Behind Razorpay’s Journey To Becoming India’s Latest Fintech Unicorn

And so, two IIT-Roorkee alumni—Harshil Mathur and Shashank Kumar—decided to leave their corporate jobs and take a shot at building a payment gateway focused on these segments. Six years later, Razorpay became the latest Indian fintech startup to have a $1 billion valuation. A unicorn, joining the league of Paytm, PhonePe, BillDesk and PineLabs.

The latest $100 million funding came from a clutch of investors, including Singapore’s GIC Pte Ltd. and Sequoia Capital. Other investors in the company include Ribbit Capital, Tiger Global, Y-Combinator and Matrix Partners.

Picking Product Over Pricing

Back in 2016, when Mathur and Kumar started out with a plan in hand, they were quickly served a dose of reality.

Convincing bankers to partner with their platform was not easy so that became their first task. Given the stranglehold that banks and established payment companies had over the payment gateway market, growth was initially slow.

Mathur and Kumar stuck it out and kept trying to address the payment needs of fellow startups and small businesses across the country, rather than the large enterprises who were anchor clients of the incumbents.

“Indian online payments had multiple bottlenecks like slow onboarding for young startups, high failures and frauds, lack of customisation, limited focus on mobile and cross-channels such as cards, UPI, e-wallets and others,” said Gautam Chhugani, director for India financials and emerging fintech at Sanford C. Bernstein. By constantly improving its product, Razorpay helped solved these friction points, he said.

India is a price-sensitive market but a weak payments product becomes critical to the success of young internet startups, Chhugani said. He said Razorpay borrowed from the Stripe playbook and targeted app developers, who could easily build atop Razorpay’s offerings. The San Francisco, U.S.-based Stripe is an often-cited success story in payments and offers solutions for a range of businesses, including in-person retailers. It also offers lending, expenditure management, card issuing and fraud detection services to its clients.

One key decision Razorpay made was not to fight the price war, said a former employee of the company, who spoke on condition of anonymity. It stayed away from under-cutting the rest of the market on the pricing of payment gateway services, which would have burnt cash. Instead, they focused on the product, keeping the needs of merchants in mind, this person said.

The established payments companies and banks would hide behind a curtain which meant that merchants had to constantly interact with incumbent players’ salespeople and technical teams. The feedback we got from SMEs and startups was that this process was time-consuming and cumbersome, this person explained. So Razorpay focused on ensuring that merchants and potential clients have access to all the commercial and technical information upfront on the website, including pricing, to make the onboarding process smoother and quicker, this person said.

A senior payments executive, who also spoke on condition of anonymity, said that the incumbents were focused on on-boarding more clients and tweaking the pricing based on transaction volumes. Razorpay took a different view. It built solutions on top of the payments gateway to can address specific business needs, this person said on the condition of anonymity.

Keeping Losses In Check

One consequence of staying away from the price fight was that Razorpay managed to keep losses in check at least in the core business.

Razorpay’s gateway business falls under Razorpay Software Pvt., set up in May 2013. A separate entity—Razorpay Technologies Pvt., was set up in August 2015 to handle the company’s research and development business. In July 2018, it set up Razorpay Financial Services Pvt. to handle the lending business, Mathur explained.

Further, in March 2020 Razorpay Financial Aggregator Pvt. was set up and in September 2020, Razorpay X Pvt. was incorporated.

In the year ended March 2019, Razorpay Software reported revenue of Rs 197.45 crore, up 114% up from Rs 92.2 crore in the previous fiscal, according to documents from the Registrar of Companies. It made a net loss of over Rs 3.26 crore as of March 2019 compared to a net loss of Rs 12.8 crore in the previous year.

Financials for the year ended March 2020 aren’t yet available.

Around 80% of the holding company’s net revenue comes from its payment gateway services, with the remaining emanating from its lending and neo-bank platform, Mathur said. We expect to break-even on the payments business next year, he added.

Here Comes The Diversification

With a client list that includes Reliance Jio Infocomm Ltd., Zerodha, Hotstar, JustDial, Quikr, Swiggy, Oyo, PaisaBazaar, several consumer lending companies and financial services entities, Razorpay now processes more than $25 billion in transactions annually over a base of around 5 million clients who use the gateway services, according to Mathur.

BloombergQuint couldn’t independently verify these numbers since they aren’t in the public domain.

But the company’s ambitions have now widened and an attempt to diversify has set in.

The diversification is coming in two ways.

First, several features are being added to the payment gateway, such as payment links which merchants can generate and send to customers to receive payments, payment pages which allows a merchant to create a payments web-page quickly with minimal coding on their end, invoice and subscription solutions and loan collection solutions.

But there is diversification beyond payments, too. In 2018, ‘Razorpay Capital’, facilitates loan applications, was launched. The same year a neo-bank ‘Razorpay X’ was also started. The company has moved into corporate credit cards with their banking partners and has issued over 3,000 corporate credit cards, Mehta said.

The group has made a few acquisitions too. Last year, Razorpay acquired ThirdWatch, an artificial-intelligence-based company for real-time fraud prevention. It also bought in Opfin, a payroll solutions firm.

Most of the businesses Razorpay is targeting comes with an objective of earning fee income. In the lending platform, the company earns around 150-200 basis points on the loans sold. The neo-banking platform, through which clients can open a current account and manage payrolls, Razorpay charges a fee of Rs 5-10 per transaction, Mathur said.

But managing diversification is easier said than done.

Organisations who will develop these micro-ecosystems and command loyalty through their product and experience will be backed by the market, said Vivek Belgavi, partner and fintech leader at PwC India.

“We’ll probably have to re-imagine the term cross-sell. For the incumbent industry, there is a primary product and everything is a cross-sell,” he said. “Whereas for these platform-economy companies, the market has moved to a share of wallet construct rather than cross-sell.”

Mathur also appears to see it that way. “The -add by connecting payments, banking and lending together is significantly higher than just payments alone,” he said.