India Payments Research

We have been writing for a while now about the potential for credit cards to capture market share in India, irrespective of the trajectory of buy, now pay later (BNPL) and e-wallets. In a nutshell, there is nothing quite like a credit card when it comes to cashless payments: the potential for rewards, the potentially significant credit limit, and in some cases, the prestige of holding a specific card. And then there is the bonus that paying off the balance promptly helps one build a solid credit profile over time. Even though India’s credit card penetration is estimated at just 5.5%, in absolute terms, that’s still about 77 million people because the subcontinent’s population is 1.4 billion. So even at that low level of penetration, India has a larger credit card market than all of France or the UK.

After years of losing money, Paytm has turned things around in the past two years. A disappointing IPO on the eve of a long-overdue slowdown in inflated tech stocks and valuations was a wake-up call for the company to focus on profitability instead of growth in myriad verticals. In the June quarter, India’s most prominent fintech showed some promising signs, especially in terms of loan growth, but it also faces rising competition and lacks a banking license that would allow it to lend directly to customers.

This commentary was written in collaboration with Banking Circle

India’s United Payments Interface (UPI) real-time payments system has transformed how Indians make payments, allowing them to easily transfer money instantly from one bank account to another: from a customer to a business, or between individuals. Since its 2016 launch, UPI has amassed 300 million users and 500 million merchants in a population of 1.4 billion and been a decisive factor in India’s embrace of cashless payments given its ease of use and interoperability.

September 26 2023

Why PhonePe is thriving

There is usually good reason to be skeptical these days about a loss-making fintech with a sky-high valuation, but India’s PhonePe – valued at US$12 billion – could be an exception to the rule. The company has fought its way to the top of the subcontinent’s massive UPI payments rail, edging out Google Pay and Paytm, is gradually building out a comprehensive digital financial services ecosystem and continues to raise eyewatering sums from investors at a time when the easy money no longer flows.

Paytm seems to have found the secret sauce at last. After years of rolling out seemingly unrelated digital financial services, the Indian fintech giant is instead focusing on lending and seeing its revenue rise accordingly. In the first quarter of the 2024 fiscal year, Paytm’s revenue rose 39% year-on-year to 23.42 billion Indian rupees (US$286 million). The company reported an operating profit for a third straight quarter, despite higher employee expenses and no government incentives, while its net loss narrowed to 3.57 billion rupees.

In recent years, the biggest credit story in India has been buy now, pay later, sometimes abbreviated as BNPL. Tremendous demand for credit has driven the BNPL boom in the subcontinent, but tighter regulation and slower growth are both now inevitable. As BNPL slows in India, there is an opportunity for the overlooked – but better regulated and steadily growing – credit card segment to build market share. To be sure, credit cards remain more of a premium product in India now than BNPL and the market is significantly smaller than for installment payments. Still, it is not small given India’s overall market size.

Patience is a virtue, and good things come to those who wait? Or so it seems in the case of Paytm, India’s most prominent fintech, once best known for looking like yet another questionable bet by Masayoshi Son, but now reminding us he knows how to pick winners after all. Paytm stumbled out of the gates of its November 2021 IPO, but since then has gradually improved its core metrics and has had a pretty good 2023. The company’s stock is up 67% this year; it has a booming lending business and may be profitable sooner than expected.

Raising money is not nearly as easy it used to be for fintechs, but that has not stopped PhonePe. India’s Walmart-owned payments fintech giant just raised another US$100 million from private equity firm General Atlantic as it races towards a US$1 billion fundraising goal.  PhonePe is arguably the most prominent Indian fintech unicorn that has yet go public, with a valuation of US$12 billion, massive transaction volume and a commanding presence on the ubiquitous United Payments Interface (UPI) payments rail.

It is no exaggeration to say that India’s United Payments Interface (UPI) real-time payments system has been a game changer for the subcontinent. In a nutshell, UPI has transformed how Indians make payments, allowing them for the first time to easily transfer money instantly from one bank account to another: from a customer to a business, or between individuals.

In the roughly seven years since it was launched, UPI has accrued 260 million users in a population of 1.4 billion and been a decisive factor in India’s embrace of cashless payments thanks to its ease of use and interoperability. Mastercard’s 2022 New Payments Index found that Indians are the most willing of any consumers in the Asia-Pacific region to use emerging cashless payment methods with 93% likely to have made such a payment in the past year.

While many fintech success stories have come entirely from the private sector, state-backed UPI shows that public-private digital financial inclusion efforts can bear fruit when they are implemented well. Having achieved dominance at home, UPI now has set its sights on global expansion.

The question is: Can what works for digital payments in India work globally?

India’s most valuable fintech startup has been on a roll, all things considered. Despite an increasingly challenging environment for funding, e-payments firm PhonePe is continuing to raise the enormous amounts of money, most recently US$200 million from its key backer Walmart and before that US$100 million Ribbit Capital, TVS Capital Funds (TCF) and Tiger Global. Valued at US$12 billion, PhonePe has projected a revenue of US$325 million for the calendar year 2022 and US$504 million for 2023, according to a valuation report prepared by KPMG and filed by PhonePe.

Page 2 of 7