Monetisation in Consumer Payments (#63)
Understanding the need for monetisation in the present climate, and the ways to approach the strategy
Welcome to the 63rd issue of Unit Economics. In this article, I dive deep into the investment and business need for monetisation in consumer payments, and share thoughts on the many ways they can be monetised today. Dive in!
It is a tough time to thrive for startups in India. Relentless inflation, ineffective increases in interest rates, and struggling technology investments in the west have formed troubling tailwinds for startups in the east.
Consequently, institutional investors and limited partners, to safeguard their money, have developed a relatively bear outlook for venture and private equity investments. This has resulted in lower commitments and more accountability for the field investors, mandating an urgent change in the nature of discussions they have with founders.
For example, while acquisition and growth metrics were favored points of discussion earlier, the same conversations quickly turn traditional and nuanced now with a focus on monetisation and business sustainability.
The change in investor narrative directly impacts the ground-level focus of startups and puts each kind in a different dilemma.
For the ones growing fast, the investors are wary of the fast-depleting capital and the uncertainty in the performance of revenue lines. More than the scale of the platform then, the estimates of the scale of the potential paying users on the platform appear crucial. In this instance, these startups are being put in a position of needing to manage their costs without hindering much growth, establishing revenue lines, and raising funds to buy more time and resources – all at once.
For the ones struggling with growth or product-market fit, investors continue to question the execution capability, business strategy, and team quality as they would have before. However, these startups are today caught in an unfortunate gridlock, where investors demand both growth and revenue. Ideally, at least in B2C fintech, a startup would want to reach a critical mass before monetising. However, without money to acquire, revenue must be delivered relatively prematurely – putting the focus on startups to build moats and drive low-cost product-led growth. Those that are unable to, struggle.
As a result, startups are finding it harder to attract investments or get acquisition bids at a premium, making it essential to build monetisation levers for survival. If we zoom in on the world of consumer payments, the challenges get even more compounded.
Regulations only make it worse
There is a fair amount of appreciation in the industry for the customer-centricity of the recent RBI and NPCI regulations. (A) The cleanup of digital lending, (B) clarifications around credit on PPI and BNPL models, (C) safety in storage of card details, (D) push towards UPI interoperability and credit-on-UPI are all long-term measures in the right direction, as many of the industry veterans suggest.
However, only a few startups would agree with this notion given the complications that arise in the interpretation and navigation of these guidelines. For instance,
Uni, Slice, and a few others have had to pivot from offering credit-on-PPI to the more traditional lending models (personal loans, credit cards). In the many months these changes took, some businesses shut shop, and the rest had to stop all onboardings and re-activate / engage their previously active customers – both substantial business costs.
BNPL partners have, similarly, had to pause onboardings and find new ways of moving funds directly between the lender and the borrower. Meanwhile, questions on the business sustainability of such models have only grown.
Merchant platforms that accept card payments or offer repayments to cards have had to constantly re-configure new pay-in and pay-out solutions, both of which are yet to reach a level of maturity for the saved cards.
The constant notifications from NPCI, mandating the addition of UPI functionalities such as making UPI interoperable with PPIs, launching UPI Lite, introducing credit card or credit lines on UPI, among others - continue to take more than the desired legal & tech bandwidth for PSPs and TPAPs. The continued stance of maintaining UPI as a public good hardly offers any respite to the added cost of operations.
Commoditised services; struggle with charging premium
Payment platforms, due to their complicated multi-party nature, require the involvement of a few common intermediaries to process any form of payment.
For instance, UPI payments require the involvement of bank or non-bank Payment Service Providers (PSPs), Technical Service Providers (TSPs) that act as switches or offer integration support, and the NPCI. Bill payments are processed largely over the existing Bharat Bill Payment System (BBPS), with banks, PGs, and TSPs enabling the BBPS platform. Quite similarly, card payments require Payment Gateways (PGs), Card Networks, and banks for payment processing.
Notice the involvement of similar forms of intermediaries in different forms of payments. These intermediaries force industry-wide democratisation of any new form of payment to the extent that the payment method fast becomes a commodity.
As a result, it is almost impossible for a particular app or platform to offer differentiation in their payments service for long, other than via rewards – which is hardly sustainable for a business. The problem only gets compounded by the value-conscious and low-loyalty nature of an average Indian customer.
This commoditisation of the core payments services limits the potential for a platform to charge any premium, with the threat of getting undercut and losing customers. The brevity is further undermined by the low fixed ceilings on payments charges imposed by the regulators on the most popular forms of payments.
Lastly, in each form of payment, few – if any – top companies today inspire any confidence with their monetisation strategies. When the larger players – with their capital buffers – can continue to remain irrational far longer than a new smaller competitor can survive, the decision to start charging for payments services only grows tougher.
With a poor investment climate, regulatory hurdles, and the commoditised nature of the payments services – how do consumer payments in India sustain themselves?
Many who ask this question usually end up with the same answer: use payments to drive platform engagement, and cross-sell loans or other services to customers. Using platform engagement through payments seems to have worked for Paytm, but only due to the existence of a stable and large merchant network on the other side of the platform. A luxury that few businesses can claim to have built.
What means then do such platforms have?
We will start with the most common one: Cross-sell other financial services to existing customers. Personal loans, buy now pay later, P2P investments – all services where the platform can partner with a bank, NBFC, or a relevant regulated entity (RE), undertake no-risk, and charge a distribution or DSA fee to the RE for each customer that avails the service.
Utilise platform engagement by selling app real estate to interested third parties, who would benefit from the brand visibility they would get on the platform. For platforms, this requires substantial platform engagement to generate partnership interest, and once gathered - the platform can negotiate an agreement with the brand, wherein impressions or conversions to the brand are then monetised.
Note that both of the above methods utilise platform engagement to monetise through third parties, and are significantly more popular due to the lack of regulatory, customer, or competitive barriers they face. More commonly, a payments platform may, similarly, earn through interchange on certain forms of payments as per the agreed-upon contract with the issuer.
However, it is relatively more complicated and uncommon to introduce direct charges to customers. I have captured the ones that appear most promising, with each exposing the business to a certain level of risk.
Charge a convenience fee for processing payments: apart from UPI, funds transfer systems, and BBPS, that would come with regulatory overwatch for charging customers a fee – there are no specific regulations around charging a “convenience fee” to the end customer in India. If platforms are comfortable with ruthlessly prioritising paying customers, a convenience fee offers a monetisation alternative with high customer coverage and fast go-to-market due to it potentially being applicable on each platform transaction.
Offer a subscription bundle, by packaging benefits on multiple services offered on the platform. This would target and bind a set of power users, who would be comfortable with paying a periodic or one-time fee for enjoying higher rewards or status on the platform. For example, a subscription program that combines (a) a lower transaction fee, (b) a lower interest rate on the personal loan, and (c) a multiplier on the existing rewards program on the platform, if modeled well, may offer sufficient value to derive subscriptions from a subset of platform users, without hampering the experience of others.
Undertake credit-risk to earn from interest payments and late payment charges on loans or credit lines. This comes with the risk of defaults, which if in the red - at scale – can deplete capital fast from the company’s books. However, if the platform can produce low NPA % at scale, the margins can provide significant uplift to the average revenue per user.
Further, as a payment org – while the above means would offer ongoing avenues for building a top-line, the focus must also remain on building moats that offer a medium to long-term business advantage and separate one further from the competition. These may include,
attaining strategic licenses that allow the business a higher share of transaction revenue, and provide the potential for operating ancillary, standalone operations to hedge business risk – for example: a license to issue prepaid payment instruments, or to operate as an NBFC, among others
expanding the payments portfolio by offering a range of payment services, which may include UPI, card, wallet, and bill payments, among others, to (a) capture a higher wallet share of the customer, and (b) limit the need for a customer to multi-home on other applications, and
entering into strategic bank partnerships, which (a) helps develop customer trust, and (b) offers long-term benefits of involvement in regulatory hurdles and critical industry consortiums
Final thoughts…
The change in investor and business climate has forced consumer payment companies to be nimbler and more strategic in their business & product strategy. As businesses tread this environment - judicious use of money in the bank, identifying and acquiring a large pool of paying customers, and developing the right forms of revenue lines will likely decide who survives the funding winter, and I hope this article provides some insights or structure on the same. Until next time!
If you have any views or feedback to share on the topic, feel free to add a response below or to share your thoughts with me over Linkedin. In case you feel your friends or family would be interested in reading about payments, feel free to share the blog with them as well. See you in a few weeks!