New Battleground for Indian Payment Companies

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Fin in the FinTechs

Indian Payment companies such as PhonePe and Paytm are in a very tricky situation. They have developed a large user base (PhonePe: 300+ Mn and Paytm: 450+ Mn users) on their platform over years of cashback and user acquisition schemes. They are successfully expanding the digital payment market in India by promoting UPI transactions made on their platforms.

However, they cannot directly monetise UPI transactions. In a debit/credit card transaction, the merchant (receiving the money) is charged a small MDR fee (Merchant Discount Rate), ranging anywhere between 0.3% to 3% of the transaction value. However, as per Finance Ministry directives, to encourage digital payments, MDR charges cannot be levied for UPI transactions, leaving Indian payments companies in a fix. They have a vast user base that cannot be directly monetised, so they are constantly searching for earning opportunities by providing ancillary services such as bill payments, ticket bookings, etc. and offering payment gateway services to businesses.

September 2020, an announcement from Google PlayStore ignited the ‘tech’ in our FinTech start-ups. But first, let’s look at the App development ecosystem.

App development ecosystem

Android is a dominant operating system for smartphones with a 95% market share in 2020 in India. PlayStore provides app hosting services to app developers on the Android platform. For this, it charges a developer fee as a % of revenue (in most cases 30%) on in-app purchases, subscriptions, or paid-app downloads. In-app purchases include OTT, news, dating apps, fitness apps and other digital goods. It generally does not cover online payments (Paytm, PhonePe), purchase/delivery of physical goods (Flipkart, Amazon, Zomato, etc.), ticketing, transport services, etc. Against this, they provide several services to the entire app ecosystem like malware scans on apps, monitoring apps to avoid illegal content, providing developer tools, etc.

Earlier, PlayStore did not strictly enforce the 30% fee, and developers could bypass it by not using Google’s Play Billing system. However, this changed in Sept-20, with Google providing one year (till Sept-21) to app developers for integrating the Play Billing system and start paying the commission. It came as a two-front war on the Indian start-up ecosystem: (A) They had just begun exploring the potential of mobile-based commerce and services. A 30% commission will be a big hit on EBITDA for start-ups, especially when many would be still loss-making to develop their user base. (B) Compulsory use of the Play Billing system reduced payment gateway options for app developers while also restricting the business of Indian Payment Companies.

Subsequently, Google changed the developer fee to 15%, but only for the first $1 million revenue, post-which 30% shall continue to apply. Further, on 16th July 2021, Google extended the deadline to use Play Billing until 31st March 2022. But the damage had been done. The Indian payments companies got a whiff of the plan.

Igniting the 'Tech' in FinTech

Google made Play Billing System mandatory for app developers challenging Paytm, PhonePe, RazorPay, etc. To revert, Payment Companies decided to enter PlayStore’s territory. But how?

Google has been successful because it has a sizable Android platform developed over years of investment in developing the Android ecosystem. By default, this broad audience of Android users becomes users of PlayStore, giving them a scale that would lure app developers towards them and deter competition.

However, our Indian payments companies are no less. They can leverage their sizeable non-monetised user base. Enter: Paytm’s App Mini Store and PhonePe Switch. These are platforms made available integrated into their payments app to allow web-app versions of different apps. It bypasses PlayStore and its hefty fees while providing app developers with a good user base and easy payments integration. This model is helpful for Indian markets where people are conscious of downloading multiple apps and have storage space concerns. It is a blessing for India-focussed apps such as NetMeds, Cult.Fit, TeenPatti, BookMyShow, etc.

One of the early-movers in this space has been IndusOS. It currently has 100+ Mn users of its ‘App Bazaar’ (they also power Samsung’s ‘Galaxy Store’ in India, a pre-installed app in Samsung smartphones). Designed for the Indian market, their offering also includes several regional language capabilities that app developers can leverage. They allow app developers free hosting of apps with the freedom to choose their payment gateway. It earns revenue by charging app developers who want to promote their apps on the Indus App Bazaar. Further, these payments are made on CPI (cost per install) basis, i.e., app developers pay for each install attributed to the promotion made on IndusOS’ platform. This model seems like a win-win for both the app developer and the platform.

Currently, Walmart-backed PhonePe is acquiring IndusOS for USD 60 Mn. However, the deal is in legal trouble for valuation concerns raised by existing investors: Affle & VentureEast.

Bottom-line:

Indian payment companies are now diversifying to become app stores and are looking at it to drive their growth. With them doubling down on it with M&A activity and the ongoing anti-competitive cases against Google & Apple in the USA, EU & Australia, this area will be an exciting space to watch.

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