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Payment firms eye merchants for next wave of growth

Finding a business model for internet companies is similar to finding god, says Paytm founder

May 4, 2019 by Moulishree Srivastava
Payment firms eye merchants for next wave of growth

Last week during a startup event in Delhi, Paytm founder Vijay Shekhar Sharma revealed the question he is often asked: when will the Softbank-Alibaba backed unicorn find a business model? It seemed that he would finally answer the question. He did answer it, but in the most elusive way he could.

“Finding a business model for internet companies is similar to finding god.” Sharma went ahead and declared, “As soon as you have a fixed business model, you are destined for death.”

It was a fancy attempt to justify the payment firm's shifty quest to lock down on a sustainable business model. And Paytm is not alone in this quest. After pouring in millions of dollars in peer-to-peer (P2P) transactions, Paytm, PhonePe, Google and Amazon are taking the fight to peer-to-merchant (P2M) payments.

Although a huge opportunity, making money off merchants in India may prove to be way more than payments firms bargained for.

ET Money founder, Mukesh Kalra believes GooglePay and PhonePe are neck-to-neck with Paytm, when it comes to P2P.

“P2P is all cashback driven, so you cannot do much in terms of monetisation. Thus, everyone is resetting very fast to P2M. Since Paytm has a huge merchant base on its platform, everyone is moving towards that,” Kalra said.

According to Kalra, users do more merchant transactions as compared to sending money to peers.

Anil Joshi, managing partner at Unicorn India Ventures, said it is a natural evolution for payment companies to shift focus to merchants.

“Merchant base is a huge market and digital payment density for them is quite high. They provide you with some certainty in terms of payments and higher realisation because they have businesses on the retail side,” he said.

The payments firms believe if the merchants start to pay them, at some point, the transaction charges wouldn’t bleed them by thousand cuts.

“That will be the first level of monetisation,” said Kalra. “The second level will be when there are multiple products on top of payments, which companies to cross-sell to merchants, since they are much more locked into the transaction ecosystem.”

Not only companies can serve merchants better in terms of cross-selling financial products, but it can also render services for managing the businesses, said Joshi.

But all this talk falls in the realm of prediction. For now, everyone is caught up in the mad rush of on-boarding merchants.

Paytm is targeting to escalate 10 million retailers on its platform to 25 million by the end of this year, according to a Business Insider report. With three million merchants on board, PhonePe launched PhonePe for Business platform last November to manage retailers’ transactions. In future, it will allow businesses to collaborate with its partner platforms, apart from providing them value-added services related to capital needs and accounting solutions.

In March, Google Pay partnered with Pine Labs to offer payment service across latter’s 330,000 point-of-sale terminals in over 3,000 towns in India. The internet giant is now reportedly working with small offline retailers to let users pay through Google Pay.

Can P2M make money?

Currently, payment services charge nothing or a nominal amount to merchants for using their platforms.

National Payments Corporation of India (NPCI) charges payments companies 10 paise on each Unified Payment Interface (UPI) transaction under Rs 1,000, and 50 paise for those above Rs 1,000.

Joshi said the firms have to bear the cost of setting up a business.

“Over a period of time, they will monetise by levying small charges or cross-selling to merchants," he said.

But that is going to be “super tough”, according to ETMoney's Kalra.

“If one person decides to not charge, then everybody has to follow. That is what has happened in P2P as well. Then it depends on how much VC money you can pour into this,” he said. “It is the classic case when competition decides your pricing and takes everyone to the no-profit zone.”

Kunal Shah, founder of Freecharge and Cred, says WhatsApp will ultimately be the leader in P2P as well as P2M payments.

“Just like WeChat took over the whole P2P market in China, when WhatsApp launches, it will be over for others. In P2M space, if the standardisation of QR code happens with BharatQR code, WhatsApp will win again,” he told The Passage in a recent interview.

According to Shah, monetisation on UPI based transactions is not possible.

The payment companies, nonetheless, are pinning their hopes on the rapid increase in digital payments. According to a 2018 Credit Suisse report, Indian digital payments will touch USD 1 trillion by 2023 from the current USD 200 billion. And a major share of this pie is expected to be P2M payments.

“Once people start to understand the benefits of digitisation and get used to it, they will start paying for it," Joshi said. “But user habit and the critical mass (of users) need to reach the optimum stage for that to happen and that inflection point will at least take two years."

However, Shah believes payment is going to be just a utility, and not a cash cow on its own.

“All the players are going to systematically move into credit. They will do lending and go for other financial services like insurance and wealth management. The cross and up-sell of financial services is the only way to make money in payments.”


If Kalra is to be believed, getting into credit is going to be an uphill task as well. He said a consumer who is doing a digital transaction worth Rs 10 will not buy insurance of Rs 1 crore from the same place.

“The DNA of payments players is transaction oriented. Financial services is relationship-driven business, based on trust and advice. It is not a one-off transaction that you have to get done with,” said Kalra.

In a transaction oriented model, there is little to no loyalty, which is integral if payments companies want to cross-sell financial products.

“If there was loyalty towards one payment services platform, others would not have mushroomed so fast," he said.

Currently, the only so-called loyalty that companies have is based on who gives how much cash back.

“Insurance and mutual funds are more tightly regulated than payments, and there are no cash backs allowed in insurance and lending," he added.

According to Paytm’s Sharma, cash back is an integral part of the company’s business model. Cash backs have helped payment companies capture a large number of users at a lightning fast speed. Financial services is a different animal altogether.

Moulishree Srivastava

Moulishree Srivastava is a Bangalore-based tech journalist. She focuses on emerging Indian startups and unicorns. She can be reached at

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