BHARATPE: REDEFINING INDIA’S PAYMENT ECOSYSTEM

Penned by Rajdeep Sil and Shelly Singh

While the reader must have heard about the brawl between BharatPe & its co-founder Ashneer Grover, but this does not take away the fact that how BharatPe started & is catering to its customers is remarkable. Thus, in this edition we would like to discuss the business model of BharatPe.

Introduction

Being a shopkeeper when the whole economic ecosystem has been disrupted by the virus from China isn’t easy. But, life before corona wasn’t easy for Ramesh either. Ramesh, a tired shopkeeper, shares his plight, “Declining margins in my business worry me every day. Will I be able to earn a decent income? On one hand I’m giving products on credit to customers, but when it comes to getting credit, I am met with hard luck. I’d like to grow my business, I want to invest. But the formal sector offers me no respite. They demand papers from me. I don’t have any. At last, I have to ask the Dada (loan shark) in the city or my friends and relatives.”

Ramesh’s plight is shared by thousands of shopkeepers in India. But, the plight doesn’t end at the inability of the shopkeepers to secure credit. It has another layer to it. Ever since India started treading on a digital path in 2016, many fintech companies like Paytm and PhonePe have been easily adopted as a means of carrying out day to day transactions by consumers. As these fintech companies focused on acquiring more consumers through various incentives such as cashbacks, they didn’t pay heed to the merchant market. Ramesh, like many others, is troubled with the problem of accepting payments digitally without narrowing the margins even further. It was noted that almost all of the payment apps charged 1.5% commission on the payments.

This is where BharatPe came in. According to its founders Ashneer Grover and Shashvat Nakrani, SME was the most inadequately served segment of the Indian Economy. They leveraged Unified Payments Interface (UPI) to tackle this problem. Almost four years ago, the awareness about UPI was limited. Interoperability of UPI makes it easier for users to accept and transfer payments from any gateway without holding multiple QR codes. Leveraging UPI meant removing all charges on payments borne by the merchant. The founders were also keen on making a merchant network and monetising financial products.

Primary Business of BharatPe

Since BharatPe removed the entire system of charging commissions for payments, they had to make business out of some other financial products. At this stage, the co-founders realized that the kirana shop owners do have a steady income, however, in case the shopkeeper is in need of funds, he/she has to borrow from friends or the loan sharks because banks are unwilling to lend to these people considering the absence of the necessary documents. Here was the opportunity to tap into an untapped segment. Hence BharatPe came up with their loan products specifically targeted towards these kirana shop owners. While the reader might wonder, considering that even the banks are not lending considering the risk involved, does it make sense for BharatPe to enter into this segment. As a matter of fact, as per company’s sources, the loan repayment stands at a whooping 96%. Read on further to understand how.

The Loan Products

BharatPe has come up with an AI based algorithm that analyzes various parameters of a shopkeeper’s transaction such as frequency, volume, nature of the transactions etc which gives the nature of the cash flows of the business. This is then further compared & analyzed with the shopkeeper’s any previous loan history or credit score. However since BharatPe cannot lend money on its own, it has to partner with other RBI approved NBFC to make the credit available to the shopkeeper. Further, to attract merchants to avail of this service, they are being offered loans at a meager 2% interest rate without any collaterals. The surprisingly high repayment rate is mainly due to the fact that instead of requiring the merchant to explicitly pay the daily installment, it simply deducts the installment amount from the QR transactions amount before the bank settlement each day.

Talking numbers, these unsecured loans generally amount to Rs. 20,000 to Rs. 7 lakh per merchant for a duration ranging from 3 months to 12 months. Currently, BharatPe processes loans of around Rs 300 crore per month, and during the time of the pandemic this lending business grew by almost 10-12 times, while the payments side grew almost 4-5 times.

How BharatPe is Different?

BharatPe has conveniently chosen to focus on the merchant side which ensures that too much cash is not required to be burnt to maintain a base of consumers. Additionally, with their zero commission payments service, this attracts merchants to come to BharatPe’s platform and hence saves BharatPe a large sum in the form of customer acquisition costs. Further, BharatPe along with Centrum recently got the approval from RBI with regards to their banking license by taking over scandal hit PMC bank. This move by BharatPe is bound to fuel its next stage of growth. One of them being with an outright & simplified opportunity to increase margins on loans through the lowered cost of acquiring funds with their foray into the banking segment. This will further differentiate BharatPe from its rival fintech firms who are yet to obtain any banking license and hence are not able to diversify their portfolio.

Authors’ Take

While the business model of BharatPe is interesting and has scope in the future but currently it doesn’t look good. Let’s have a look at some financials :

Observing these numbers, we can infer that BharatPe is bleeding money profusely. The reaction of the authors can be best portrayed by the words of co-founder of BharatPe himself:

To put things in perspective, if we look at the data for FY20, we can see that to generate a revenue of around Rs 6 crore, BharatPe incurred an expense of around Rs 229 crore. Even though the segment that BharatPe is operating is lucrative, it is still important for BharatPe to work upon increasing its margins to

bridge this wide gap. With the acquisition of PMC Bank, it does give BharatPe to diversify its business offerings and reach out to a more wide customer base, and if the technology can be integrated with it then there is no doubt that BharatPe can overtake its immediate fintech competitors like PhonePe, Paytm etc. But will BharatPe ever manage to close down on this gap and venture into the path of profitability? Only time will tell.

References

Aishwarya | Ayush | Bhavya | Jayati | Shivika | Varshita

Apoorva | Jeevan | Priyank | Rajdeep | Sakshi | Shelly | Varnika

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