to insurance, investment, and lending products to monetise their growing user bases. However, the promotional expenses comfortably towered any gains from cross-selling. This has, over the last couple of years, meant that while there is a focus on cross-selling higher-margin products, the expenses had to come down too.
For Paytm, this has translated to a more than 50% YoY reduction in marketing and promotional expenses. In FY21, the figure stood at INR 532 Cr as compared to INR 1397 Cr the year before.
This points to an industry-wide trend that draws resemblance with the last few years of the telecom industry in India. History tells us that fighting a price war makes sense if you can outlast others in the market. For Airtel, this was improbable against Reliance, and Airtel chose rightly to shift strategy and focus on a more premium segment, cutting out a big part of its existing user base.
For payments, it appears to have become a collective understanding to slowly stray away from the cashback wars. Given that almost each of the big four competitors (PhonePe, Paytm, Google Pay, and Amazon) have heavy pockets, the price war would last for many more years.
For now, the focus is beginning to shift from gross volume to unit economics in payments. If we are to break down the problem, the question then becomes one of maximising take rate for a unit of cost across payments. This is challenging given that few, without the network effects of card networks or processors, have done this well in B2C space. But I briefly suggest a few directions that might make business sense.
Dedicated loyalty programs can help drive cost-effectiveness by directing the promotional expenses from the masses to a segment of engaged users, who are willing to spend and transact more on the application.
Given that the big payments platforms today offer services ranging from payments to investments & lending – the benefits of the loyalty program must be closely tied with the services within the ecosystem to drive higher involvement. This would:
Churn out a set of low quality acquired users as more rewards are directed to those part of the loyalty program
Increase switching costs for frequent users since they will be tied to the loyalty benefits accrued on usage
Allow apps to charge a premium for any value-added services, which could include PFM insights, investment advisory, better lending rates, reward points boost, etc.
There are few better examples in the ecosystem of a well-functioning rewards program than the Amazon Pay ICICI card that has tied millions more closely to Amazon.
Improve Transaction Economics with Cards
Following up on the previous suggestion, cards offer an ideal medium for building a loyalty program. They equally allow a way to earn through relatively higher interchange share, and favorable interest / late fee charges if credit risk is managed well. Moreover, cards have been found to drive better recall with the personalized plastic. So if your card CVP is well-thought out, it’s a win-win.
Manage Risk using Transaction Data
I have written previously on the potential of transaction data to facilitate digital lending, which offers a high margin play to payments providers. Increasingly, this trend is more apparent in the risk policies of the payments credit products, which are shifting reliance from external bureaus to internal transaction monitoring.
Transactions offer a host of behavioral data that can be used to assess purchase preferences, channel usage, net-worth, risk averseness, all of which can help inform the repayment behavior of users. Presently, the risk models driven by transaction data are in infancy and will only be able to manage smaller ticket loans. As the models are iterated upon given the market behavior, there is potential for them to serve payments companies profitably by informing the credit behavior better than the static bank statements or oft-outdated credit bureau scores.
Final few thoughts
The write-up is meant as a short note to highlight the quiet industry movement away from cashbacks towards monetisation, which is no doubt to the benefit of many stakeholders.
The trend also raises the stakes for founders and puts across a challenge that hardly anyone in B2C has crossed successfully in payments. Going ahead, lending – as it appears – will need to be closely tied with the product roadmap, and cards & loyalty programs will have to be in fashion for some of the businesses to make sense.
If the reading of the trend is right, this will be a decade where some of the giants that are unable to crack for unit economics will have to fall. For those that are able to, a bigger market will be waiting to be captured.
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3️⃣ Fintech Top Three
1️⃣ BharatPe and impact on Fintech Startups
Ashneer Grover, cofounder and MD of BharatPe, filed his resignation from the board of the startup. A day later he was ousted from BharatPe and Unity Small Finance Bank, will no longer be a Cofounder, Employee or Board Member and all pending shares will be clawed back. Ashneer is accused of financial fraud.
Unfortunate public mudslinging: This whole public spat is unfortunate. The VC industry usually over-indexes for Mark Zuckerberg's character in The Social Network. With those kinds of characters, this is what you get. Neither side has handled this well and none will benefit, not even BharatPe.
Fortunate outcome of this situation: The only good thing to potentially come out of this situation - a focus on compliance and processes. Indian startups typically give very little attention to this aspect. Very few board-level people even ask compliance and structure related queries at board meetings. This function is usually outsourced to a CA or a Company Secretary who themselves are inundated with clients and often miss deadlines.
Short term implications for Fintech startups: Given every fintech startup doesn't work in isolation and needs a licensed Bank/NBFC at the back end, IMO, these licensed partners might "take a chill pill" for some time. They might go through each fintech with a fine tooth comb before onboarding them as partners to avoid "risk by association". RBI itself is probably watching this unfold - the regulator wants boring, stable financial services for the country.
2️ Investing in US Stocks via GIFT City is now live
The National Stock Exchange's (NSE) International Financial Services Centre (IFSC) launched trading of 8 US stocks out of GIFT City. These stocks include Berkshire Hathaway, Mastercard, JP Morgan Chase, Morgan Stanley, Nike, Paypal, Pepsico, Pfizer, Intel among others. NSE IFSC has approval to trade in up to 50 US-based stocks.
FYI: GIFT City is India's experimental finance hub with its own offshore jurisdiction within India's borders and will have special rules and regulations to attract foreign investment.
Speed of Execution: As covered in the Edition #33, this product was announced in August, 2021 and within seven short months, it's now live - fairly impressive given the experimental nature of the project and the government bodies involved. This has also been years in the making in terms of concept, regulation and integrations.
Timing couldn't be better: In Feb, 2022, SEBI (securities regulator) and RBI's (central bank) notified Mutual Fund houses that the limits for investment in overseas assets i.e. $7bn, were close to exhaustion ($6.32bn as of Feb, 2022). Proposals are being made to increase this limit. Aside from this, apps like INDMoney, Vested etc. are trying to make it easy to "diversify geographically" but bank transfers remain a challenge. *enter NSE IFSC*.
No taxation benefits: It is important to note that taxes to invest in US stocks are brutal. I've covered this in the same 33rd Edition. Was hoping for some benefit from this "offshore jurisdiction" to aide retail investor participation.
More experiments like this: This NSE IFSC US Stock trading is the first, low hanging product launch. There are many more in the pipeline. It's also great that there is government interest aligned with making GIFT city a success. Otherwise, from the few conversations I've had with private sector folks, they're still wary of launching anything yet because everything is "so experimental and fluid".
3️⃣ Southeast Asia Round up
AirAsia launched AirAsia Money, a financial marketplace in Indonesia and partnered with several startups for various products. BigPay, Capital-A backed Malaysian payment startup, launched a personal loan product.
Funding Societies launched Elevate, a virtual card for SMB digital payments.
DBS Bank partnered with Mastercard and PineLabs to roll out BNPL product for users in Singapore. Jiye Technologies, a Pakistani argi-tech startup, launched BNPL for agri input.
CIMB Bank in Malaysia reported a credit loss of $67mm due to a processing error that led to some customers receiving duplicate credits to their accounts.
Pakistan's central bank released QR Code standards to accelerate digital payments.
Volopay, a Singaporean corporate cards and payable management startup, raised $29mm. DeZy, a Singaporean cash-to-stablecoin startup, raised $2.2mm.
AirAsia's fintech ambitions: By now I'm assuming you've heard people say that airline companies are actually rewards and loyalty companies. Well, AirAsia wants to take it up a notch by wanting to become a fintech company. They've already launched BigPay, a neobanking platform with 2mm customers, in Malaysia because of the brand that is AirAsia. Now they seem to be expanding geographically with the launch of AirAsia Money in Indonesia. I've never seen an airline get into fintech but will be following AirAsia's fintech ambitions outside home turf.
Pakistan's QR Code Standards: After launching Raast, Pakistan's instant bank transfer system, in Feb, 2022, State Bank of Pakistan (central bank) this week released QR code standards. They've gone the India route of mandating standards for interoperable, standard QR codes. These measures will probably be looked at as an inflection point for Pakistan's digital economy.
Pay later is growing in South and Southeast Asia and is getting more contextual: While the overall market sentiment towards Buy Now Pay Later (BNPL) seems to be declining, startups in this part of the world can't seem to get enough of it. Funding Societies' Elevate card for Singaporean SMB's, DBS + Pine labs for Singaporean retail users, Jiye for Pakistani farmers, and BigPay Later for Malaysian retail users. BNPL is clearly not restricted to typical fashion, electronics and commerce use cases.
The US, the EU, the UK, and Canada agree to cut off a “certain number of Russian banks” from the SWIFT international payments system. Crypto became viable for transactions in Ukraine, where Tether is popular, after its central bank suspended digital cash transfers and limited cash withdrawals . Zip, an Australian BNPL startup, acquired Sezzle, the US BNPL startup for $357mm. Klarna, the European BNPL startup, reported annual losses of $748mm. Zeller, an Australian neobank, raised A$100mm.
Looking for the news digest? Read all the week’s fintech news and updates in India and SEA over at This Week in Fintech - India and SEA Edition.
🏷️ Other Notable Nuggets
Value of Time by Miten
🎵 Song on loop
Fintech updates can get boring, so here's an earworm: This week a stumbled upon a beautiful Portuguese song - Grecia by Elsa y Elmar (Youtube / Spotify). It’s slow and mellow and the vocals are stunning. Great weekend listening.
👋🏾 That's all Folks
If you’ve made it this far - thanks! As always, you can always reach me at firstname.lastname@example.org. I’d genuinely appreciate any and all feedback. If you liked what you read, please consider sharing or subscribing.
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See you in the next edition.