The crisscrossing paths of Flipkart and PhonePe

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A fortnight ago, Flipkart announced the launch of a lending platform with private sector lender Axis Bank. Its sister company and fintech firm PhonePe had launched a lending marketplace for merchants less than a month ago.

While PhonePe is a market leader in unified payments interface (UPI) with around 47 percent market share in the country's most popular digital payments platform, Flipkart is planning to launch its own UPI payments. They have utility payments and also aggressively sell insurance on their platforms.

Both platforms allow hotel, bus and train tickets and flight bookings on the platform. What is interesting here is while Flipkart uses Cleartrip, which it acquired in 2021 to power these services, PhonePe uses Makemytrip as its partner.

In April this year, PhonePe launched ecommerce app Pincode on the government’s non-profit platform open network for digital commerce (ONDC). While this does not compete directly with Flipkart, it does seem like the companies are facing off against each other.

Both Flipkart and PhonePe are majority owned by US-based retail giant Walmart. From being a subsidiary of Flipkart, PhonePe was spun off as a separate company in December last year and ecommerce firm does not own any shares in the payment company. PhonePe now has new external investors outside of Walmart who probably expect the company to be bigger than Flipkart.

“So be it”

“Flipkart is also competing with Amazon, which also has similar services. They are separate entities and there is not much of a synergy or cross-pollination of customer data. With different investors and different strategies, the overlap of products and services is inevitable,” says Madhur Singhal, managing partner and CEO at Praxis Global Alliance.

Flipkart acquired MIME360, a media distribution startup founded by Sameer Nigam, Burzin Engineer and Rahul Chari, in 2011. The three executives started working at Flipkart in senior roles. After more than three years, they went out to start PhonePe, a digital payments app.

While the company was looking at raising money to take on the big digital wallet players, Flipkart wanted a payments play and cajoled the PhonePe founders to join back the company with enough funding and independence to run the company as they pleased. The company was structurally and organisationally different with the PhonePe employees always carrying separate ID cards. Losing the payments play that Flipkart always wanted is not lost on anyone.

“The truth of the matter is, the board and all the investors understand and now appreciate that we are very, very different companies and businesses, both. And, therefore, we need to chart our own destiny. Now if that means that we will compete in certain areas, so be it,” Nigam told Moneycontrol in a recent interview.

Flipkart and PhonePe did not offer any comments for the story.

The game of growth and potential

"Now with independent ownership, their destinies also seem to be different and the paths are intertwining more as the companies want to keep growing even as the addressable market remains the same in the short term," says a founder of a profitable startup and an angel investor in several unicorns, who wished to remain anonymous.

While ecommerce has been gaining market share over offline retail, the shift has slowed down over the last few years. With the growth spurt coming from Covid restrictions also winding down, Flipkart is looking at new growth avenues in financial services.

Unlike Flipkart, PhonePe continues to grow fast as more people adopt UPI for small-ticket payments with the company expected to touch 500 million users by this year's Diwali. The company’s challenge is that for its valuation of around $12 billion, the revenue of around Rs 2,655 crore during the year ended December 2022, looks puny.

This is probably forcing the company to expand its suite of products to monetise its large 465 million registered user base. For FY22, the company had reported 99 percent of its income from processing payments. While UPI payments volumes have grown by close to 70 percent over the last year or so, the revenue will not grow at a similar rate as there is no merchant commission for UPI payments and the company will have to diversify to grow its topline.

"If the addressable market or the monetizable market for the companies remains the same, the only way the companies can keep growing is by entering new markets while catering to the existing customers. A lot of large digital firms that already have a large customer base need not spend aggressively to get new customers by offering new services. As the companies are trying to reduce their losses, this strategy makes more sense in the medium term," says a fintech consultant who did not wish to be identified.

For instance, the incremental cost of getting more revenue from existing customers is often cheaper than acquiring new customers even if they belong to the company's core business domain.

Catching up with valuation

"When you are a company that has raised money from investors at a steep valuation, first you will have the pressure to meet their expectations of growth. And then the existing investors need to see the valuation rise well enough for them to make money while exiting a few years down the line," says the founder and investor quoted above.

PhonePe founder and CEO Sameer Nigam mentioned at the recent Moneycontrol Startup Conclave that the monetizable market for Indian startups could be only around 100 million consumers in the short term. He had also added that the company is looking at a larger time horizon for it to realise its full potential growth.

PhonePe has been expanding its offerings at a rapid pace over the last one year or so. It launched a PoS device a fortnight ago installed with its PoS app that can be linked with its own transaction announcement smartspeaker, its answer to Paytm's PoS machines that can be linked to the Soundbox. Paytm has installed close to 7 million devices, which earn a monthly subscription fee. PhonePe has more than 35 million merchants, a sizable market.

The Bengaluru-based company has been offering its payment gateway solution to online merchants without any commissions as it looks to wean some customers away from competitors. It helps PhonePe as many of the payment gateway firms such as Razorpay, PayU and Paytm have been asked by the regulator to stop onboarding new customers since late last year.

"They have got a stable platform of over 200 million monthly active users. Their usage metrics on UPI, market share and even merchant traction also did not see much fluctuation over the last couple of years. PhonePe probably thinks this is the best time to expand into various financial services products,” says the fintech consultant quoted above.

The nuances of the rivalry

While it may seem like Flipkart is going after PhonePe’s bread and butter, the focus is clearly to target a different set of consumers. The ecommerce firm is hawking personal loans in its lending platform whereas PhonePe currently looks at merchant loans.

While Flipkart has a credit marketplace for its sellers, the company is targeting customers who take loans north of Rs 1 crore. PhonePe’s target here is small merchants and mom-and-pop store owners rather than large retailers.

Flipkart Pay Later is designed to help ecommerce shoppers with credit to enable them to purchase more products on its platform. Its credit card is also designed to do the same. While the company has utility payments, it is enabled only for users who have opted for the Flipkart Pay Later product, a small subset of consumers.

“Flipkart’s confidence in financial services stems from the success of its co-branded credit card with Axis Bank, an indication that it has a loyal customer base of four million customers who can be served with personal loans, for which the interest rates would be much lower than revolving credit card dues, a sizeable and captive market,” says an ecommerce analyst.

PhonePe does not yet target a similar clientele but going by its rival Paytm’s growth trajectory in Paytm Postpaid loans, it is highly likely that it could soon enter the segment. Both Paytm and Google Pay also have co-branded credit cards with banks and sooner or later, PhonePe will also likely enter the lucrative market. However, going by Paytm’s experience, it is not going to be a large market for PhonePe. Paytm has only six lakh credit card customers despite being in the business for around two years.

Bottomline - the active and passive users

While there is definitely an overlap of users, the most loyal and active users of PhonePe and Flipkart are not the same. While a typical active payments user could be visiting the app multiple times in a week, the frequency for an ecommerce app would be likely to be less than half.

But then a typical ecommerce user's average ticket price could be several times higher than a payment transaction. For instance, 84 percent of all UPI merchant transactions are below Rs 500. PhonePe’s average transaction value is also Rs 1,683, most of which is owing to the high-value person-to-person money transfers that cannot be possibly monetised. In comparison, an ecommerce site earns around 15 percent commission from a single sale of a product.

Payments is highly commoditised and the commission earned through it is not enough for the company to be profitable. Nigam also highlighted this market distortion in the payments ecosystem where money is being raised by the private sector but monetisation is getting very difficult.

"Trying to say that your company won't make money on the core business instead doing a societal good and now public good is not a strategy. There are 700 million internet users to whom we need to make digital payments accessible… but in this industry barring a few B2B players it is difficult to make money. In fact, the next highest profit pool last year was actually NPCI's," Nigam said at the Moneycontrol Startup Conclave.

Nigam has said that the company has no plans to compete with Flipkart directly. It has no other option but to explore various monetisation opportunities that could potentially clash with that of its former parent company.

Flipkart’s parent firm Walmart is expecting the ecommerce giant to go for an initial public offer sooner than later, probably in the US. Meanwhile, being in the highly regulated payments space, PhonePe has flipped its company domicile to India while also looking at potential listing in India.

Going by the experience of listed Indian technology startups, markets expect them to be profitable apart from their growth potential to sustain high valuations. Nigam has also made it clear that PhonePe will only list after the company becomes profitable. The Flipkart story cannot be much different and while chasing growth and profitability, the homegrown ecommerce giant has no choice but to explore potential opportunities outside of ecommerce.

To put it in Nigam’s own words, if their paths crisscross because of their compulsions to grow and evolve, so be it.