Digital payment services firm PhonePe was launched in 2015 by Sameer Nigam, Rahul Chari and Burzin Engineer. With a market share of 46.04% and 1-billion transactions a month, PhonePe has cornered a lion’s share of the payments pie, and is valued at $5.5 billion. After payments, PhonePe now is looking at the next big digital frontier — financial services.

The Idea!

Sameer Nigam: Rahul Chari and I came out of a four-year-long exhilarating journey with Flipkart, witnessing the first big hockey stick effect in the start-up ecosystem in India. All three of us are engineers who love product-led strategies. When we looked at the consumer internet space in India, we felt that just as search, social or chat, payments, too, was in the primitive layer, but it could be a horizontal ubiquitous layer that could solve financial inclusion at scale. That’s how the concept of payments or transaction-based platforms came into being. It was still the pre-UPI era where banks were using IMPS [immediate payment service]. But they were not convinced about partnering with us. Then in 2016, we attended the first hackathon on UPI where the likes of Nandan Nilekani, the regulator and the NPCI, sounded excited. We also saw big banks, ICICI, Axis and Yes Bank, saying, “we are in”. We left that meeting, scrapped everything we were doing and said: “we are all in!” We were clear that either UPI will work like a charm or it will be a total bust. The next port of call was with Binny Bansal who had taken over as the CEO of Flipkart. What we wanted was strategic and operating autonomy besides capital runway for three years, and our promise was that we would build, on top of UPI, India’s largest payments company. He agreed and we merged back with Flipkart, even before launching. Finally, in 2020, we spun off and here we are!

Early Struggle

Even though we had the capital runway, we spent very little in the first year. We set annual targets which were very aggressive — Flipkart-like targets. We were operating like a Series A company for the first two years. By then wallet companies had already become large —Paytm had raised $1billion and Freecharge had raised $100 million. That’s when serendipity struck again. Demonetisation was announced and when ATMs went dry, we were summoned as the only private non-banking player to Delhi and were asked how do we solve the peer-to-peer money transfer problem? We told them you are sitting on the most progressive public-private collaboration stack in the world today. That’s how Bhim UPI was born!

Make Or Break Moment

The one thing that set us on the map was August 28, 2016 — that day UPI was launched, and so was PhonePe. We had enough credit in the Bangalore ecosystem in order to get early adopters — we were adding 5,000 users a day. Once demonitisation happened, we had 10 million installed users by December end. The need for peer-to-peer money transfer, mobile recharges and all critical services had to move online. It was a super-turbo charger moment in PhonePe’s journey.

The Business Model

If you’re on the path of payments of any and every kind, each category and its sub-category will be a big contributor as long as you keep operating costs down. So, our focus is on automation. We have a very, very high contribution margin because we have kept operating costs low. We also sell insurance policies on PhonePe, and are one of the fastest-growing MF distributors.

Tech Challenge

Most banks have outsourced their tech stack, which means they are not monitoring error codes. The first thing we did was to build an automated dynamic kill switch system. Instead of letting two or three of every 100 users initiate a transaction where the money gets debited but doesn’t reach the party, we don’t allow the customer to do the transaction. By avoiding any payment-led friction, you earn the consumer’s trust.

HR Challenge

Culturally you have to be honest with your employees. We have told our internal team that your task is to get the job done by automation. But you don’t have to worry about not having a job because you will never reach perfect automation. They have the comfort of knowing that if they make an intellectually honest decision, and do things right, they will have a thriving career. All our full-time employees have Esops. We publish our P&L statements across the entire employee chain but so far never had a leak. That’s how trust works.

Managing Investors

In the first year when we were building stuff, nobody cared because we hadn’t launched. Then suddenly WhatsApp, Amazon and Google started announcing that they were coming. Suddenly there was this paranoia phase of “OMG our competitors”. I think the hardest thing was explaining to investors why you can still win with a product on a fully interoperable network and why capital will not ultimately prevail. The second struggle was when we chose not to play the cashback game. Cashback is great to turbocharge early on. We played it for a year, but structurally it did nothing for us. We found that if people want to pay a bill and they liked the experience, they will come — with or without cashback. But that meant we lost market share. Though we have always been in the top three, it kept oscillating. Last November, we were at 33-35%, and Google was at 46% [according to NPCI data]. Today we are at 47%, Google is at 33%. We have added 30-50 million people; we are trying to build a business that will be profitable. But that’s also not very easy to discuss with early stage investors.

Marketing & Sales Lessons

The best feedback I got from all my investors early on and I remember Lee Fixel telling us: “Don’t spend your money on cashback. Prove that the product has legs instead of using cashback, and then make sure you’re a household brand.” That pivot we made really transformed the business.

When Did You Think You Had Arrived

As a payments player we felt we had arrived last year. We have fended off competition from Paytm, Google, WhatsApp and Amazon. Banks have settled into a very happy partnership model and that is the right outcome.

Riding Through Toughest Times

The toughest time was when ICICI Bank shut us down in 2018 and made the case that we were not legit. The episode went all the way to the regulator and NPCI. There were claims and counterclaims. That was nerve wracking but we hoped that fairness would prevail. Eventually it did — today ICICI is our banking partner! The other challenging phase was when the Yes Bank moratorium was announced and our UPI handle was shut down. The team worked overnight with NPCI and our new UPI partner, ICICI Bank. Thanks to Sandip Bakshi and team, we were back in business within 24 hours.

What Next?

We are the incumbent on the payments side, but on the consumer, merchant and ecosystem fronts we believe we are at Day Zero. Having said that, every 8th adult Indian today uses our app every month, 1 in 3 Indians has our app already, so we are growing in ways we hadn’t imagined, but faster than we thought!

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