SynopsisThough BillDesk is not a new-age payment provider with lending and other businesses, its focus on fundamentals and deeply entrenched position among utility-payment companies makes the company attractive. While pricing power is on the wane for companies, the joint entity is hoping to cash in on allied digital payment services and scale to fight competition.
The acquisition of payment gateway firm BillDesk late last month by smaller rival PayU for USD4.7 billion (INR35,000 crore) in an all-cash deal could not have been timed better. The valuation, at 15x its annual revenues, may look expensive for a company that reported INR2,300 crore in FY21 revenue. But it would have cost PayU much more after a couple of years as India’s startup valuations are skyrocketing.
BillDesk was looking at a public listing through an Initial Public Offering (IPO) and it would have given the company a much higher valuation on the back of strong investor sentiment in the broader market. Contrary to the claim made by businesses that stringent regulations could hamper investor sentiment, the acquisition of BillDesk by the technology investment arm of Naspers in a deal that is 10x bigger than the second largest fintech deal in the country (Snapdeal acquired Freecharge in 2015 in an all-stock deal valuing the company at (INR2,400 crore) has a lot to do with the changing regulatory landscape.
BillDesk, the market leader in India with close to 50% share, has got this valuation even as it is facing increasing competition and at a time when large merchants are increasingly integrating multiple payment gateways on their websites. For instance, a merchant can easily promote one payment gateway over another by simply moving it to the top of the payments page. It can even suggest that one payment gateway has a better success rate on its website than another.
Still, according to analysts, the deal could not have come at a more opportune moment for Prosus N.V the Netherlands-listed entity of tech investment giant Naspers.
What BillDesk brings to the table
Prosus owns PayU, which had acquired CitrusPay, Paysense, and Wibmo over the last few years.
“PayU was taken aback by the growth of its competitors such as Cashfree, Paytm, and Tiger Global-backed Razorpay over the last three years. The company is losing incremental market share, albeit in a much bigger market expanded by these new players. The new entrants undercut with pricing, aggressively acquired customers, and were doing transactions even with a gross margin loss at a time when PayU was looking at reducing its losses,” says a former PayU executive who did not wish to be identified.
PayU was founded in 2010 and had a head start by acquiring Internet companies and small-and-medium businesses (SMB). In fact, PayU even lost the tailwind that propelled it ahead as a large player by acquiring competitor CitrusPay in 2016. In FY17, PayU was 15x larger than Razorpay in terms of revenue. By FY20 Razorpay had clocked more than double the growth rate of PayU and half its revenue. Though the FY21 revenues are not available, analysts believe that the gap is likely to have narrowed further. Even in terms of transaction value for FY21, at USD55 billion Razorpay is at par with PayU.
Meanwhile, BillDesk complements PayU’s strengths in the digital and SMB segment, whereas the former has around 5,000 large enterprise customers and hence there are no chances of cannibalisation.
Over the last one year, the Reserve Bank of India (RBI) has been tightening the regulations around the payment industry. Starting September 30 this year, any non-bank entity will need a payment aggregator (PA) licence for running a payment gateway and a minimum net worth of INR15 crore, besides several other requirements. While only firms with a PA licence can onboard merchants, they also need to store payment data within India. This indicates that only serious players willing to invest for the long term will enter the business.
A ‘decent buy’
Global valuation advisory firm Duff & Phelps has done some number crunching and the data shows that Razorpay is valued at 43x its FY20 revenue. In comparison, offline point-of-sale software firm Pine Labs is valued at 30x and digital payment gateway firm Juspay at 21x their FY20 revenues, respectively.
Prosus paid 15x the FY21 revenue of BillDesk, a profitable company with scale. BillDesk has seen a CAGR of 26% in sales over the last three years. The company had more than INR928 crore of accumulated profits in the bank as of FY20 and is expected to have added another INR250 crore in FY21.
The joint entity gets payment data and can develop revenue opportunities beyond payment gateway as well as grow the lending business, which is one of the key verticals for PayU in India. In fact, it is seen as the most lucrative business by all its competitors from Razorpay to Paytm to Pine Labs.
“Prosus gets an asset that will appreciate in exchange for idle cash. It gets a majority market share in a fast-growing market like India. Prosus shares rose by up to 6% following the deal announcement. For its investors, USD750 million in annual revenues from India is like a winning bet from any angle,” says the executive quoted above.
The joint entity will be processing around USD150 billion in payment value. Only 28% of the country’s payments are digital and this segment is expected to grow rapidly to touch USD2.6 trillion by 2026.
Founded in 2000 by MN Srinivasu, Ajay Kaushal, and Karthik Ganapathy, BillDesk has raised a total of USD250 million in funding so far. The three founders have around 10% stake each in the company and have individually earned more than USD450 million.
“Digital payment firms have the ability to quickly achieve operational scale without humongous Capex spend as they do not need to establish physical infrastructure unlike traditional banks to attain customer outreach. Furthermore, the volume of digital payments in India has grown by more than 80% from 24 billion in 2019 to 44 billion in 2021,” says Bimal Raj, partner with Singhi Advisors.
According to Srinivasu, from the very beginning, the trio was focussed on building a custom solution and took the cost burden of developing it within the proper regulatory framework. “We built confidence in consumers to transact online safely during the early days. We built it at scale and in a sustainable way with every transaction making money,” he says.
Further, BillDesk’s Standing Instruction (SI) Hub is the only platform in the country that can process recurring payments with additional security as mandated by the RBI, giving it the company monopoly power for such payments.
“The Billdesk-PayU partnership is strong. The company also manages mutual funds and systematic investment plans for many mutual funds too. Even within the Bharat Bill Payment System, most of the bank-end is run by BillDesk. Their strengths are complementary and BillDesk is deeply entrenched among banks and utility-payment companies. They did all the hard work,” says a senior executive at a consulting firm, requesting anonymity.
Competition has been good for the industry, bringing down the prices for merchants and accelerating the digitalisation of SMBs. The consolidation will likely intensify the competition. But it is not without drawbacks.
“The process of KYC has suffered amid intense competition and has raised concerns of routing black money abroad through cryptocurrencies. The payment gateway companies onboarded merchants without due process and has seen these merchants collecting money from consumers, which is under the scanner of several regulatory bodies,” says the digital head of a large private commercial bank, requesting anonymity.
This is one of the key reasons why the RBI wants payment aggregators to obtain licence before providing online payment gateway services. By bringing these companies under stricter rules, the banking regulator can cancel their licence in case of infringement or any illegal practices. Payment gateways have also been accused of enabling online betting and gambling, which are banned in India.
“Prosus gets an asset that will appreciate in exchange for idle cash. It gets a majority market share in a fast-growing market like India. Prosus shares rose by up to 6% following the deal announcement. For its investors, USD750 million in annual revenues from India is like a winning bet from any angle.”
— A former PayU executiveCybersecurity has also taken a backseat with MobiKwik and Juspay suffering data loss that has made the regulator nervous. Indian customers’ credit-card data could be misused at a global level, whereas in many countries two-factor authentication is not a condition for payment transactions.
“The scale and governance should be similar to banks. As long as innovation and creation of new products don’t suffer, and there are no unusual barriers for market participation, consolidation is good. There should be guard rails as companies are dealing with billions of consumer money. To do all this and make the business viable is not easy,” says Srinivasu.
Banks are not the happiest among the lot because of BillDesk’s deeper integration with them. The pricing power that BillDesk might gain is a bigger worry for lenders than it is for large merchants.
“A single player controlling 60% of the market in a huge economy like ours is a worry even though the competition is intense. Even if RBI wants to do anything, it cannot stop such a deal. Other than a few fines for collusion in pricing or oligopolistic tendencies or anti-competitive measures, the Competition Commission of India (CCI) has not stopped such an M&A deal. There is a regulatory vacuum that can assess the issues arising out of systemic risk,” says the banker quoted above.
He points out that the deal has system risks like that of Unified Payments Interface (UPI) for mobile payments. There are similar examples that validate the banker’s concern. For instance, one of the reasons why RBI thought of creating an alternative to National Payments Corporation of India (NPCI) in the form of New Umbrella Entity (NUE) is the system risk. It is a similar philosophy under which the NPCI has said that no single customer-facing UPI app should have more than 30% market share. PhonePe was dependent on Yes Bank for its UPI payments. When the private lender faced a crisis, almost 40% of the UPI payments failed.
This also assumes significance in the light of increasing regulations that RBI is placing on payment players.
“As long as prices are fair to consumers, CCI usually does not have any objections. They will not approve a merger between Ola and Uber or Swiggy and Zomato. They had raised a lot of questions when Hyundai wanted to invest in Ola. These payment firms are also intermediaries and hence do not impact the pricing for the public,” says the former PayU executive quoted above.
BillDesk’s grip on the market despite its lack of innovation could also be its undoing, says a senior vice-president at a competitor. “They were not tech-savvy and innovative. Like several large, mature companies they started focusing on profitability and stability and have not chased aggressive growth by cutting prices,” the former PayU executive says.
The executive adds that both PayU and BillDesk were mostly catering to large businesses and the growth has been several times higher in the SMB segment. “What PayU has done is a safe old-school acquisition and the immediate benefit is mostly for topline and bottom line, not so much in competitiveness,” he adds.
When the Life Insurance Corporation (LIC) was renewing the deal to manage its payment gateway provider, it wanted someone who would do it cheaper than its existing provider, BillDesk. And Paytm won the tender with an aggressive bid as it had other avenues to make money. LIC had registered 80 million transactions worth over INR60,000 crore in premium collections on its digital platforms and was something that could give a boost to the winner’s chops.
“They always put profit ahead of volume,” says an analyst with a consulting firm, referring to BillDesk’s strategy.
As bill payments moved from utilities and banking portals to consumer apps, it undercut BillDesk’s market opportunity. Also, the payments market is increasingly fragmented with multiple companies working together to enable a single transaction.
The vice president quoted above points out that BillDesk usually looks at government and long-gestation businesses, which most startups didn’t chase until recently. Hence, BillDesk did not have serious competition. But that seems to be changing as large financial institutions and governments also wake up to lower fees charged by payment gateways like in the case of LIC.
Also, the emergence of zero merchant discount rate (MDR) for UPI payments also meant that payment gateways were not making commission on such payments. That is also one of the reasons, besides the world’s lowest payment-gateway commissions, which is forcing payment firms to look at lending as a primary source of revenue.
According to the consultant quoted above, as an incumbent BillDesk’s hands were tied for it to aggressively promote UPI payments, which is likely to erode its profitability.
Opportunities and challenges
The new payment gateway companies have attracted customers to these services by selling at negative gross margins, says Srinivasu. But what they have also done is to bundle other services like a digital storefront, human resources management, and ledger facilities apart from lending to the customers to make them stick. But once prices are raised — whether customers will stay put due to all the bundled services or because moving data from one service provider to another is often expensive and exhausting — needs to be seen. The founders and their venture capital investors are banking on this.
Recently, physical point-of-sale software firm Pine Labs said it is aggressively looking at digital payment gateway business. However, “They have an advantage in the offline world and their investments in that space are going to be more capital efficient and the resource allocation will not help the company to challenge digital incumbents,” says Srinivasu.
A senior executive with one of the competing firms said that PayU would like to try to bundle multiple services for BillDesk’s large enterprise clients, but a majority of those companies are likely to have digitised most of their divisions.
One of the biggest reasons why BillDesk looks attractive is the company’s focus on fundamentals. BillDesk might not be a new-age payment provider with lending and other businesses such as inventory management or ledger facilities like many of its competitors provided. It makes 90% of its revenue from gateway and loyalty points management business.
Nevertheless, a combination of PayU with its new-age strength and BillDesk’s old-school way of running a tight ship can help Prosus build a payments business that will help the company cement its position as the largest and strongest player in the Indian payments ecosystem.
The combined entity will also face challenges in addressing the concerns of senior sales executives at the companies that inevitably happen at any large M&A deals. “Any turbulence is advantageous for us. People will leave and that creates opportunities for us,” adds the vice-president of the payments company quoted above.
The bottom line
BillDesk and its parent firm PayU will sooner or later go down the road of allied digital payment services including lending, which is described as one of three important pillars for PayU’s growth in the country. Whether the combined entity can successfully sell credit and make profits in the long term is a question to which we will have the answers in a few years.
(Graphics by Mohammad Arshad)
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