By December 2022, PhonePe plans to double its consumer user base to 500 million by investing and deploying manpower particularly in Tier-5 and beyond towns and cities. The company has 100 million monthly active users and processed 825 million transactions on the Unified Payments Interface (UPI) platform in October this year, giving the payments app a market share of 40% in UPI transactions, it said in a press release last week.

The company plans to double its merchant base to 25 million from 12 million at present on its payments network by next year, Hemant Gala, PhonePe’s head of payments, banking and financial services told MediaNama. “Our vision is to become the largest transactions player in the country which is built on digital payments,” he said.” PhonePe works on the principle of building services across three axis: the right use-cases, the right products and growing the acceptance infrastructure and network, he said.

On revenues and the merchant discount rate

Going forward, the strategy for revenues are going to be multi-track, says Gala. “Ads and monetisation will be a key pillar, payments for financial services will be another key component, and there is also the hope of the merchant-discount-rate (MDR) coming back,” he said.

Last year, as part of its budget proposals the central government removed the MDR on UPI and Rupay debit cards and said that all businesses with an annual turnover of more than ₹50 crore will have to offer digital payment modes. Prior to the budget announcement, the government was subsidising MDR, which is typically 1.5-2% on every transaction, for low-value digital transactions below ₹2,000. “Zero MDR has impacted our revenues and in our view we will need to put in efforts on the acceptance side for at least a decade to make payments mainstream. We are hopeful there will be some intervention going forward,” Gala added.

Building financial services on top of payments

Since all payments companies acknowledge that revenues have collapsed since the MDR was gradually reducing prior to last years’ budget announcement, over the last few years they have gradually shifted to building a ‘stack’ of services over and above routine Person-2-Person or Person-2-Merchant payments. These include bill payments, payments for financial services, cross-selling financial products like mutual funds, insurance and loans, in addition to building more business services on the merchant-end of the business to encourage further digitisation of micro-small-medium-enterprises in the country.

While PhonePe is yet to foray in lending, unlike its counterparts that have either began cross-selling loans for merchants and consumers through their apps, it has made considerable headway in the insurance and mutual fund space especially in the wake of the COVID-19 pandemic. The Flipkart-owned payments app began in January with tying-up with leading mutual fund houses to allow user to pay their monthly installments via the app and in May this year it launched a super fund scheme allowing users to invest across four mutual fund houses and their schemes for as low as ₹500. In September this year, it expanded the mutual fund offerings by allowing its users to invest in seven different types of schemes. On the insurance side, it currently offers six insurance plans such as COVID-19 insurance, hospital daily cash, travel insurance, dengue & malaria insurance, and personal accident cover. Between April and August 2020, it sold over 5 lakh worth of insurance policies, according to a press release.

“Both mutual funds and insurance have worked very well for us in the last few months and we crossed 0.5 million policies on the insurance side, with many more in the pipeline to be launched by December this year. We will have a comprehensive insurance platform in the next few months,” said Gala. He added that adoption for insurance policies has emanated from 15,000 pin-codes across the country which indicates PhonePe’s penetration across various towns and cities. “The same is for mutual funds as 30-40% of the customers are new to mutual funds investors,” he said.

“We have consciously looked at one business at a time and then scaled it. COVID-19 has put things into perspective, so we will hold off on providing lending for the next 12 months and work on deciding the contours of a lending product,” said Gala.

Growth strategy going forward

We are clearly headed towards taking merchant acceptance to Tier-5 beyond towns and cities, and seeing the smartphone penetration we believe India is ready to adopt digital payments. Any effort on the offline space requires cost and manpower,” he said.

In FY19, PhonePe reported a net loss of ₹1,907 crore, higher from ₹791 crore in the previous year, according to filings with the Ministry of Corporate Affairs. It spent ₹1,296 crore on advertising and marketing expenses in FY19, compared to ₹602 crore in the previous year. The company’s revenues grew ₹184 crore in FY19 from ₹142.8 crore in the previous year. Filings for FY20 were not available.

In August this year, Business Standard reported that the company is working on an initial public offering by 2023 pegging the valuation of the payments firm at US$7-10 billion.

To grow the merchant network across Tier-5 and beyond towns and cities, PhonePe is scaling up its foot soldiers on the ground over the coming months. At present they have close to 7,000 people on the ground that work on acquiring merchants. “This manpower to increase acceptance will come at a cost. It will be difficult but if we solve for the right constructs and use-cases, it will give customers the option to migrate. In general, growing acceptance is not an easy job so there will be heavy investments going forward in this direction especially without MDR,” Gala said.