Business Case Study: BharatPe's Billion $ Business Strategy

How Ashneer Grover's GENIUS STRATEGY turned Bharatpe into a $2.8 Billion company?

Feb 6, 2022

In the past five years we have seen a dozen players jump into the digital payments market and BharatPe in spite of being a newbie in the crowded wallet market has already reached a 2.8 billion dollar valuation in just three years of its launch and within this short span of its existence, it's already serving more than 7.5 million merchants in more than 140 cities and claims to process over 110 million UPI transactions per month.

But at the same time, if you look at the other side of it according to FinTrackr while the operating revenue of the company went from 0 to 5.96 crores, the losses of the company shot up by 839 % going from 23 crores to 216.32 crores and for FY21 their cash burn is already at 2.6 million dollars per month that's close to 19 crore rupees a month.

So the question is in spite of such scary figures why is BharatPe considered among the top five fintech firms in the country, what is their business model and how on earth can BharatPe become profitable in the presence of giant competitors like PayTm PhonePe and GooglePay and most importantly what are the key pointers that you need to keep an eye on to understand BharatPe and the evolving fintech space of India.

This is a story that dates back to 2016 when the payment renaissance of India began due to demonetization and as we all saw 86 % of India's cash was declared invalid overnight but all thanks to the internet and mobile penetration PayTm came as a savior and helped us transfer money even to the smallest vendor through a QR code and as usual with such a huge untapped market several other payment gateways started offering cashback to onboard as many merchants and customers as possible.

While most of us very easily became the adopters of this digital payment system behind the scenes an IIT Delhi student named Shashvat Nakrani noticed three critical problems in the system,

Since each payment app needed a different QR code, when you went to a Kirana/Grocery store at the time of making the payment it would turn out that the shopkeeper only had PayTm while we had migrated to GooglePay or PhonePe so obviously the shopkeeper would then insist that we make the payment in cash and this defeated the entire purpose of going cashless.
While payment apps charged zero % fee on transactions for customers like you and me for merchants there was not a single wallet that was taking less than 1.5% in commissions.
So, if you bought groceries worth 500 rupees the profit of the vendor itself is just 50 to 75 rupees and in that also 1.5 percent of the purchase value which is 7.5 rupees used to go to the payment gateways as commissions.
Lastly, the awareness of UPI system which was practically free, was very very less and that's when it struck him that there has to be some way of leveraging UPI to remove all charges on payments.

This is when on 20th of march 2018 Mr.Nakrani and his co-founder Mr.Ashneer Grover launched BharatPe with a vision to revolutionize the payment systems in India and the first thing that they did was that they leveraged UPI’s star feature which was inter-operability so now a single QR code was enough to transfer funds from your bank account to my bank account without any hurdles of a closed ecosystem and the best part of this entire transaction was that it was free for both the merchants and users and another plus point for merchants was that while most wallets and payment gateways had a minimum 2-day settlement window through BharatPe they got their money credited on the same day itself, as a result, thousands of merchants adopted BharatPe.

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Now, the question is if this entire transaction was being done at free of cost then how did BharatPe make money?

Mr.Ashneer Grover has spent years in American Express wherein he met more than 100 founders who were into the payment business. This helped him understand the fintech space properly on top of that since he was the CFO of Grofers he understood the problems of the merchants more than anyone else and this experience gave him two critical insights:

The margins and retail were too low to burn a hole in the pockets of the merchants with commissions so the right way to make money was definitely not commissions.
He understood that although shopkeepers won't pay for the service, they would be more than happy to pay interest on loans. Because one major problem with Indian banking is that despite micro small and medium enterprises being such an indispensable pillar to our economic growth no private bank wants to lend them money due to either lack of documents or collateral and it's quite understandable because lending wouldn't make sense if there is no instrument to measure the risk of actually lending money to an individual.

So in spite of all these merchants having healthy balance sheets in spite of they having an incremental increase in their growth, unfortunately very few banks wanted to lend them money and guess what this unmet credit gap of micro small and medium enterprises is one trillion dollars in India.

This is a reason why BharatPe tabbed on this golden opportunity to start a merchant lending system and they entered the lending space by partnering with non-banking financial companies this target segment included 65 million msmes in india that employ close to 80 million people.

Now the question is that if banks couldn't lend to small merchants what was so special about BharatPe that they could tap onto this golden opportunity and more importantly how do they intend to become profitable?

Well this is where BharatPe's AI algorithm comes in and here's an oversimplified explanation to understand how it works.

Just like our credit card companies note our spending pattern every time we make a payment. Every time you make a payment at a store through the QR code the BharatPe algorithm takes note of the cash inflow at the merchant's end similarly when a merchant pays his supplies through BharatPe the algorithm keeps note of her monthly inventory value and it also notes a spending pattern and several other parameters to estimate the Projected Savings, Income and Consistency of Income.

And just like credit card companies look at your spending pattern to decide how credit worthy you are, the algorithm of bharatpay uses this data to calculate the risk of lending to a particular merchant.

This way without paperwork the BharatPe algorithm can decide the credit worthiness of a merchant even if he/she is in the remotest corner of the country and all the progress that our Grocery store makes is officially documented by the BharatPe’s algorithm.

Once this lending procedure starts the algorithm gets smarter and smarter at risk assessment based on the merchant's loan history and credit score. This is how BharatPe currently provides unsecured loans in the range of Rs.10,000 to Rs.7 Lacs for up to 12 months and charges an interest of about 2 % per month.

One of the biggest problems with lending is the collection challenges and defaults.

So even if a company wants to scale its lending business through the lenghts and breadths of the country they need a tremendous amount of workforce for recovery.

According to BharatPe its repayment rate is 96% which is among the best in the market. Instead of requiring the merchant to pay monthly installments, it deducts the amount from the transactions before the bank settlement for each day.

Example: If the merchant has to pay back Rs.15,000 installment per month and he has an average inflow of Rs.15,000 per day so instead of asking for the payment at the end of the month, the app at the end of the day it by default subtracts five hundred rupees as daily installment and then pays fourteen thousand five rupees to the merchant at the end of the day.

This creates a win-win situation wherein the merchants are not burdened they don't need to be reminded about payments and at the same time BharatPe can ensure that its repayments happen without any problems.

This is how merchants pay back their loans in easy daily installments as small as Rs.430 per day average this is the reason why BharatPe has an astonishing repayment rate of 96%.

As of october 2021, BharatPe had already facilitated loans to over 3 lakh merchants and disbursed over Rs.2,800 crores in loans.

As of october 2021 according to economic times BharatPe was processing loans worth Rs.300 crores each month and today BharatPe loans are available in more than 11,000 pincodes in 24 states and has a sales force of 4000 agents to educate merchants on various financial products.

On top of that they have an insane retention rate with 45% of its merchants taking repeat loans and all of this is being done digitally in a hassle-free manner with no application fee and most importantly without a collateral.

Therefore more merchants means more data, more data processing means better risk assessment, better risk assessment means less bad debt which means insane profitability.

This is a reason why BharatPe spending $2.5 million a month to onboard as many merchants as possible.

this is how BharatPe is solving a major problem for the MSMEs of india using its insane artificial intelligence algorithm as a result they have witnessed a crazy growth of 10x in the last fiscal and now bharatpay aims to disburse loans worth 1 billion dollars among merchants.

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