Daybreak - Why every payment aggregator should be scared of Phonepe

Episode Date: May 21, 2024

No other payment aggregator has been able to pull off what Phonepe has in less than a year. Its nearly 50 per cent market share is obviously a huge draw for new merchants. And in the last couple years, its been able to onboard some pretty big names like Bharti Airtel and IRCTC. But the bigger the client, the more ruthless their demands. At the end of the day, they are only loyal to the aggregator that promises them the lowest prices and highest success rates. So how does PhonePe make sure that it stays on top? And where does that leave everyone else? Tune in.Correction: The host mistakenly referred to NPCI as NCPI towards the end of this episode. We apologise for the error.Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.P.S. Daybreak episodes drop daily now :)

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too? It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording.

Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. Every payment aggregator should be scared of phone pay. That's what a payments executive at a rival fintech had to say when the Ken asked about phone pay's relatively new payment aggregation business.

And this isn't just a one-off statement. It's a sentiment that's shared by most people in the business. And when you think about it, fairly so. Phone pay has managed to pull off what no other UPI network in the country has been able to do. Today, one out of every three Indians is on phone pay. That essentially means that billions of digital transactions take place exclusively through the phone pay app. No other UPI network, other than perhaps Google Pay, even comes close. So once it managed to dominate the UPI ecosystem,

the next natural step was to enter the payment aggregation space. And like with UPI, phone pay very quickly managed to surpass its rivals here too. Basically, the company has managed to pull off what PTM has been trying to do for the longest time now. It successfully leveraged its dominance in the UPS. ecosystem to make massive inroads as an aggregator. But first, let me quickly tell you what a payment aggregator actually does. They essentially facilitate all online transactions. So say you place an order for a burger on Swiggy,

when you proceed to make your payment, it is an aggregator that is responsible for listing out all your payment options. So whether it's UPI, credit card, debit card or net banking. Payment aggregators have been around for a while but no one has been able to pull off what phone pay has in such little time. It's nearly 50% market share is obviously a huge draw for new merchants

and in the last couple years it's been able to onboard some pretty big names like Bharti Aetel and IRCTC but the bigger the client the more ruthless their demands. At the end of the day, They are only loyal to the aggregator that promises them the lowest prices and the highest success rates. So how does phone pay make sure that it stays on top?

And where does that leave everyone else? Welcome to Daybreak, a business podcast from the Ken. I'm your new host, Rahil Philippos, and I'll be joining Snigda every day of the week to bring you one business story that is worth understanding and worth your time. Today is Tuesday, the 21st of May. By the way, have you heard our special episode that dropped on Friday last week? It's not like the daybreak you're used to. You can think of it like the slightly more fun weekend episode of daybreak.

If you haven't heard it yet, Snigda and I talk about the skincare industry and why people just aren't scared of putting chemicals on their faces anymore. Please check it out and let us know what you think. And now, back to the episode. In many ways, phone pay has the same advantage that HDFC does when it comes to credit and debit cards. Okay, let me explain. HDFC is the country's largest private lender. It also issues the largest base of credit and debit cards.

And that's great from a merchant's perspective, right? Because customers are more likely to have an HDFC credit or debit card since they're more widely accepted. And based on this, the bank is able to bring more. more and more merchants on board. Now, this is when things get interesting. When a transaction happens between two parties using the same financial institution, which in this case would be HDFC,

it's called an on-us transaction. This is basically a win-win situation for both the merchant and the customer because the success rates of this sort of transaction is higher. That's simply because the bank has more control. Now, phone pay is particularly, capable of pulling off just that with its UPI business. Take for instance the case of Hoichoy TV.

When the Ken's deputy editor, Arundhati Ramnathan, spoke to Alok Majumdar, the vice president of technology at the company, he said choosing phone pay as its aggregator was a no-brainer. That was because most of Hoi-choi's UPI payments were happening via phone pay anyway. And there's a huge opportunity for phone pay to exploit here. like HDFC, it has the capability of pulling off on us transactions with the help of its UPI app. PhoneP is one of the few players that have actively been improving UPI technology. It also has tighter integrations with its banking partners

as well as the NPCI, which is the government body that runs UPI. All of this combined makes for a much smoother experience both for customers and merchants. So like with HDFC, it's a win-win situation. other aggregators like JustPay and Razor Pay have also invested heavily in this sort of integration, but no one has had the same success. There is, however, a slight issue here. Because phone pay, like HDFC, is able to pull off on us transactions.

That should also ideally mean higher success rates compared to its rivals, right? Because technically, phone pay like HDFC, has more control in that situation. But people in the business, including Hoi Choy TV's Alok Majumdar, said phone pay success rates are just like other aggregators. The Ken actually asked phone pay just this. Why aren't its success rates higher? And this is what the company had to say. Success rates are dependent on factors including the category of merchants and value of transactions among others. Now, luckily for phone pay, merchants are pretty forgiving when it comes to payment aggregates.

A payment executive said most merchants recognize that it takes time to settle with these things. It also helps that phone pay is able to explain exactly why a transaction may have failed to a merchant because it knows the consumer side of the story so well. It would be able to specify the exact cause of a failed transaction, you know, whether it's a wrong UPI pin or if the merchant pressed the back button or even if the bank account was not linked to the app. Other aggregators just can't do that, not even P-TM, despite its UPI business. That's because P-TM, unlike phone pay, is more focused on winning over merchants than improving its consumer app.

So clearly there's little anyone can do to upstage phone pay. So where does that leave everyone else? 2023 was a horrible year for payment aggregators. The RBI had just banned a majority of them from onboarding new merchants. In fact, the Ken had previously reported that more than 10,000 merchants were waiting for the RBI to lift the ban, so they could partner with payment aggregators like Razor Pay and Cash Free. But their loss was phone pay's gain. The RBI's ban meant that for a year until the ban was lifted,

it was pretty much the only viable payment aggregator, other than plural, the online payment product of FinTech Pine Labs. Cut to one year later. RBI lifted the ban and started handing up. payment aggregator licenses like candy. But by then, it was almost like there was no point even competing with phone pay. It's been less than a year since the company started its payment aggregator business, and it's already processing monthly transactions worth close to 5,000 crore rupees.

To put that in context, it took companies like Razor Pay years to get to that point. So obviously, other aggregators see the company as a huge threat. Now, this is where the NCPI is meant to come in. You see, the body has been attempting to cap phone pay and Google Pay's market share for some time now. You can think of the NCPI almost like a class teacher in a school. Google Pay and Phone Pay are those first ventures, you know, the toppers who get it right every single time. But a good class teacher will have to give the other kids in class opportunities to match up. The way NCPI does this is through innovation.

by introducing new tools to make UPI technology better. But in a way where other aggregators have an opportunity to use these tools and improve their prospects in this highly competitive ecosystem. One such product was introduced just last year. It's called the UPI plugin. It's essentially meant to make payments more convenient for customers. For instance, imagine if you could make a payment on the Swiggy app without having to leave the app to complete the transactions.

Aggregators like Razor Pay and Just Pay can work with banks to create the solution for merchants, and they can expect to bump up transaction success rates by as much as 15%. But PhonePay hasn't been a fan of this product. And anyway, it has enough of its own innovations underway. It's constantly improving its UPI technology. And to make matters worse for phone pay's drivers, the whole payment aggregation space is in a bit of a flux. There's a dark cloud looming over the whole industry

and that dark cloud is RBI's draft guidelines on payment aggregation. These guidelines are likely to make in-person know-your-customer process compulsory even for smaller merchants. Phone pay is at an advantage here as well. It has more than 29 million merchants and can easily deploy its massive field force to comply with the norms. For most aggregators, other than perhaps PTAM, it'll cost a lot of money to pull that off. Now, this isn't the first time the payment scene has witnessed a shake-up like this one. Something similar happened in the 2010s when pay you enter the picture.

And then in 2015, when Razor Pay found its footing. Every single time, we saw a massive. innovations take place in the aggregation space. So, sure, everyone is afraid of phone pay, but this could be just to shake up the industry needs. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website.

Today's episode was hosted by Rahil Filippo's, produced by me, Snigda Sharma, and edited by Rajiv Sien.