“Haven’t wasted money outside customer segment”

Merchant payments and financial services provider BharatPe does $12-billion transactions annually through its gateway. The three-year old firm’s valuation has soared over three times in the last six months, placing it in the unicorn club with a $2.8-billion value. It has also recently bid for PMC Bank along with Centrum, and the joint venture has received in-principle approval to set up a small finance bank. Ashneer Grover and Shashvat Nakrani, co-founders of BharatPe, are looking to expand the fintech’s loan portfolio to $1 billion in two years. This is to cash in on the merchant base, which they created by offering QR code-based cost-free transactions.

The Idea!

Ashneer Grover (A.G.): Shashvat is 16 years younger to me. He was doing engineering at IIT Delhi. I had graduated in 2004. In 2018, a common friend told me Shashvat and a few of his batchmates had figured out something interesting on UPI. We met in June. They had found that there was no architectural difference between people to people (P2P) and people to merchant (P2M) transactions, and were excited about building the merchant side of UPI. It had the power of making UPI free for merchants. We also wanted to build a lending business. All of us moved to a basement near my house in July and started work. On August 16, we put our first QR codes out.

Shashvat Nakrani (S.N.): Nobody was promoting UPI with merchants. There were only Paytm QR codes, which were getting used by wallets.

Early Struggle

A.G.: It was about generating trust and convincing merchants to put our QR code. We were just a small player in the segment amidst established ones. Merchants had the initial disbelief that it was too good to be true. We had to explain to them that we would offer payments free and give loans later. Then there was the whole piece of raising capital and putting feet on the street. We went from shop to shop to put the QR codes out. Another struggle was to get the right engineers to build the backend that can handle millions of transactions.

Make Or Break Moment

A.G.: Over time, we took a call to make payments free. It was a tough call since banks were charging us for transactions, but we were not charging merchants. We had the conviction that bank charges merchants were not sustainable for a long time since people to people transactions were free. We gave the service free to reach millions of shops and built a business of lending around it. (In December 2019, the Centre announced UPI as the prescribed electronic mode of payments, against which banks and service providers cannot impose charges).

The Business Model

A.G.: We knew shopkeepers won’t happily pay for services. But, they would be ready to pay interest on loans. So, we were pretty clear about the business model that we won’t charge for the service, but will offer loans to the same customers. This strategy helped us in building a merchant base of 75 lakh. We have achieved 12.5-crore transactions a month. We power ₹6,000-crore worth of transactions a month on UPI. There are 1,00,000 card machines, which generate transactions worth ₹1,500 crore. Together, it comes to ₹7,500 crore a month. So far, we have disbursed loans worth ₹1,900 crore and collected ₹1,200 crore.

Tech Challenge

A.G.: The major challenge was streamlining systems of partner banks. For every payment, we had to work with banks at the backend. The banking infrastructure was not built for bulk transactions. So, it took time to develop the system and empower banks to handle lakhs of transactions.

HR Challenge

A.G.: When we started in 2018, we had just ₹1.9 crore as initial capital. In today’s time, the seed money is at least $5 million. So, it was not easy to attract talent by offering high salaries. We built the team slowly by recruiting from known networks. We offered them equity and low salaries. Currently, we have 350 people on the rolls, including 55 engineers in the technical team and 20 in the product department.

Managing Investors

A.G.: If you have the numbers you can raise capital. You need to be transparent about what you are building, your problems and why your numbers are growing. We have not wasted money by experimenting outside our customer segment. We spent lesser capital and achieved higher valuations. We have not spent even $100 million so far. Investors appreciated it. Considering our cash reserves and the incremental rate of spending, we can run the business for another six years without raising capital. The annual cash burn comes to $50 million. We have so far raised around $520 million.

On the liability side, we tie up with NBFCs. The second is the peer to peer (P2P) model, in which we borrow from cash-rich merchants and deploy it. Almost 70% of our book is P2P funded and the rest is NBFC funded.

Marketing & Sales Lessons

A.G.: We wanted to create a strong brand since we were dealing with money and our business is based on trust. In the first year, we set aside 10% of the capital raised towards getting Salman Khan as the brand ambassador. It helped in getting an imputed trust transferred from the star to the brand. In the second year, we changed track by making 11 cricketers our brand ambassadors.

When Did You Think You Had Arrived?

A.G.: If the company has not reached profitability with the revenue of customers, the confidence is not genuine. Being profitable with investor money is not an accomplishment. We are profitable today considering the contribution margin. The core lending business makes money for us. But our overall expense is higher than profitability since we are acquiring new customers by offering free service and spending for building a tech team and marketing the product.

Riding Through Toughest Times

A.G.: We have gone through a no-growth phase twice during the two lockdowns. Offline payments stopped and transactions fell 75% in the first month of lockdown. Due to the rise in adoption of digital payments, we have grown multiple times since then. We currently process annualised transactions worth $10-12 billion, compared with $2 billion pre-Covid.

What Next?

A.G.: We want to build an outstanding loan book of $1 billion from the current $100 million in the next two years. We want to increase the annualised payments volume by at least three times to $30 billion by 2023. We are also looking to expand our operations to 200 cities from 130 by the year end. Small shopkeepers largely borrow from the unorganised market. Banks are absent there. We are trying to address that market as well.