Shopkeepers in India are a harried lot. Events like the Covid-19 pandemic usually hit mom-and-pop or kirana stores the hardest; margins are shrinking every other day. And despite offering credit to their customers, when it’s time for them to invest in their business, the friendly neighbourhood merchant has little to no options in the formal sector.

“Small shops in India solve hundreds of problems. But the shopkeeper has to borrow from friends or loan sharks for capital as banks won’t give him a loan as he has no papers,” says Ashneer Grover, 39, co-founder and CEO of BharatPe, a New Delhi-based fintech startup. And it wasn’t just limited to loans. Or the pandemic. Since India’s digital renaissance in 2016, fintech companies like Paytm and PhonePe have focussed on payments, but zeroed in on the customer by spending boatloads on incentives such as cashbacks to sign them up. It was left to a student at the Indian Institute of Technology (IIT), Delhi, to focus on the other side of the equation—the shopkeeper.

“During my IIT days [around 2017-2018] I was working on a startup. It is then that I identified a huge problem faced by merchants/SMEs—the challenge of accepting payments digitally without losing out on margins,” says BharatPe co-founder Shashvat Nakrani, 22. SMEs, he says, are the backbone of the Indian economy and one of the most underserved segments.

“No payment gateway or wallet was taking less than 1.5% commission. Moreover, awareness of the UPI system was practically zero. That’s when it struck me that we should be leveraging UPI to remove all charges on payments, build a network of merchants, and monetise through other financial products,” adds Nakrani.

Image : Graphics by Rahul Sharma

The then aspiring engineer had figured out a way to help merchants by leveraging Unified Payments Interface’s (UPI) star feature—interoperability, which was largely ignored by the closed ecosystems of payments companies back then. (In October 2020, the Reserve Bank of India said payments companies would have to shift to interoperable QR codes by March 31, 2022.) Nakrani’s solution meant merchants needed only one QR code that could be used by any payments app. But he was unsure of how to commercialise it. Enter Grover, 16 years Nakrani’s senior at IIT, Delhi. While Nakrani had the tech skills, Grover came with the “sense of strategy and execution”. Thus was BharatPe born, with Nakrani dropping out of IIT to set it up.

His career path seems to have honed Grover, an alumnus of the Indian Institute of Management, Ahmedabad, for his current role. Seven years at Kotak Investment Banking taught him “how to build a business from scratch, because Uday [Kotak, executive vice chairman and managing director] too hadn’t started his business too long back”, says Grover. Over nearly two years at American Express, he met more than 100 founders who were only into payments. “I got an understanding of the industry from there.” His experience with the retail space came as CFO of e-grocer Grofers for two-and-a-half years. He came away with two insights: “One, margins were low in retail; and two, shopkeepers won’t pay for service.” But he did realise shopkeepers were ready to pay interest on loans. That’s when he decided to do something in the fintech space, with kiranas at the centre.

In June 2018, BharatPe launched its merchant-focussed QR code as a pilot in Nehru Place, a commercial hub in New Delhi. Some 1,000 merchants came on board in the first month, lured by the interoperability feature and, more importantly, zero transaction fees. Grover says shopkeepers would insist on cash just to save on transaction fees, since they operate with margins of around 15%.

“In a way, we were able to solve the reason why digital payments weren’t picking up in India—because shopkeepers had a problem with being charged for digital transactions,” says Grover. Not only that, merchants also got their money credited on the same day, which wasn’t common then, he adds.

Image : Graphics by Rahul Sharma

The fintech startup hasn’t looked back since. It launched its QR code commercially in August 2018, and six months later, en - tered the lending space. It did this by partnering with non-banking financial companies, or NBFCs, to disburse loans. A few months later it partnered with peer-to-peer (P2P) NBFCs, like LiquiLoans and LenDenClub, to launch P2P investments, offering merchants a return of up to 12%. BharatPe ac - quired its first set of merchants in double-quick time with QR codes, but to retain and monetise them, it launched a lending product and P2P investments.

“We are capital providers to small businesses. Whatever else we do is incidental,” Grover says.

But how does the loan product work? BharatPe has developed an artificial intelligence (A.I.)-based algorithm that picks up various signals—the kind of transactions a shopkeeper does, their usage of other products on the platform, etc.—which gives them an insight into the business’s cash flow. This is then analysed in tandem with the merchant’s loan history and credit score to make a loan offer. For a willing shopkeeper, the fintech firm’s NBFC partner processes the loan and credits the merchant’s account in a few days. All digital, hassle-free, and, perhaps most importantly for the shopkeeper, collateral-free.

These unsecured loans are in the range of ₹20,000 to ₹7 lakh for up to 12 months and come with an interest rate of about 2% per month. The merchants pay back the loan in easy daily instalments. Currently, BharatPe processes loans worth about ₹300 crore each month. This fiscal, it plans to launch a suite of secured lending products for merchants, including gold and auto loans.

But lending comes with its own set of risks, especially in uncertain conditions. “A lot of fintech companies that developed algorithms for lending—in terms of identifying customers and lending to them—that worked out well. But the problem is, especially in this kind of a pandemic where there are huge collection problems and defaults, a lot of them do not have a workforce for collection,” cautions veteran banker Samit Ghosh, who founded Ujjivan Financial Services.

BharatPe, however, says its repayment rate is 96%, among the best in the market. That’s because instead of requiring the merchant to pay the daily instalments, it deducts the amount from the QR transactions amount before the bank settlement each day. Given the ubiquity of digital payments, it turned out to be a win-win situation, especially during the pandemic.

“Last year, our business on the payments side grew almost fourfive times. The lending business grew almost 10-12 times,” says Grover. “When shops reopen, the market will move away from cash. Also demand for credit will go up as the shopkeepers have had to keep their shops closed for long and to restart their business they need capital. The immediate effect in the month the lockdown happens is transactions go down. After the lockdown is lifted, there’s a multiplier effect.”

Today, BharatPe—valued at $900 million in its Series D funding round announced in February—says it has 6 million merchant partners, processes more than 106 million UPI transactions per month, and has disbursed loans worth ₹1,600 crore. All in less than three years since starting up.

And it’s not slowing down. In August 2020, it introduced BharatSwipe, India’s first zero-fee point-of-sale (POS) machine that required only an upfront payment. BharatPe is now the No.3 private POS player in India, claims Nakrani. In March, it rolled out another lending product, distributor-toretailer (D2R) finance, to provide instant liquidity to distributors, wholesalers, traders, and dealers. It will also offer collateral-free loans of up to ₹50 lakh for 7-30 days. “You have to bring a new product to the market every time. And our ability to bring out new products and to execute on them is very high,” says Grover.

BharatPe seems to be on the right path. “With increasing competition in the payments space and post the initial phase—and focus on client acquisition and facilitating transactions—digital payments startups have started offering credit as a product to retain clients, monetise data, and transaction history,” says Bama Balakrishnan, COO, Northern Arc, from which BharatPe recently raised ₹50 crore as debt. It has also raised debt of more than ₹300 crore from Alteria Capital, InnoVen Capital, Trifecta Capital, ICICI Bank, and Axis Bank.

The startup has raised $233 million in equity investments till date, from marquee investors such as Sequoia Capital, Ribbit Capital, Insight Partners, Coatue, Steadview Capital, Beenext, and Amplo. The early birds enjoyed handsome returns. “The fact that it has given 80x returns to investors in less than three years speaks volumes about its growth and the strong moat it has to differentiate from the existing players in both the digital payments and lending business,” says early investor Anuj Golecha, co-founder of Venture Catalysts.

But how has BharatPe differentiated itself from competition, all of whom seem to have bottomless pockets? “We have chosen to be on the merchant side which ensures that you don’t have to burn too much cash to maintain a base of consumers. Second, we started monetisation very early, because when you lend, it doesn’t create friction in your main business. It works as a flywheel,” says Grover. He says BharatPe ensures it doesn’t spend more than $2 million-$3 million every month and claims they still have some $165 million of the funds they have raised till date in the bank. “We compete with the top five companies in the world by cash reserves: Walmartbacked PhonePe; Alibaba-backed Paytm; Facebookbacked WhatsApp Pay; Amazon-backed Amazon Pay; and Google-backed Google Pay. You can’t win by capital; you can only win by innovation, proposition, execution on the ground, and servicing of the merchant.”

He attributes BharatPe’s success to good execution and a robust team—16 on the senior team have been independent CEOs or run their own startups. And banking on them, BharatPe wants to deepen the suite of services for merchants, scale up D2R financing, and even enter the consumer space if it helps shopkeepers. The endgame is “to become a digital bank that can serve as a one-stop destination for all merchant needs,” says Grover.

But even as Grover aims to be a banker for merchants, traditional banks have realised the potential of the kirana economy. For example, Kotak’s digital unit has also started acquiring merchants using QR codes. However, in the digital lending space, “PSUs and larger private sector banks are yet to jump onto the bandwagon because of the limitations of their underwriting policies,” says Northern Arc’s Balakrishnan.

Last year, BharatPe and Mumbai-based financial services major Centrum Group bid for the fraud-hit Punjab and Maharashtra Co-operative (PMC) Bank, which is under government administration. While they are one among three groups in the fray, what happens if they win? “We will capitalise it very well, manage it very well, and we will get it up and running immediately,” says Grover. The lending business will play a key role. “We have set ourselves a target of 5x growth and are aiming for $30 billion TPV [total payment value] by March 2023. We also aim to grow our lending business manifold and have committed to disburse $700 million of loans to small merchants and kirana store owners by March 2023. We will be expanding our reach to 300 cities in India by 2023,” says Grover.

So, while Grover seems to be following in the footsteps of Uday Kotak, who he admires and respects, he might have to be on high alert as Kotak, and other big banks, give him a tough fight.

(This story originally appeared in Fortune India's June 2021 issue).

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