Cashfree exploring strategic sale, Pine Labs emerges as frontrunner

Reeju Datta and Akash Sinha, co-founders of Cashfree (Image source: SBI)

Payment gateway platform Cashfree is exploring a strategic sale as the funding winter has affected the company’s prospects, sources have told Moneycontrol, adding point of sale (PoS) startup Pine Labs is the frontrunner for the buyout.

The talks, however, have been stuck over valuation, Moneycontrol learnt. Silicon Valley-based payments giant Stripe was also in discussions to acquire Cashfree but has since dropped out, one of the three sources said.

Stripe, however, denied that any such talks had taken place.

Cashfree firmly denied that it is in talks with anyone for a strategic sale.

Fintech unicorn Razorpay, too, negotiated with Cashfree some time ago but has since opted out. The development could not be independently verified.

All three fintech companies — Stripe, Razorpay and Cashfree — are backed by Y Combinator (YC), the American startup accelerator.

While Cashfree is looking at $1.2 billion, the suitors are unwilling to pay more than $600 million, sources told Moneycontrol.

"Due to the recent shift in market conditions, we have made the decisive choice to temporarily pause our fundraising plans. Our company is self-sustainable and currently does not have any immediate financial requirements," Cashfree said in a statement.

The Bengaluru-based firm has raised more than $40 million and was valued at around $200 million during its last fundraising round in June 2021, which saw investment from the government-owned State Bank of India (SBI).

But even $600 million looks like a decent price given the current funding squeeze and the constantly evolving regulatory landscape for fintech startups.

Pine Labs and Razorpay were yet to respond to Moneycontrol’s emailed queries. The story will be updated when they respond.

Pine Labs is the largest independent PoS player in the country and of late has been expanding its payment gateway business under its Plural brand.

An acquisition will help the company become a large player in the online PG business overnight, making it a better fit. On the other hand, the acquisition will likely catapult Razorpay into becoming the second-largest PG player in the space.

Cashfree itself made two acquisitions. Early this year, it acquired one-click checkout company Zecpe. In 2o21, it acquired UAE-based payment solution provider Telr for $15 million.

The deal is of particular importance because in 2022 Prosus-owned PayU India reneged on an agreement to buy the largest online PG firm Billdesk for $4.7 billion.

If Cashfree is bought for $1.2 billion, it could be the second largest startup merger and acquisition (M&A) in the space.

Payment gateway firms have been among the relatively better-off startups, with major players such as PayU, Razorpay and Billdesk reporting profits in the financial year (FY) 2022.

Cashfree was an exception. After being profitable in FY20 and FY21, Cashfree reported a loss of Rs 3 crore in FY22 after a profit of Rs 25 crore in the previous fiscal.

During the same period, Cashfree’s revenues climbed 54 percent from Rs 227 crore to Rs 350 crore, regulatory filing accessed via Tofler showed.

All the firms, however, have faced increased scrutiny from the Reserve Bank of India since early 2022.

Amid a cash crunch, Cashfree also fired about 80-100 employees in January 2023. The company has also been trying to raise around $100 million for the past 12-18 months but the round has been stuck because of the economic downturn and regulatory changes made by the central bank.

Even other players were facing issues. The RBI asked Paytm, Razorpay and PayU to reapply for payments aggregator (PA) licence, as it asked for clarifications from merchant onboarding and KYC measures to ownership structure and domicile among other issues.

The RBI in 2022 asked all payment gateways to apply for a payment aggregator licence to bring these players under its direct supervision and regulation. Earlier, these firms used to partner with banks to onboard merchants and facilitate online payments.

The RBI and the Enforcement Directorate (ED) have been clamping down on merchants facilitating international money transfer for illegal activities such as crypto payments, gambling and as well as unlicensed Chinese lending apps.

The ED and the RBI also found that some of the companies were not doing due diligence of the merchants.