India's pay later services accelerate digital payment, market worth billions

04, Oct. 2021

From left, BillDesk founders MN Srinivasu, Ajay Kaushal and Karthik Ganapathy who had successfully created a popular payment gateway in India.(Photo: BillDesk)
From left, BillDesk founders MN Srinivasu, Ajay Kaushal and Karthik Ganapathy who had successfully created a popular payment gateway in India.(Photo: BillDesk)

By Atul Ranjan

INDIA, NNA - The surge in the popularity of the flexible payment method of buy-now-pay-later (BNPL) is not only driving the tremendous rise in digital payment in India, but is also offering immense growth potential and investment opportunities.

The payment method that initially began with e-commerce marketplaces has gradually spread to other industry verticals. Food delivery, the travel industry, and online grocery shopping are some of the areas where BNPL providers are seeing a lot of growth.

While higher purchasing power proffered by BNPL during challenging times of the coronavirus pandemic is accelerating growth, it is the informal nature of accessing credit that is acting as the primary driver behind its rise, according to the Q2 2021 BNPL survey by Research and Markets.

BNPL payment in the country is expected to shoot up by an astounding 72.7 percent to reach about $6.3 billion in 2021, said the research firm which believes the segment will continue to be robust in the long term.

It expects BNPL adoption to grow steadily at a CAGR (compound annual growth rate) of 28.9 percent from 2021 to 2028, with gross merchandise value in the country increasing from $3.6 billion in 2020 to hit $37.4 billion by 2028.

Among the BNPL players are Simpl, ZestMoney, LazyPay, Capital Float, PineLabs, Paytm Postpaid, OlaMoney Postpaid, Amazon Pay Later and Flipkart Pay Later.

India was well on track to record significant growth in the digital payment market even before the pandemic. However, the global coronavirus outbreak has dramatically hastened the shift, said Research and Markets.

In addition, the positively strong growth of e-commerce helped startups and fintech giants to move into the BNPL space in India.

Amazon's pay later service has attracted more than two million users and processed more than 10 million transactions since its launch in April 2020.

This surging popularity of credit among consumers has forced traditional banking players to venture into BNPL.

To attract non-credit card users in the country, conventional banks such as ICICI Bank and HDFC Bank have added BNPL services to their existing set of financial products.

In November 2020, ICICI Bank, in partnership with PineLabs, launched a flexible payment solution that allows consumers to make in-store payments.

The success of India’s digital payments giant Paytm, which counts Ant Group and Softbank among its key investors, has paved the way for its coming public listing. It has filed for a $2.2 billion initial public offering that has got many investors excited.

Recently, Netherlands-based global consumer internet group Prosus N.V. seized opportunities in the digital payment wave to acquire local BillDesk, the South Asian country’s leading and oldest digital payment gateway.

The $4.7 billion deal will see Prosus integrating its payment and fintech business PayU with BillDesk to create a diversified platform for much further expansion.

Collectively, PayU India and BillDesk provide payment gateway services in areas encompassing e-commerce, travel, bill payments, government sector, SMEs, credit solutions and personal loans as well as security and risk management.

“PayU India and BillDesk run complementary businesses within India’s digital payment industry. Together, the two expect to create a financial ecosystem handling four billion transactions annually - four times PayU’s current level in India,” the company said.

“The combined entity will have $147 billion of volumes (total payment value). This will make us a significant player in the Indian digital payment market,” said Laurent Le Moal, CEO of PayU, when he spoke at an investor presentation on Aug. 31.

The combined entity will have the technical capabilities and resources to work with big tech players such Google, WhatsApp, Amazon and India's Jio Platforms, he said.

“PayU can now scale new opportunities across all fintech space in India,” he said, adding that the company plans to complete the transaction for the acquisition by late this year or early 2022.

This will enable PayU to become one of the leading online payment providers globally, handling a total payment volume of $147 billion.

A PayU India spokesperson told NNA that the company will decide whether BillDesk will be renamed and come under the PayU brand

The deal has brought Prosus’s cumulative investments in the Indian tech space to more than $10 billion.

Prosus said the merger of PayU India and BillDesk will meet the changing payment needs of digital consumers, merchants and government enterprises in India and deliver state-of-the art tech services to even more people in currently excluded groups in society.

The combined entity looks to strengthen positions in emerging segments such as merchant payments and consumer finance, said Prosus, which expects the digital payment market in India to hit $2.6 trillion by 2026.

In addition, the addressable market in the overall fintech segment covering categories such as digital payments, lending, wealth management and insurance is expected to more than double to $5-6 trillion in the next five years.

The growth potential is enormous as cash is still king in India, accounting for 72 percent of total consumer spending, said Prosus.

It said the country is credit starved as household debt only makes up 11 percent of the GDP compared to 84 percent in the US. Also, less than 3 percent of the Indian population invest their savings in equities and mutual funds apart from very low insurance coverage.

Prosus also noted that 40 percent of credit for small and medium enterprises now come from informal channels.

Mumbai-based BillDesk was founded in 2000 by Ajay Kaushal, MN Srinivasu and Karthik Ganapathy.

The company is backed by investors such as General Atlantic, Temasek, Clearstone Venture Partners, State Bank of India, and SIDBI Venture Capital.

PayU, headquartered at Hoofddorp in the Netherlands, was founded in 2002, and is the payment and fintech arms of Prosus, which is majority-owned by Naspers.

In India, PayU serves more than 4,50,000 merchants with over 100 payment methods and is the payment partner for e-commerce merchants, including all leading e-commerce firms and a majority of airline businesses.

Globally, PayU operates in more than 20 high-growth markets across Asia, Central and Eastern Europe, Latin America, the Middle East and Africa.

According to Moody’s, the payment segment in particular is expanding exponentially in India, helped by the introduction of the Unified Payments Interface (UPI) by the Reserve Bank of India (RBI) in 2016.

The UPI, a QR code-based payment system open to banks and providers of digital payment services, allows consumers to make peer-to-peer payments just by sharing their mobile numbers without using bank account details.

With almost all banks and fintech companies allowed to offer instant payment services on the UPI, the system gained traction quickly since its inception in the country.

Moody’s noted in its recent report that the RBI's digital payments index, which measures the development and penetration of digital payments, has more than doubled in the past two years - from 100 points as of March 2018 to over 200 points as of March 2020.

RBI also estimates that the number of digital transactions will jump to 87 billion in 2021 from about 40 billion in 2020. Already, the number of digital payments increased by more than seven times to around 40 billion between 2015 and 2020, according to data from the RBI.

The rapid growth in digital transactions was in part triggered by the demonetization of large currency notes by the government in November 2016, which was originally aimed at curbing unreported income, tax evasion, corruption and financing of terrorism.

Moody’s analysts noted that India's push for digital financial services actually started much earlier, dating back to 2010, when the country introduced a biometric identification system called Aadhaar.

Most of India's 1.3 billion people now hold Aadhaar IDs, making it the largest digital identity program in the world. Banks allow people to use Aadhaar IDs to open accounts without having to show paper documents.

Other key drivers are the growing middle-class population and an increasing penetration of smartphones and high-speed internet.

“India now has 700 million internet users and that makes it the second largest internet market in the world after China, and it's twice as big as the US, and is still growing very quickly,” said Prosus group CEO Bob van Dijk at the investor conference.

“The combination of affordable smartphones combined with inexpensive data has really accelerated innovation in the fintech market in India,” he said.