BharatPe is banking on microcredit to usher in monetisation

BharatPe wants to build a more meaningful relationship with your neighbourhood kirana store. The startup, which offers a QR code-based app for small merchants to accept payments, is now looking to leverage its eight-lakh-strong network of mom-and-pop stores to branch out into lending as a first step towards monetisation.

It’s already been a whirlwind first year for BharatPe. Six months after Ashneer Grover and Shashvat Nakrani floated the fintech venture, prominent venture capital investors Sequoia Capital India and Singapore-based Beenext led an investment of $2 million last October. 

This was followed by a large Series A round of $15.5 million two months ago in which US-based investment firm Insight Partners joined Sequoia and Beenext. 

And recent media reports suggest that BharatPe has been in talks with marquee investor Tiger Global, among others, to raise as much as $75-100 million in what would be one of the largest-ever Series B rounds in India’s startup ecosystem. 

BharatPe’s rapid growth has been marked by a strategy of aggressively courting small merchants, offering them a QR code based on the Unified Payments Interface (UPI) for inter-bank transactions across multiple wallets including Paytm, PhonePe and MobiKwik, as well as those offered by State Bank of India and HDFC Bank, among others. Both setting up and settlement are free.

“None of the wallet companies catering to merchants and kirana stores are giving them the amount in full and credited instantly,” said co-founder Grover, who was previously the chief financial officer of online grocery startup Grofers. “If payments are free online, why would anyone pay for digital payments offline?”

Across metros and elsewhere, offline merchants have emerged as an entry point to reach out to new users. This trend has been gaining momentum with the likes of Reliance Retail and Walmart experimenting with Point of Sale (PoS) systems.

While these players are exploring physical PoS systems or mobile-based PoS which may entail an expense on the part of offline businesses, BharatPe is leveraging UPI-based QR codes that open up banks and wallet-based transactions for small merchants at almost no cost.

A comparable product is Bharat QR, which has been jointly developed by digital payments body National Payments Corporation of India (NPCI), Visa and Mastercard. It allows retailers and small merchants to generate a UPI-based payment QR code at no extra cost and facilitates payments from 14 banks and Visa-enabled debit card or Mastercard bank accounts at no transaction cost.  

But BharatPe’s Grover said that there is no real incentive for merchant acquisition and it is up to merchants to add this mode of payment.

While Paytm and PhonePe have spent large sums on building merchant networks for their respective QR code-based payment systems, being restricted to a single wallet and the lack of incentive for merchants to increase the volume of their transactions on the platform poses a challenge.

For its part, BharatPe is hoping credit will be that incentive.

After setting up its QR code-based transaction platform across 13 cities over the last year, BharatPe now wants to build a loan book of $250 million (Rs 1,735 crore) over the next two years by extending micro-loans to its network of merchants. 

Since it rolled out its lending services a fortnight ago, BharatPe has already extended 150 loans in a pilot in Bengaluru. It had also announced a partnership with Apollo Finvest for this purpose.

“We are refining the product and will build the feature into the merchant app so that the option for taking a loan can be accessed on it. The deductions will be built into the settlement of QR-code based transactions at the merchant,” said Grover, adding that the company has compiled a list of 15,000 merchants pre-approved for loans based on their transaction volumes and other data.

According to a report by the Boston Consulting Group and Omidyar Network, digital lending to medium and small enterprises (MSMEs) in India is expected to scale to $80-100 billion in annual disbursements by 2023. The report states that close to 40% MSMEs borrow from informal sources at present.

Grover said that based on the volume of business done by any merchant on the platform, BharatPe will extend short term loans from Rs 10,000 to Rs 2.5 lakh which can be closed as early as three months. The interest rates range from 1.67% to 2% per month depending on the tenure of the loan.

“The cost of acquisition for NBFCs is high and they target larger loans for longer tenure to make good those costs. For us, it is an extension of the business and we have brought down our merchant acquisition costs to as low as Rs 150 per merchant,” said Grover.  

BharatPe has also applied for a non-banking financial company (NBFC) licence to underwrite part of the loans and has created an entity with paid-up capital of Rs 2 crore for this purpose. 

BharatPe currently claims to process close to 3 lakh transactions on a daily basis and says it is on track to sign up 25 lakh merchants by the end of 2019. 

According to Grover, the idea is to get into co-lending through the NBFC entity, leveraging the data on volume of business and transactions available on the QR platform. It has also appointed former Fullerton India and Bajaj Finserv executive Pratekk Agarwaal as chief business officer to lead its lending initiatives.