Razorpay Rises at Fintech’s Cutting Edge

Last week, payment solutions startup Razorpay raised $75MM to deepen its neo-banking and lending product portfolio. 

Social Proof

Shashank Kumar and Harshil Mathur, batchmates from engineering, decided to quit their post campus jobs to start something of their own. 

The year was 2014, and the Indian startup ecosystem had begun to roar. The birth of giants like Ola, Flipkart, PayTm had made starting up sexy. It was also the year crowdfunding would become interesting.

To fill this vacuum, the two thought of starting an online crowdfunding platform. 

In the process of ideating and building out this platform, the duo realized that the platform was dead in the water. This was due to the lack of access to online payment infrastructure, without which funding from an online crowd would just be a nice idea on paper.

Startups lacked access to online payment solutions, which usually lay behind incredible paperwork. Realizing that this problem extended to other online commerce companies, the two decided to instead pursue a payment solution.  

Anchoring

The duo’s payment gateway would be the startup that would solve the online payment problem. Given the acuteness of the problem, the belief would be that businesses and banks would lap it up. 

Or so they thought. 

For the startup to be useful as a payment “gateway”, it had to be a channel between banks, which had customer accounts, and businesses, which would be paid with the customers’ money.

A channel without the banks was meaningless, and it was thus critical to have the banks on board. 

As if being young startup founders was not a challenge enough in the regulated financial services domain, nobody had a clue as to what payment gateways were. The founders spoke to multiple bankers and nobody bought in. It was the hope given by one HDFC manager that helped the company get off the ground.

Razorpay was finally born. 

Occam’s Razor

In 2015, India was just beginning to demonstrate growth in digital payments. 

From a INR 38 Cr volume in 2007 ($7MM), it had grown rapidly to INR 181 Cr ($30MM) by 2015. With a 30% growth every year since 2010, the expectation was that the digital payments run would continue. 

As I had elaborated on how fintech’s revolution has been the story of this decade, India began to build financial infrastructure that would enable digital payments. The drivers for this growth would be rapidly increasing internet penetration, growth of smartphones and the shift towards mobile commerce. 

 A favourable regulatory environment only augmented this trend.

But in 2014/15, e-commerce companies would struggle with cash payments and lack of access to digital payment solutions. Most e-commerce commentators believed the “friction” due to poor payment infrastructure would bottleneck the growth of e-commerce itself. 

The search for the simple, beautiful solution to a complex problem was on.

Giants like Flipkart would start their own payment infrastructure solutions to solve this. PayZippy would be started to solve this payment friction by Flipkart, but would struggle to solve e-commerce’s bugbear. In late 2014, PayZippy would shut down.

In late 2014, Razorpay would find itself in a prestigious US accelerator. 

Loss Aversion

Being one of the first few Indian startups to be accelerated in its cohort, Razorpay was on a roll.

After returning from San Francisco to Bangalore to solve the India specific problem that it had set out to solve, Razorpay began to build out India focused technology. With transactions running on 2G speeds, high failure rates existed on online transactions.

With rates as high as 30-40%, consumers did not trust these payment mechanisms and hence preferred cash on delivery. Poor payment gateway experiences, due to multiple redirects and slow network speeds only exacerbated the problem. 

As a channel or “middleman” between businesses and banks, a successful gateway would have to be easy to integrate on both sides. With these problems identified, Razorpay set out to improve the gateway experience for consumers, as well as the integration between businesses and banks.

Having 1,800 customers in tow, the company raised $9MM in 2015. With the integration of Razorpay with the business websites as easy as a few lines of code, the company was rapidly growing in scale.

Solving for customers’ loss aversion, payments were becoming smooth.

Framing

For all the friction that Razorpay took out, it would need to scale to be compensated. 

As the company was a channel that enabled payments, it would take a fee for facilitating the transactions. For a 2-3% transaction fee on every payment, the company would make revenue through the transactions it would enable. 

With $40Bn of digital transactions in 2016, Razorpay was looking at a $1Bn market that was expected to 3x in 5 years. It would be a fairly large market, to begin with, but one would need to get to an incredible scale to make a billion $ company. The beauty of fintech is that it sits through financial transactions.

If you sit in the flow of money, you can make even more money.

Sitting on this flow of the money, Razorpay began to introduce more products. From facilitating consumer transactions, the company also began to facilitate vendor payments. Once the merchant was acquired, Razorpay could upsell and cross-sell other solutions.

As payments were a monthly phenomenon, Razorpay stood with a recurring revenue business model. In 2016, the company grew to $1MM of revenue, but that would only be the start of Razorpay’s golden run. 

The end of 2016 would bring a lot of pain to most people, except fintech firms.

What You See Is All There Is

Demonetization would starve the Indian financial system of cash, and the fintech startups would capitalize. 

As the only available option, digital payment infrastructure would be rapidly adopted, both by consumers and merchants. UPI, which was just launched in Aug 2018, would 10x in November itself. Razorpay would not be behind to capitalize.

Just 11 days later, it would introduce the recurring payments product solution, along with an ePOS app that would digitize merchants. Facilitating the merchants allowed the company to scale the merchant base from 2K to 25K by the end of December 2016. 

The company would 5x its revenue in just one year, reaching a $5MM revenue in 2016-17. The average revenue per customer would be $200, or an average of $20K transaction for a business. 

By upselling and cross-selling, Razorpay could significantly increase the average revenue per customer. For the 40MM+ SMEs in India, Razorpay was looking at a potential market of $8Bn in the long term. 

The startup was sitting on a gold mine.

Endowment

By early 2018, the company had added another 40K merchant – growing to 65K merchants.

Based on the average revenue per user, the company had likely scaled to revenue of $15MM. The high clip growth rate resulted in another fundraise of $20MM, and the startup had entered a $100MM valuation club in just 3 years of starting. 

Very interestingly, the majority of merchants on Razorpay were from tier II cities, although the metro cities likely accounted for the higher volume. It indicates the large, untapped digital payments opportunity in tier II cities.

Simultaneously, digital payments, powered by UPI exploded to INR 15K Cr ($2Bn) in early 2018. By the end of 2018, UPI would have reached INR 100K cr ($15Bn). As Razorpay would partner with Bharti Airtel for UPI payments, the company would now have its hand in another stream of gold.

Razorpay would also increase its merchant base to 200K by the end of 2018.

One would wonder how it was scaling so fast. The fact that it was a software solution, that was so easy to onboard was a large contributor to this. There was no additional “cost” to add a new merchant and it would take a few minutes to plug and play. 

But the frictionless nature amplified the “network” behaviour that every matchmaker sees. As Razorpay onboarded more banks, more merchants would sign up, and feed the cycle. Merchants would see other merchants get on board, and that would make Razorpay more attractive.

The company would be off to the races.

Hot Hand

Given the company had so much information about a merchant’s transactions, it would only be natural to launch a lending solution. I had elaborated why lending is such a big space, and it allowed Razorpay access to an even larger market. 

2019 would also see the company launch Razorpay X to manage financial operations. By following the textbook path of disruptive innovation, the startup had begun in 2015 by servicing startups. Today, it was serving huge businesses across various value-added services, increasing the revenue per user.

With 400 employees, the company had grown to 350K merchants in April, an incredible merchant/employee ratio of 1K. At this scale, the company was at a revenue run rate of $70MM – with $7MM coming from the non-payment business. 

The $450MM valuation would likely peg the business at 6x revenue. 

The company expects this to account for 40% in 2 years. Assuming it grows 3x in two years at this scale, it expects 40% of $210MM or $84MM to come through non-payments. That is incredible growth, and expectation from the non-payments business.

Given the level of digitization of Indian payments, and Razorpay’s previous growth, this looks achievable. The huge merchant base, that Razorpay has so painstakingly acquired, will likely lap up the other services Razorpay has. 

As Razorpay continues to increasingly partake from the flow of money it sits in, it has access to a lucrative market. It is getting closer to be the de-facto leader in payments, with an easy to use product through continuous innovation.

Razorpay has risen sharply at fintech’s cutting edge, and its future looks promising.