PhonePe faces its toughest challenge yet, despite its right to play approach

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Late last month, payments giant PhonePe launched its stock market investment platform, Share.Market. With a monthly active user base of around 20 crore and an overall installed base of 45 crore, it has the potential to take equity investment in the country to new heights.

When its competitor Paytm went all-in on the lending space, few expected the company to disburse around Rs 15,000 crore in a quarter on its platform.

At some level, that is the expectation from PhonePe, a market leader in payments, controlling almost half of all UPI payments in the country. After all, PhonePe is probably twice the size of Paytm.

Unlike several other areas where fintechs find adjacencies and rapid growth, equity investing is more nuanced and complex, and it is also addressed to a more niche audience than the mass market.

The competitors in the space are technology-focused players such as Zerodha, Upstox, and Groww, and they have given brokerage houses and banks a run for their money. These players are called discount brokers because they charge a small fee, a flat fee, or even zero fees for equity delivery and trading.

Apart from the new-age players, even traditional brokers such as Kotak Securities, Angel One, and ICICI Direct Neo target the same retail investors with minimal onboarding charges and equity delivery fees.

PhonePe acknowledges this fact. According to co-founder and CEO Sameer Nigam, PhonePe will help customers trade wiser and elevate the discount broking experience with less emotion and more intelligence. PhonePe distributed one million systematic investment plans (SIPs) in August, giving the company confidence that there is still a market waiting to be tapped.

"The market has credible technology company players and evolved fintechs," Nigam said during the launch, indicating that winning the market is not easy.

The gold rush

An even more pertinent question to ask is whether this space will ever be big enough for PhonePe to make money.

"Nobody bothered about Zerodha until they realised that the company was making huge profits. Till around 2016–17, everyone thought discount broking would not work or make good margins. Suddenly, everyone wants to be in discount broking. Now even the large banks are in discount broking," says a senior executive with a technology platform that facilitates trading.

Zerodha has close to 20 percent market share in NSE trading while the number of active clients stood at around 65 lakhs. Angel One has around 45 lakhs and Upstox has about 35 lakhs.

To give credit where it is due, PhonePe charges for account opening and equity delivery, apart from trading. So the company will definitely make money from the business and will not likely be a loss-making proposition if it does not go aggressive on the marketing and customer acquisition routes.

Around 60 percent of all active traders in India trade with discount brokers. While there are around 12 crore demat accounts in India, only around 30-45 lakh of those are active traders. Most discount brokers make close to two-thirds of their income from these traders. In the case of Zerodha, it is 90 percent as it does not charge for equity delivery.

Retail investors continue to enter the stock market and the trend is expected to continue at a healthy clip over the next decade. However, it is not sure how many of them will take the trading path, which is where most of the money is.

According to PhonePe, even as the demat accounts went up rapidly, retail participation is around 30 percent with a high churn rate, and this opens up the possibility of attracting such customers.

"A large number of retail investors continue to come to the market but don’t get retained in the market. This is going to change in the coming days. This gives us a right to play in this market," Rahul Chari, Co-founder, and Chief Technology Officer (CTO) of PhonePe, told Moneycontrol in a recent interview.

According to a couple of industry experts, the offerings that PhonePe is currently providing are not differentiated enough for existing traders to shift allegiance. However, the Bengaluru-based company has not launched all the tools for traders and investors; it plans to roll these out gradually. According to the company, it wants to understand what its customers want.

"If retail investors have gone out of the market, it is not for want of a better trading platform or a lack of confidence in equity investments. There are multiple reasons, including the fact that they don’t have enough surplus money to invest because of their debts or because their consumption patterns have changed. This is one space where there are no incentives or cashback to drive loyalty to shift allegiance after a year," says a senior executive of a fintech app that promotes equity investments on its platform.

Payment and broking - not the same mantra

What PhonePe has going for it is the huge number of customers using their app daily for payments. While spending, saving and growing money on the same platform sound like a good strategy, the investment platform being a separate app does not help matters for PhonePe.

According to markets regulator SEBI, an investment and trading platform cannot be selling products such as insurance or gold on the same platform. Since PhonePe has these products it had to bring the investment platform as a separate app. Since investment and trading is a complex and rather niche product, it also did not make sense to push such heavy tools on to the same app which could have made the app slow and clunky for a large majority of PhonePe’s payment users.

In 2022, PhonePe acquired two wealth tech platforms, WealthDesk and OpenQ, valued together at $70 million, which helped the company launch the tools and products for Share.Market platform.

In payments, owing to the low failure rate and faster payments compared to its competitors, PhonePe consistently managed to attract more customers over time. The company managed to do this with a tight joint management of the UPI system with its banking partner Yes Bank.

Often the argument is that Google was not the first search engine and WhatsApp was not the first instant messaging platform and still managed to come on top. However, these were better than those before it and that was the differentiation that helped them be market leaders. In fact, PhonePe was not the first mobile payment platform in the country with Paytm, Freecharge and Mobikwik being leaders before UPI came to the scene. And even in UPI, Google Pay was ahead of PhonePe for the first few years.

However, in investments, everyone works with the exchanges – NSE and BSE – on an even keel with the equity delivery and settlement and the modalities are controlled by SEBI.

“There is nothing to optimise here and there is no efficiency that a player brings to the market,” says a fintech consultant who did not wish to be identified adding that when the scope of differentiation is little, the attractiveness of customers to do investment on a new platform is limited. “It is most likely that most of the investors and traders with good disposable income already has an existing app and nobody will want to create a new investment portfolio in a new app,” the person adds.

PhonePe’s ‘take it slow’ method

At the launch press conference, PhonePe executives stressed that the company does not have any goals and targets and has no pretensions or tall claims to make about how the company will change equity investing. In fact, it downplayed its potential success.

“I don’t necessarily believe that our strategy is how we will take market share from Zerodha or Groww but it is about catering to the market that is going to expand in the coming days,” Chari said in the interview mentioned above. According to PhonePe, over the next decade a new crop of middle class will emerge and it will be huge enough for the company to capture this new market, who are already using PhonePe for payments.

While PhonePe says that even sending a notification to one percent of its users could drive huge volumes to a new platform, being a separate app does mean that those who are not looking at serious trading will not likely go and download the app. Such a customer profile will rather buy SIPs and mutual funds on PhonePe itself rather than going to Share.Market.

The senior executive quoted above says that serious traders would stick to a trading platform rather than using one app that is trying to be a super app. “Trading or serious investment is not an impulsive decision but rather a calculated one. Those who join them after a notification alert cannot be a serious customer,” the person adds.

Then there is the perennial debate about the real size of the Indian consumer market, especially those with sizeable disposable income. At the Moneycontrol Startup Conclave, even Nigam of PhonePe concurred with Nithin Kamath of Zerodha that the customer market for various financial services could be around 100 million in the country while Nigam did add that as the country’s economy grows rapidly, this could increase the size of the overall market.

“Even then, PhonePe could turn out to be just one of the several players which tried to win the market. My belief is that payments and investments are different and they will need to figure out what kind of customers they are targeting and if that is the trading community, it is likely to be niche,” says a second fintech consultant, who did not wish to be identified.

Lack of focus

Until now, PhonePe has been focussing on getting the payments right and the company did that and the results show for itself. However, in a bid to monetise its large customer base as the investors expect fintechs to show revenue and profits, PhonePe has been trying to launch every single financial services possible for a fintech company. From merchant lending to payment gateway to ecommerce in the form of ONDC-backed Pincode and consumer lending by the end of this year.

Some of this stems from the fact that Paytm has been quite successful in some of these sectors despite having a much smaller market share in payments. However, of late Paytm has been focussing on three sectors such as payment services, merchant payment subscription devices and lending. Recent news reports suggest that it is not keen on insurance or even investment business.

The senior executive quoted above feels that PhonePe could also end up like Paytm Money, where the average ticket price of a SIP is less than Rs 1,000 with more than half of those being less than Rs 500. Even the average mutual fund ticket size in India is around Rs 75,000.

There are 6.65 crore SIP accounts in India. But in more than half of the SIP accounts, the investments through those are small to matter much, says a senior executive with a fintech platform that lets customers buy SIPs.

“The Indian market is shallow even today and the unique demat accounts are only 6 crore and the 12 crore gives a sense that it is a huge market, which it is not yet. Saying we will have newer customers or will have a pie of a future market is guess work and not a real business to be taken seriously,” says the senior executive with the competitor quoted earlier.

The bottomline

"What PhonePe created in payments is exactly what Zerodha has done in trading. If distribution mattered, banks would have been the market leaders with their captive rich clientele who have banking and demat accounts with them. But most of the bank customers’ demat accounts are dormant. Customer requirements were more specific, and the new-age companies catered to them and found customer acceptance. Whatever PhonePe has shown us so far is rather uninspiring," says a fintech consultant.

At the launch, PhonePe said that it would slowly roll out its products, see what its customers want, and listen to them while providing more features and tools. It has promised to launch quant-based analytic tools for traders and wealth-basket products for investors. However, none of these are anything new, and rivals offer similar products that have seen customer adoption and several iterations over the years.

While in the payment gateway business, where a lot of its competitors were stopped by the regulator from onboarding new customers, PhonePe displayed its aggressive intent to take the market with zero commissions.

This clearly shows that PhonePe understands that pricing and looking for weakness alone cannot be a winning factor in equity markets. Whether PhonePe has an ace up its sleeve is not known yet. For the time being, the company is not looking to shake up the share market investment business.