For a rather late entrant into the digital payments segment, Flipkart-owned PhonePe has claimed high growth figures in a short time. Recently, it claimed to have overtaken Bharat Interface for Mobile (BHIM) app in terms of total transactions with a 45% share in August. It has also launched pilot solutions for offline commerce and has onboarded at least 25,000 offline merchants. It promises to make payments a more seamless experience with the launch of UPI 2.0. In an interaction with VCCircle, the company’s co-founder and chief technological officer, Rahul Chari, discusses at length the company’s expansion plans and the broad roadmap ahead for PhonePe.
You have been claiming great growth numbers in recent times. What is the roadmap for PhonePe?
Our growth trajectory has been phenomenal over the last few months. We expect to continue this ‘hockey stick’ growth over the coming months. We are at 10 million transactions a month now and looking to more than double it. We have been receiving a lot of positive product feedback and a lot of things in the ecosystem have been coming together in the right way. Obviously, I am talking about the Unified Payments Interface (UPI). We will be ramping it up with our UPI 2.0, which will be a significant growth driver in the coming months.
A lot of partnerships are also in the making as we have demonstrated our technology innovation. We don’t believe that payments and digital transactions is a one-player-take-all game.
What will be your focus areas?
A lot of enhancements based on data, new partnerships, new products and experiences for the consumers, coupled with ecosystem changes, were and will remain our focus areas. It has always been about where we can bring technology to something that is happening in the market and make it grow big and fast. The UPI was that one opportunity PhonePe seized.
About a year and a half ago, when we were gung-ho about the UPI, a lot of players including banks themselves weren’t sure how this will pan out.
Could you elaborate a bit about UPI 2.0?
The exciting thing about UPI 2.0 is the ability to create e-mandates or standing instructions. Traditional methods like NACH (National Automated Clearing House) will become significantly more seamless. So, UPI 2.0, as a protocol, is bringing about that.
We expect to leverage this protocol for the consumer and believe e-reminders will redefine the concept of recurring payments. Even from a UPI perspective, we believe this will drive the next set of changes in the digital payments ecosystem. So, UPI 2.0 would bring many more such product offerings on top of the e-mandate feature.
You were a late entrant into this space. Do you feel the pinch?
There’s no two ways about our rather late entry. The digital payments space was largely categorised into payment gateways and e-wallets. With the UPI, we saw an opportunity to make a difference through a well-defined consumer product. However, we are not just about the UPI. While the UPI brought about a differentiation, we leveraged that to build a significantly superior experience.
How have you faced the challenges vis-a-vis consumer adoption and building a user base?
This is why we joined hands with Flipkart, which helped us take our product to a much larger user base in a short time. Besides, Flipkart helped us to revise our product market fit.
On the flip side, there was not a very strong learning curve in terms of onboarding consumers, owing to awareness and use of such products. We overemphasised on the UPI, took that to a learning curve and made that our differentiator element.
Recently, the prepaid payments instrument (PPI) industry sought to do away with the need to collaborate with a bank to offer UPI-based services. Do you feel tying up with a bank restricts your scope of offerings?
The PPI industry is probably looking for a stronger representation and take PPIs/wallets to broader use cases than currently allowed by regulations. I guess the UPI falls under that. It really depends on the partner you have. Having said that, in YES Bank, we have had an extremely good partner. In general, Indian banks are progressive and are partnering with startups in testing new waters.
Are there service offerings that can be improved by not working with banks?
While we have had no roadblocks on that front, in a broader sense, unbundling of various financial services will happen as a natural evolution and has already been happening across the globe. There will be some that will get completely unbundled.
For example, non-banking finance companies have been in the lending business for quite a while. But there is nothing to say that they have been doing it better than banks. Likewise, the domains of credit scoring and lending based on low credit scores, while seeing an influx of a number of players, are likely to innovate and do a better job than banks in catering to the ‘new to credit’ customers.
In acquiring offline merchants, did you ever have to bank on your parent’s brand value and recall, owing to lower awareness about Phonepe?
We had to, in some instances. As a brand, our parent evokes a lot of trust with the consumers. While we have not explicitly used it, we have not shied away from doing so where it made sense.
Has your tie-up with players like Pine Labs and Comdel Labs for offline customer acquisition worked for you? Likewise, where is your focus vis-a-vis online and offline commerce?
It’s early days, but it has worked out well so far. This tie-up is essentially a tech integration and we go with these players to offline merchants and sign agreements. We have reached a stage where are confident about scaling this out with things going in our favour. In partnerships of this nature, if you get it right once, then it’s an infinite scale. We have not actively started any strong marketing campaigns in the offline space. We will make more efforts in the coming months.
In offline, there is an opportunity for us to create more footfalls. In the online space, that may not be a problem. Having said that, our strengths have so far been in the online space. We are learning rapidly in the offline space. The focus on both is extremely high.
Your marketing efforts remain very muted at this point. Why?
It is a conscious choice. Currently, we do it every time there is something new for the consumer or if we have onboarded a partner. This helps in a compressed learning cycle in terms of product feedback from consumers, which helps tune our product market fit. Our brand campaigns will be more consistent and continue to be a milestone based on fulfilling basic needs and value add for consumers. It is also a little about the Flipkart model of doing things.
What are the challenges in the unorganised retail sector and where do you hope to make a difference?
The unorganised sector has largely been a QR code-based payment opportunity. The credit card/ debit card cost structure, both from the kind of device needed to maintain it as well as the MDR (merchant discount rate) structure itself, is not cost effective for the small players. There is an opportunity to improve the overall reconciliation experience between the consumer and the merchant, which is largely about scanning and paying. We don’t have anything specific out there yet.
Are you trying to position yourself more as a B2B player than for consumer?
Our focus on both the segments is equally strong, with our verticals well defined. Our tech and business development teams for our merchant solutions and services are separate. Likewise, our consumer offering team is also separate. We also have a core team (for product and engineering) that builds out the common platforms for both these verticals.
I don’t think it helps to focus only on one. Focusing only on merchant solutions while being a B2C player doesn’t bring anything to the table, in the absence of enough users. On the flip side, a focus on only B2C doesn’t bring enough use cases for merchants.
Do you see B2B as the chief driver of monetisation?
As a payments container, our universe is not one single instrument like a wallet. While that will become the focus in this segment, it will not be at the cost of our B2C story. We sense opportunities in domains like corporates, supply chain, B2B merchant transactions, and a digital payments player is yet to make any significant dent. We are at an ideation stage with respect to these opportunities.
What areas are being explored for ideation in the B2B segment?
Some areas are already being addressed by different players; reimbursements, digital food coupons etc. The ones, I believe, can be addressed much better includes money flow in a supply chain and FMCG distribution. We hope to give it a more concrete form by next year. With the growth rate of our core business, it would be difficult to comment on the launch of these new ideas, as they require both a mind share and execution capabilities.
What are other potential areas to expand PhonePe’s offerings? There were recent reports of cross-selling and upselling financial products.
For selling financial products, we are looking towards a meaningful launch with some strong partners on board. Work is underway in this regard and a launch could happen within this year. Our journey in terms of being able to use your money, manage it and grow is an in-thing. While it’s not announced or put out yet, we are actively working on it.
I also see huge opportunities to build great products (not limited to just the app), but also financial products with good partnerships, exclusive products that will be available only our platform. This is a very large area and there is scope for a lot of innovation.
Does PhonePe has plans to get an NBFC licence and begin lending?
It’s very much within the realm of our definition of financial services. I cannot comment specifically on whether we have already acquired an NBFC licence. But I don’t think it’s going to stop us from what we want to do. There are a lot of partners out there who would work with us purely as a technology and product company, where they bring the regulatory requirements as well as the financial backing and take products to the market.
We will not restrict ourselves in what we can offer. We are very big on partnerships. Irrespective of whether we have an NBFC licence or not, if we believe there is a great product to be built through a partnership, we will definitely collaborate.
Do you believe the UPI is here to stay or is it just a fad?
The building blocks behind the UPI, which include things like Jan Dhan Yojana account, the mobile phone penetration and Aadhaar identification and authentication, have ensured that the UPI was successful right from the word go. Hence, it is not right to look at the UPI in isolation. A lot of work has happened in the past across governments. Also, IMPS, the underlying switch behind instant money transfer, has shown significant amount of volumes. The UPI is merely giving a consumer-friendly face to that for both individuals and businesses.
Countries across the globe are, in fact, looking to emulate the UPI. Singapore is in the process while Europe has been at it for a while but yet to see fruition.
Flipkart recently announced its intent to develop a WeChat-like platform. What will be PhonePe’s role in that?
I don’t have too much of a view into this platform, as we operate as a separate company. However, I am pretty sure that, if and when that platform rolls out, PhonePe will play an important role in terms of payments or financial services and vice versa. I think there will be a lot of value a platform like that adds to PhonePe, in terms of reach and use cases.
Do your current growth figures entail some significant hiring? Do you have an offline presence beyond Bangalore?
We are actively hiring across all fronts; product, business and marketing for people who are able to take on part of the charter and claim complete ownership in terms of ideation, decision-making, budgeting and go-to-market, besides meeting their own goals.
Our employee headcount is 160 and a little more than half of it is engineering. We will ensure that 50-60% of our workforce will comprise the tech team as we continue to grow. We will be 250-280 in a short period of time. Besides Bangalore, we also have a tech team that functions out of Pune.
Have you developed any tech expertise that you can roll out as a potential software-as-a-service product?
There are a lot of potential opportunities. I believe that our automated reconciliation methods, the rich transactional analysis (which will be launched into the product soon) are standalone software stacks by itself.
But, there is a huge scope for intellectual property to get built from our products. We have started filing patents in multiple areas. However, we have still not thought on those lines.
How much of an operational autonomy and freedom does Flipkart gives you?
We operate in a completely independent environment, where we can use our budget the way we want to use it and execute on our plans. We do have reviews; the board which reviews Flipkart and Myntra also reviews us, but within the frame of PhonePe. Flipkart plays two roles—one as an investor/owner and the other as a merchant—and they don’t let any of these two to dilute our strategy.
What is your cash burn? When do you hope to break even?
While I can’t share the numbers, we do spend on marketing, though a significant part of our growth has been on the back of data-driven approach to product and product hacks.
In terms of breakeven, our focus would be to achieve that in individual categories. While we keep our marketing costs separate, our foray into different categories as a payments provider will become operationally cash positive by virtue of the business model. It would be very difficult to give a timeline on the breakeven metric.
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