What makes Razorpay, India’s latest fintech unicorn, tick

Last week, fintech Razorpay joined the growing league of unicorns -- startups valued by private investors at $1 billion or more -- in India, taking the country’s overall tally to 32, according to the Venture Intelligence Unicorn Tracker. Notably, the payment gateway provider is the third fintech in the last two years to hit the unicorn valuation mark.

Why the unicorn valuation matters

It has taken Razorpay seven years to achieve a valuation of $1 billion. During this period, it has managed to process transactions worth $25 billion, a benchmark that has taken older and larger competitors in the payment gateway services business 10-15 years to achieve, CEO Harshil Mathur told TechCircle.

Razorpay competes chiefly with Infibeam-owned CCAvenue, Prosus Ventures’ payment arm PayU, which counts India as its primary market, and Visa-backed startup unicorn BillDesk. 

The firm holds one important trump card over competitors. It has a relatively smaller dependence on ‘transaction discount rate’ (TDR) or ‘merchant discount rate’ (MDR). The Indian government in the financial budget for 2019 made MDR zero for transactions below Rs 2,000, which saw most payment service providers oppose the move.

B2B edge and SMB push

The payment gateway business accounts for 80% of Razorpay’s revenues and only 20% of this comes from transaction processing fees. The bulk of the revenues come from a slew of B2B products and services provided by the company including payment links, payment pages or invoice products, says Mathur.

Razorpay has quite intentionally stayed away from the B2C segment, unlike, for instance, Paytm which runs a payment gateway as well as multiple other lines of business, the most popular of those being its digital wallet. 

The target customers for Razorpay’s B2B offerings are different from BillDesk, which, according to media reports, commands nearly 50% of the bill payments market in India, including utilities and other services. Billdesk has built a loyalty and rewards programme on top of this layer and is reportedly in talks for a buyout. 

Another differentiator is that Razorpay’s small and medium business (SMB) customers differ from that of Paytm and BillDesk. It largely targets online or digital-first businesses such as direct-to-consumer brands, subscription based OTT and media services, among others. Paytm typically targets corner stores and small retailers. According to Mathur, the mix of clients is equally split between enterprise grade customers and SMBs.

What's next?

The company is training all guns on its new business verticals -- lending platform Razorpay Capital and neobanking platform RazorpayX.

Razorpay launched its SMB lending platform Razorpay Capital in December 2018, offering three to six month tenure working capital loans to SMBs on its platform. It charges an origination fee as it works with multiple NBFCs in the backend for its lending product. It also launched neobanking in 2019 and both these verticals contribute 20% of the company’s revenues, a figure which is expected to touch 35% by the end of the current financial year.

“Our cost centres, the biggest cost centre is the headcount as we are hiring a lot of new resources to build the R&D on the new products and services on the neobanking and capital lending side,” said Mathur. He added that the company’s payment gateway business was expected to achieve break-even next year.

The company’s revenue from operations grew 114% to Rs Rs 193.03 crore in financial year 2018-2019, according to data collated by VCCEdge. The company is yet to file its earnings for financial year 2019-2020 with the Ministry of Corporate Affairs. The CEO, however, said that losses have reduced further in the financial year 2019-2020, in line with the trend from the previous year. 

Will Covid-19 temper growth?

The answer, says Mathur, is no. Though there was a temporary lull in the company’s lending business during the pandemic-driven lockdown, demand is back, he adds.

Razorpay Capital has been disbursing loans worth more than Rs 250 crore per month as the rebound in demand. “This is the year for digitisation of business in all sense, not just payments but filing taxes, etc. Covid-19 has accelerated the process. Our business sign up numbers have gone through the roof in the last couple of months as most of them want to reduce the number of physical legs in the financial processes,” Mathur said.

For Razorpay’s new lines of business, it will be ‘wait and watch’ as specialised vertical players in the SMB lending as well as neobanking categories such as Open amp up the competition.