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The way you pay online will change soon, thanks to these startups

When you click the ‘pay’ button on an app or a website on your mobile device, you are setting off a flurry of activity behind the scenes. It’s a hubbub of handshakes, verifications, gateways, one-time passwords and networks yelling instructions at each other— an instant round-trip of signals that underpins modern commerce.This usually involves at least 14 distinct steps. When everything works, it all happens in an instant. But far too often in our country, once in every three financial transaction online to be precise, ends in a failure, according to the estimates of a number of online merchants and payment companies that ET Magazine spoke with. 64809304 It’s hard enough to get a user to the checkout counter. Huge efforts in marketing, user acquisition and lead generation go into creating that moment. And then to be unable to take the money from a user who wants to pay is simply infuriating to merchants. And it’s no less frustrating to the customer. 64809311 It is this agony that a new crop of payment offerings are aiming to eliminate. Their solution? Let the customer pay later. And they do this by extending the customer a small amount of credit on the spot, upon sign-up. Transaction success rate? 99%. Merchants are delighted. As for customers, they love the ability to settle their bills collectively once or twice a month rather than every time they transact. 64809322 “In five years we believe India will have 0% payments from cash on delivery (CoD) thanks to the pay later push,” says an optimistic Nitya Sharma, cofounder and CEO of Bengaluru-based Simpl, a provider of pay later solutions.India has 120 million people who shop online, according to a 2018 Assocham estimate. This is a subset of an estimated 240 million smartphone users and 1 billion subscribers with a mobile connection, according to estimates by Boston Consulting Group and Google.More than half of online transactions happen via cash, thanks to the CoD option most online retailers offer. Debit cards, credit cards and net banking make up for an estimated 46% of the pie. And the remaining 4% are newer er payment options like digital wallets. While the success rate of CoD at the checkout counter is indeed 100%, it suffers from an industrywide return rate of 30%-40%.Individual models vary, but broadly, paylater companies extend a short-term loan to consumers (often as little as `300), which are repaid typically in 15 day-cycles (as opposed to the monthly cycle typical of credit cards). They earn their revenue from a combination of late payment penalties, interest (around 3%) from late payers and a commission from merchants.When the founders of Simpl, Sharma and Chaitra Chidanand, returned from the US, they separately discovered that their earnings as topflight executives (he was a Wall Street banker, she worked as a coder in Silicon Valley; they are family friends), were great to open gilded bank accounts, but useless for credit.They both discovered India’s credit vaccum soon enough. Their credit card applications were turned down as neither had a credit history in India. This convinced them about the market for formal micro credit in India, and to start Simpl.Firms such as Simpl make their snap credit decisions using multiple layers of data. The first is an assessment or score the merchant has about the customer.The second is gathered is by trawling a customer’s social and financial fingerprints online. Companies also tend to offer progressively greater amounts in credit depending on the repayment history of the customer. 64809334 “The Pay Later option gives customers the flexibility to make instant payments through a single swipe checkout… This is a benefit for high-frequency Swiggy customers who can save valuable time during every transaction,” says Srivats TS, VP, marketing at India’s latest startup unicorn.According to Makemytrip’s cofounder, Rajesh Magow, the firm can look at what he calls trust scores (calculated by assessing transaction data and by using proprietary algorithms) to offer pre-determined credit limits to users, either itself or through financial services partners. Other large homegrown domestic firms such as Flipkart and Ola, too, offer in-house paylater offerings to reel in younger consumers and improve ease of use.“The biggest competition for our credit is money lent typically by friends and family,” says Akshay Mehrotra, CEO and cofounder of Early Salary.This startup has raised $17.5 million in funding from investors such as Eight Road Ventures. The venture, previously focused on giving young professionals a salary advance, acquired Cashcare, a provider of consumer loans, in May this year, to boost its presence in the pay-later market. Other startups, too, have piqued the interest of investors keen on backing the next wave of tech-based lending in India. At least two of them, Simpl and Slice Pay, are weeks away from announcing fresh tranches, three VCs familiar with the development told ET Magazine, speaking on the condition of anonymity. “From both a merchant perspective and a customer perspective, pay later as a model helps significantly improve transaction success rates and may also improve frequency of buying,” says Hari Menon, CEO, Big Basket, a leading online grocer.Globally, this form of credit is not new at all. It has existed for years, but hasn’t had the same cachet as in India, where online transactions suffer from high friction and credit availability is poor. Companies such Bill Me Later (acquired by Pay Pal), Ali Pay in China, After Pay in Australia and Klarna in Sweden all offer some form of deferred payment to users. What’s different is that these firms offer it in credit-rich markets, relying on interest-rate arbitrage (lending at an interest rate higher than the cost of borrowing) as a driver for growth. 64809351 In India, this isn’t the case, contend entrepreneurs. For one, the nature of customers is different and the use of cash in ecommerce and broadly in the economy is much more widespread. Credit off-take, too, is in its infancy in India (consumer credit as a share of GDP in India is around 10%, compared to 30% in Brazil, 60% in China and 80-90% in the US), opening up a new opportunity for these ventures.Nearly four decades after Andhra Bank issued India’s first credit card, Indians have been slow to adopt it. For years, dated technology and networks held back their adoption. While debit cards and more recently mobile wallets have given us far easier access to cash, they come with a clumsy means of access online. Names and numbers have to tally, CVVs need to be entered correctly and one-time passwords need to show up in the time allotted (15% of the time this step fails).Broken payment gateways leave shoppers frustrated and companies tearing their hair out wondering how to hold on to these grumpy shoppers. In some cases, in online apparel and fashion, the failure rate at check out can be as high as 40%.A number of companies have come up trying to address the market through pay-later solutions in the last couple of years. Now they’re showing promising signs of growth. Companies such as Simpl, Lazy Pay, Epaylater, Early Salary, Slice Pay, Kissht and Mihuru all offer a one-click or one-tap payment experience for shoppers. They provide this short-term credit primarily to consumers below the age of 30. 64809358 Business leaders believe that the pay later concept may give fresh legs to their operations. Amazon, for example launched, a buy-now-pay-later program during its Great Indian Festival (Diwali 2017) sale that gave customers the option to buy products for Diwali and start paying in 2018. “(The interest in deferred payment) manifests itself more during festival period,” says Mahendra Nerurkar, director, Amazon Pay. “Based on last year’s learning … we are looking to partner with more banks to (offer more) cash-backs and deferred payment options.”India’s largest platform by the number of transactions— IRCTC — is also now offering a pay-later solution, through Mumbai-based Epaylater. “We want to provide a painless solution for merchants and consumers in what is historically a broken payment mechanism,” says Aurko Bhattacharya, CEO and cofounder of Epaylater. Some 70 lakh tickets are booked monthly on the railways’ platform and with a phased roll-out, some 7,000-8,000 tickets a day are now booked on the Epaylater platform.Entrepreneurs came into the business in different ways. Before starting Slice Pay (called Buddy in version 1.0), the founders, Deepak Malhotra and Rajan Bajaj, ran a household equipment rental startup venture that ran aground after seven months. That enterprise gave them valuable lessons when they geared up for a second go.Many young executives and students wanted to buy furniture and ACs, for example, for their houses, but couldn’t afford it. So they rented them but often ended up paying more over time than the actual cost of buying it. Relatively poorly paid and with little credit options, these young strugglers were the inspiration for Slice Pay.“Students are perhaps an ideal target,” says Bajaj of Slicepay. “Our target market has a rich and frequent history of online transactions.” The firm has disbursed some `125 crore in loans (sourced from finance partners, it doesn’t have its own capital pool, yet) to some 200,000 students in seven cities. It wants to be present in 30 cities in a year. 64809366 “We have an edge in catching students, who are the next big drivers of credit and consumption, early on,” he adds. Already, Slice Pay is thinking ahead; it has started doling out loans to young professionals who were its customers until they were in college. It wants to now provide them larger chunks of credit—and eventually become something of a bank for millennials.The opportunity to deepen India’s credit pool, is pushing some conventional fintech players to think ahead. Lazy Pay, a venture from PayU, the payment gateway from Naspers, is backed by a reported $50 million funding from its parent and is in a tear to bring in users on its pay later unit. Since April 2017 when it started, it has signed up 100-plus merchants and crossed half a million consumers for its service. “When we started off, our average loan size was `2,500, now that’s up to `25,000,” says Pallav Jain, business head of Lazy Pay.Entrepreneurs can dream big because aspirational young consumers want more, but are hamstrung for credit. “Every time it is the end of the month, I need to consider a movie and lunch with friends a luxury,” says Ashwini S, a 22-year-old contact centre manager. “These pay later options help me extend my finances without worrying about going completely broke.”However, these are often granted to those who fall between the cracks — often too young to have a strong Cibil score or other credit history. Other critics argue that the regulation around these companies is hazy—and regulating these firms may be challenging in such a fluid environment. Then, there are questions around the business model itself. Can loans for as little as `300 make sense dispensing, given the costs associated with it, even if technology minimises overheads? 64809371 “The ticket sizes in these companies are generally very small and since the space is under-regulated and defaults not linked to a poorer CIBIL score, they could easily be ignored by the young target audience,” argues Mahesh Makhija, Partner, Business Advisory Services, at EY.According to multiple bankers ET Magazine reached out to, default rates in the credit card business are 3-4%. They said pay later busineses would see delinquencies as high as 4%, even if their ticket sizes were on average far smaller. While some firms such as Epaylater are platforms and lean on regulations governing their financial partners (from the RBI), others such as Early Salary, which have an NBFC unit, will need to report their data to the Central bank directly.Then, some industry voices also worry that in its current structure, where the mobile phone number is the point of access and identification, unscrupulous applicants can game the system, using multiple numbers to take several small loans and vanish. “An Aadhaar identification layer may provide some protection, but for an emerging space, this adds another layer of authentication and will lead to some erosion in the user base,” says the cofounder of a fintech firm in a related space.This poses challenges to a market where massive volumes are key to survival. “To make a mark in the business, these guys need to sign up at least five or six million users to stay afloat,” says a vice-president with a private sector bank in Mumbai. “This is a hard ask for any startup, forget one that is just starting and can expect to be hit by a wave of regulation.” 64809378 The other bugbear for all credit providers is how to tackle defaults. In the case of these ventures, they are going with traditional recovery means, starting with texts and automated calls, followed by manual calls to pursue defaulters. More serious means of recovery agents are rarely used, since users tend to cough up their dues by step one. Also, recovery agents are typically used when dues are far larger. When the outstanding is a few thousand rupees, it’s too expensive to deploy recovery agents.Faced with these challenges, startups are already thinking beyond purely a pay-later model. Perhaps sensing the limitations, several of them are pushing to look further afield. For example, Early Salary has a NBFC licence in its kitty and another player Epaylater wants to follow suit. “We want to use our learnings with the pay-later model to provide a wider and larger range of convenient credit to our customers,” says Jain of Lazy Pay.Some startups such as Simpl, want to push this tech into the offline world too. Epaylater has signed up with IDFC Bank to offer its credit services on the UPI network, to expand its offline presence. Any merchant accepting UPI or Bharat QR can be roped in to offer credit to consumers.

Source: ET

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