Spin-off or pivot? What lies beneath Razorpay's foray into lending

Payment solutions provider Razorpay has the hottest start-ups in its portfolio

This report has been updated to correct an error in the previous version.

Solve a problem and get rich: Most budding entrepreneurs perceive this common refrain as finding a solution to a problem that millions of people face. However, two young Indian techies turned the mantra on its head — fix a pain point of thousands of start-ups which cater for tens of millions.

IIT Roorkee classmates Harshil Mathur and Shashank Kumar were working at Schlumberger and Microsoft, respectively, when they noticed that payment gateways, basically interfaces that help companies accept payments online, were only geared towards serving the needs of large enterprises. It was 2014 and a new wave of start-ups were taking off in India riding on cheap data and an increasing appetite for app-based services in the country.

Harshil and Shashank left their dollar bill jobs abroad and shifted to Jaipur in a bid to start Razorpay, a business-to-business payments solutions company. A small business doesn't even need to have a website to be able to accept payment through Razorpay's gateway. 

Initially, they encountered a lot of resistance from bankers who thought of them as upstarts who didn't know what they were doing. 

Fast forward to 2019. They have on-boarded the hottest start-ups in the country — Swiggy, Zerodha, Goibibo and Zomato, and also industry bellwethers such as Hotstar, Indigo, IRCTC. 

Razorpay last month announced its Series C funding of $75 million, led by two of the largest venture capital firms, Sequoia India and Ribbit Capital, along with participation from Tiger Global and Y Combinator. It raised a total of $31.5 million in Series A (2016) and Series B (2018) rounds via 33 angel investors and a strategic investment by MasterCard. 

Business model

"The digital payments market is still nascent in India and we expect it to grow manifold over the next decade. The way we see it, Razorpay is uniquely positioned to disrupt a $500-billion market by 2025," says Ishan Mittal of Sequoia India, which led the latest round of funding. 

At present, Razorpay's annual run-rate of transactions is $5 billion. It charges a fee of around 1 per cent on each transaction, an industry standard. A simple back of the envelope calculation would mean an income of $50 million a year. Several reports peg the company’s valuation upwards of $400 million.

However, according to a Nasscom-KPMG report, India saw transaction volume using Unified Payments Interface grow from 0.1 million in October 2016 to 312 million in August 2018 and transactions in value terms rose from Rs 0.5 million to over Rs 542 billion during the same period. This might mean consumers are ditching payments in e-commerce platforms though an inbuilt payment gateway for UPI services. 

New frontiers

One thing that you have in abundance when you process transactions worth $50 million in a year for over 300,000 businesses is a treasure trove of data. 

Over the last six months, Razorpay has launched a few new products that offer financial services such as subscriptions, disbursements, B2B collections and GST enabled invoices. The most interesting of them that has caught eyes in the fintech sector is its lending platform.  

Razorpay co-founder and CEO Harshil Mathur says that the company seeks to capitalise on the immense data it has gathered on its merchant partners, a large number of which are medium- and small-scale businesses, with respect to business and cash flow cycles. The fintech half-unicorn has tied up with NBFCs and banks to offer three-to-six-month collateral free loans of Rs 15 lakh- 20 lakh. These loans have interest rates of 18- 25 per cent and Razorpay is responsible for disbursal and collection.

Ganesh Rengaswamy, co-founding partner of Quona Capital, which has invested in online lending platform ZestMoney, offers a word of caution saying that many new lenders claim to have a lot of data, but the crux of lending is recovery.