We need to chart our own destiny: PhonePe's Sameer Nigam on ecommerce foray, competing with Flipkart

PhonePe cofounder and CEO Sameer Nigam

PhonePe forayed into hyperlocal e-commerce on April 4 with a new app called Pincode, which is a part of the Open National Digital Commerce Network. However, this marks one of PhonePe’s several forays in the recent past. Sitting down for an interview on the sidelines of the launch of Pincode, PhonePe co-founder Sameer Nigam talks about this recent foray, the company’s plans with lending and why the acquisition of ZestMoney fell through. Edited excerpts:

How does Pincode play into the larger PhonePe scheme of things? How much are you investing in this new app?

In terms of how it plays out and the reasons for getting in right, we've been working with 35-36 million offline merchants over the last five-odd years and especially during COVID, we saw them come out in real solidarity during all the lockdowns, in terms of making sure all our lives run smoothly. When the market started turning again and everyone was back in the digital-connected world and travelling again, that number went back towards online in certain categories. The overwhelming feedback that we got from our partners was, ‘Do you have any way to help us grow in this new order?’ I think ONDC (Open National Digital Commerce Network, a not-for-profit company promoted by the Department for Promotion of Industry and Internal Trade with a focus on developing open e-commerce and which is seen as an alternative to Amazon and Flipkart) for us is the right way in which a company like us can get involved. We're never going to try and compete with Flipkart or Amazon in terms of supply chain logistics. Been there, done that, loved it, but don't want to ever do it again. We are a different company today. Pan-India e-commerce facilitation, marketplaces, that is not where we're at. We want to take all these offline shops live with the least amount of effort and focus on the consumer experience. I think we understand that part well.

So in a model where logistics is somebody else's headache, the seller platform is working with them, accounting, inventory, digitisation, all is coming on a platter, I can focus on what I believe we understand best, which is the experience of shopping. There's a login with PhonePe when you try the app, you log in with PhonePe, it imports your addresses which are already there. You don't have to keep repeating information. For payments, the PhonePe app is integrated.

Everything in between is like a separate company. Pincode is to PhonePe almost what PhonePe was to Flipkart. They’re on different floors with a completely different team. App development, design, product—everyone's different. They are doing their own thing.

I think our investment in the business will be commensurate with what the margins are like and what the CAC (customer acquisition cost) looks like because it's a zero base play. Just the market potential from a CAC basis is open-ended right now. The tricky one is when we entered UPI (Unified Payments Interface), for example, we knew peer-to-peer will work, recharge will work, so we launched that. We had no idea what scale we'd hit and if we hit that scale, what would happen to financial services corporate optionality, etc. Similarly, we put six categories up (on Pincode). I heard about the Namma Yatri (the direct-to-driver app available in Bengaluru) conversation from Pramod Verma (a moving force behind Aadhaar) a week back. He said that they're also opening up the APIs (application programming interfaces) why don't you integrate? That's cool. I can open up cab booking. Didn't think about it until a week ago.

Seller platforms will come in and start digitising niches. What 20 years ago happened in the West when everyone was putting up a boutique website, in India everyone tried to do it with apps vertically. Then you're trying to create super apps, etc. I think the beauty here is that the seller platform can digitise the seller. We can just focus on an experience that is category agnostic.

How will you make money on this?

There's a margin on every transaction, right? It comes, passes through, you don't touch the price. The delivery guy's price also you don't touch, like that just goes back, pass through, and you get the margin through the seller platform, structured. The seller pays a commission to the seller platform, the seller platform can distribute whatever commission they want to the buyer, but it's open market pricing. It's not regulated.

Is there a cap that you would consider safe? You said commissions are pretty minimal.

We kept it in single digits.

Will it inch up?

Even if I take UPI till date, it has gone downwards. I'm quite happy with that. If MDR (merchant discount rate, a fee charged to a merchant for card payments) came back, and it was like 30 basis points, I'd be very happy. For example, for the offline market at scale. I'm okay, that's better than zero.

PhonePe started out payments, then you added financial services on top of it, now has an app that is going to be more ecommerce. Was there resistance, was there debate?

I think the fact that we've spun out completely, eyes wide open, having spent a billion dollars in tax here and more abroad and whatever—I think the truth of the matter is, the board and all the investors understand and now appreciate that we are very, very different companies and businesses, both. And, therefore, we need to chart our own destiny. Now if that means that we will compete in certain areas, so be it. I'll keep Flipkart and Myntra aside, I didn't talk to Myntra at all, Flipkart at least knows what is going on at ONDC; for Myntra there is no overlap with it. I think more than, say, a Walmart's perspective, which is the largest shareholder in both companies --  if we were trying to reinvent the wheel and compete with them like Amazon or Meesho, then I think it'd be very difficult.

Here, whether I wanted to or not, if I didn't go on the buyer platform side, I would have come in on the seller platform side. That was more of the push from my sellers asking us, all our key account guys saying, 'Hey, you're saying you'll help us with growth? You've got the smart speakers, you got blah, you got merchant loans. Why didn't you like take us to ONDC.' It just felt that we should start on the buyer side actually. Buyer is actually where the opportunity is.

Will you also launch a seller-side app?

We've had furious amounts of debates on this one, I would like to wait for at least six months in the city to see if everyone steps up. I think if we can show the consumer side pull, which I believe will happen in six months, I can prove it. If I get a million people here, say I want to buy something, then the seller guys have enough of a business case to say let me go and digitise more and the sellers will start picking up—the cold call problem, they will start responding to orders. If I can grow the e-commerce market without having to get on the seller side, that is my stated preference. Because there's just a lot of work that has very little adjacency to what I do otherwise, so I don't want to do it. I can switch from my store’s tab on PhonePe, and my payments mode. When I log in on PhonePe, when my address book on PhonePe, there's a bunch of leverage you can get on the app side. There’s nothing new if I make a seller platform. I would only do it if I felt that there is genuinely a need in the market to actually digitise the stores in a way that is not getting done. Thus far I’m not finding that. I'm actually pleasantly surprised by how fast these guys are springing up.

When you raised your recent round of funds, one of the areas you said you will be focusing on is lending. What are your plans on that front?

Both will be platform-based, merchant and personal lending. Merchant has already launched, and a pilot is going on. I don't even know what to call it. But we're working now and we're going to start adding more partners. Again, demand is insane because you already have merchant relationships for so long. We don't want to build books. Again, one of those things. We'd filed for an AMC (asset management company) licence, we pulled out, and we told the board we're not doing manufacturing. Here too, merchant lending is with partners. Somewhere in there, we may apply for an NBFC (non-banking financial company licence) just to test the new-to-customer (NTC) models. We’re not doing AMC because that will be a full-on business model. So we will be entering the broking side of it, we have a broking licence. So that is one platform. Indus OS (the locally developed Android-based platform that PhonePe acquired last year) gets resurrected, that's another app store platform. ONDC is a commerce platform, we will do the platforms, we will do a bunch of them, we will do a lending platform, but we will not get into manufacturing. And on the manufacturing side, if at all we apply for the NBFC licence, which is also being discussed internally and to the board, we will only do it for the NTC testing to test out new cohorts. But we don't want to build the balance sheet, we want to take the lenders which are banks and NBFCs to the borrower.

BNPL (buy now, pay later) could have gotten a fillip if you had gone ahead with the ZestMoney acquisition.

I think it would have got accelerated.

There is a sense that it came very close to fruition and you walked away.

It came very close to fruition but it is slightly difficult because of the way the process works. You first talk to investors or the management and we agree on a number, and then basis that number alignment, you enter DD (due diligence). DD can be short, DD can be long. We generally do long DD. Because here we are regulated, our risk of getting it wrong is just too high.

We are a different company in that sense. We have learned what we need to know because of our previous experience, which has become more rigorous in our DD and it really didn't meet our bar.

The sense that we got through people is that you spent a long time analysing the company, interviewing the top employees. People perhaps thought it was slightly a bad faith move to walk away.

Obviously not, for the very simple reason that there are only two things you're looking to buy. One was the asset, the other was the people. That is part of the DD. That is not why it fell, though. We like the people for whatever it matters.

Will you look to absorb the people?

I think the reason I don't want to go down this track is that I think there are a lot of discussions happening in the background, they need to happen.

Is it also giving them a lifeline?

We've given almost $18-20 million in loans. The company was nearly bankrupt when we met them. So it was a lifeline, to begin with. We're now six months in, so we spent a considerable amount of time and effort, and resources here as well. I don't like walking away, we finished four (deals) last year, we went in with the intent to finish the fifth. It’s not like I went and said no, let me go and talk to 200 people. I can hire 200 people pretty fast, I don't think that's a problem.

How are you splitting your bandwidth? Because you have so much going on with PhonePe and Pincode and acquisitions and platforms.

The domicile change, restructuring all the businesses from Singapore to India, because you had to go to each regulator and get approval. Then all the crazy tax and convincing all the investors because all the investors had to be tracked. That took up such a large percentage of my time over the last year and a half, I'm actually smiling right now because now I get to get back on the drawing board with my designers, marketing team, and the product guys. I'm back into early-stage startup mode.

Most of the fundraising has been done by Karthik (Raghupathy, investor relations head), so now that the fundraise is also almost entirely behind us, there's money in the bank, I'm domiciled in India, I have all my entities set up, I don't want to buy anymore. I'm not manufacturing financial services. Now, I'm actually spending 70-80 percent of my time building. I'm having fun.

Do you think the BNPL model needs a rethink in India, because this is something that has been a worldwide problem?

I've never been a big BNPL fan. If you're giving BNPL lines to people who are otherwise not previously known to be creditworthy, this whole business of saying I can use a BNPL line to figure out whether your credit score will be good, which is where fintechs ended up, was always going to end ugly. You can say 'I gave you a credit card' or somebody gave you a credit card, I give you a housing loan, your score was really good, so go shopping. That's fine. To me a BNPL line is a virtual credit card, you can narrow the purpose and say you can only shop on Myntra, or you can only shop in fashion or you can only buy a particular size of phone. It's either an EMI, it's a structured repayment or it's a credit card where I don't know what it is for beforehand. BNPL is somewhere in the middle. You can call it what you want. But it's a loan with another name. You're lending to people you don't know beforehand, and you're doing it in real-time. Real-time is the enemy of good underwriting. Otherwise, we would have entered very early.

Are you going to be an aggregator (in lending)? You have said that you won't build a book. What will your consumer lending forays look like?

I think that decision will lie with Hemant (Gala, Head of Financial Services & Banking) and Rahul (Chari, co-founder and chief technology officer), but personal loans—same on the merchant side—and EMI, those are products that are logical to me, maybe virtual credit cards, stuff where the business model is well understood and I'm not gambling partners' money. Because even though I'm not underwriting, I don't want everyone else to go bust at scale. You'd want to make sure that the models inherently make sense. BNPL is not one of them right now. I think you'd probably start with personal loans.

How far are you from an IPO?

I don't think we'll look at that in 2023. I think the earliest I ask myself that question is going to be the second of 2024, with Pincode, lending and five other businesses. We're talking about very large businesses with so many people already in there. I want to build. I'm just, I'm back at building. You will see me at launches, you probably won't see me at interactions anymore. I'm the de facto CPO now.

With all these new launches, when do you think you will achieve profitability?

Lending should make money off the bat if you're a marketplace. Insurance makes money off the bat. Pincode makes money off the bat. Broking makes money off the bat. If you think about the individual businesses, they'll all be CM (contribution positive) on day zero. I'll tell you where the gap is. It depends on how much you decide to spend on marketing to grow.

Will you have to spend heavily?

I don't know. One is, do I have to spend heavily? That's only one half of the question. The question is, is it worth spending? If I find that the average customers ordering 20 times a month across four or five categories, then I know my LTV (lifetime value) is Rs 10,000 or Rs 1 lakh. Why not? How much I'm willing to spend—that is why it's going to take me time. I just need to figure out how much to spend on these businesses.

You have not yet thought of applying for an NBFC licence. So initial forays will be from your book?

We had applied, as it turned out Flipkart had also applied—this was last year. The regulator said both in the same group can't apply. After that, we realised we had too many launches, so we didn't reapply after spinning out. Now we're looking at it. I think we'll end up taking an NBFC because unlike insurance, where there's enough players opening up the market, or AMCs, in the NBFC market, I believe our role in society can be opening up the NTC market at scale. But for people to trust that that market is worth going after, somebody is going to have to run experiments, and you can't run an experiment without an NBFC. I can't do a small-scale loan without the licence. Right now it's only through partners.