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Why business payment processors are better off than their consumer facing counterparts

B2B payment companies such as Billdesk, Cashfree, Razorpay and PayU India scripted a solid FY20 performance, recording strong revenue growth while posting a profit or keeping losses within control. They are a sharp contrast to consumer facing payment entities such as Paytm and PhonePe, which are still haemorrhaging

January 12, 2021 / 03:00 PM IST
Representative Image

Representative Image

Digital payments is a cash burning business, always related to massive customer acquisition costs, low margins and an overall drag on profitability. However, a clutch of payment companies has been proving this wrong. While a few have been making profits consistently, others are narrowing their losses and posting strong revenue growth.

Billdesk, a payments unicorn, has been profitable for ages. Cashfree, a Bengaluru-based payment gateway company, has been profitable for some time now. Even Razorpay, which marched into the unicorn club in 2020, saw a massive jump in revenues last year. These are business-to-business payment companies, meaning they work with companies that accept payments online. They process these transactions, help in settlements and, in turn, pocket a commission for the service.

“In this business, companies are ready to pay a slightly higher margin since they want their partners to do well, ensure transactions move smoothly and consumer experience is not spoilt. Hence payment gateway companies make money consistently,” said Bhavik Hathi, Managing Director at consultancy firm Alvarez and Marsal.

B2B financials look strong

Moneycontrol looked at their FY 20 financials, sourcing data from business intelligence firm Tracxn and comparing it with consumer facing payment apps such as Paytm, PhonePe and Amazon Pay. The comparison shows that these entities have managed to handle their finances well.


“B2B has seen a lot more conceptual play than B2C. Conceptual players in the B2B space have built a DNA for innovation. While they take more time to get scale, they will generate huge amounts of cash as is happening with companies such as BillDesk,” said Rajeev Agrawal, Chief Executive Officer, Innoviti Payments, a Bengaluru-based digital payments company.

Billdesk, a Mumbai-based company that processes bill payments for large banks and payment companies, reported a net profit of Rs 211 crore in FY 2020, which was a 52 percent jump from Rs 138 crore in FY 2019. Billdesk, which was started back in 2000, has been the pioneer of digital bill payments for banks. It connected with utilities such as electricity companies and telephone service providers across the country and plugged them in with banks that could collect bill payments from consumers.

“Billdesk is well positioned in the Indian Payment Gateway Aggregator market, with market leadership in terms of value of transactions…With increasing competition in the market, they will need to move towards an integrated fintech play, or at least an integrated payments play to stay relevant in the market in the long run,” said Abhishek Chauhan, Head – India Consulting, at RedSeer Consulting.

Players make hay as online payments boom

Another payment gateway, Cashfree, founded in 2015 and backed by Y Combinator, has also been profitable. The company reported a net profit of Rs 17 crore in the last financial year, up from Rs 4 crore in FY 2019. Albeit on a much smaller scale, the startup has maintained a tight ship.

Cashfree competes with Razorpay, processing online payments for ecommerce firms. The company has managed to keep its burn low and continued keeping its financials strong to create a stable business.

Cashfree recently raised $35 million from Apis Partners and Y Combinator and is looking to scale up its business as more and more entities look for options to sell online post Covid19.

Two of the largest payment gateway entities, PayU India and Razorpay, are not profitable but reported a massive jump in revenues last financial year. Filings with the Ministry of Corporate Affairs show that Razorpay reported revenue of Rs 519 crore, up 163 percent in FY20 from Rs 197 crore. It still reported heavy expenses to end the year with a net loss of Rs 6 crore, almost double the Rs 3.2 crore loss posted in FY 2019.

In comparison, Razorpay’s competitor PayU, which is backed by Naspers and one of the largest payment gateway players in the country, reported a total revenue of Rs 1,194 crore in FY 2020, up 32 percent from Rs 905 crore in FY 2019. In terms of the bottomline, PayU reported a net loss of Rs 160 crore, up slightly from Rs 129 crore in FY 2019.

Strong revenue growth better margins

Industry insiders pointed out that while players such as PayU and Razorpay might have reported losses, the scale is much lower compared to those of consumer facing entities.

PhonePe reported a net loss of Rs 1,772 crore on revenue of Rs 427 crore last year. Paytm, which is building an overall financial services company, reported a net loss of Rs 2,833 crore on revenue of Rs 3,350 crore. Again, Amazon Pay, another major payment entity, reported a net loss of Rs 1,868 crore in FY 2020 on revenue of Rs 1,370 crore.

“B2C has primarily been a ‘me too play’ with companies spending more money on branding and execution than meaningful product differentiation. This leads to limited stickiness with customers, leading to high acquisition and retention costs,” said Agarwal of Innoviti Payments.

Building valuation in the consumer play

Consumer-facing apps mostly work on valuations built on future business potential and prospects. Industry insiders pointed out that Paytm, which was last valued at $16 billion, got the valuation as a digital payments leader in India, transforming how a country of a billion-plus people pay each other.

Again, PhonePe which was recently spun off from Flipkart, got a valuation of $5.5 billion.

“B2C companies have limited monetisation avenues, especially post MDR relaxations. Therefore, they have to rely more on scale and customer acquisition and thereafter increase the lifetime value of the customer through effective cross-selling and engagement,” said Chauhan.

Initially, it will be a valuation game, says Chauhan. As scale picks up with a savvy number of consumers onboarded and effective cost of customer acquisition compared to the lifetime value of a customer, these companies will move towards profitability.

Alvarez and Marsal’s Hathi, who tracks the fintech space closely, said that consumer-facing apps get highly valued because of their massive reach and their ability to change consumer habits. But given the tight competition in this space in India, many players could see a valuation correction.

“2021 and the year after will see some success stories coming up and some failures. I believe there will be a valuation correction going forward,” said Hathi.
Pratik Bhakta
first published: Jan 12, 2021 03:00 pm

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