Pine Labs, backed by marquee investors from Sequoia India to Temasek and Mastercard, will step up focus on its merchant payments business after completing a $600 million fundraise this year.
The latest fundraise valued the company at $3 billion.
Founded by Lokvir Kapoor, Rajul Garg and Tarun Upadyay in 1998, well before the fintech wave took over India, Pine Labs started out with processing card payments for fuel retailers. Its journey since has taken it into point-of-sale machines, merchant payments and, most recently, processing of buy-now-pay-later credit.
"We put technology first which enables us to power finance and commerce," Nitish Asthana, chief operating officer of Pine Labs, said in an interview with BloombergQuint. “It puts us in a unique position where we can work with financial services providers to power their services through products which eventually go to merchants and consumers."
Post the fundraise, the company hopes to widen its current base of 5.5 lakh merchants by three to four times in the next few years, said Asthana. They also plan to expand the services offered to these merchants via a wider set of tie-ups. In addition, expanding the geographical reach from the 3,000 locations currently serviced, is also on the cards, Asthana said.
The focus on merchant payments will run alongside an expansion of the buy-now-pay-later network and a business focused on rewards, loyalty and gift cards. Together, the three businesses, the company says, will propel Pine Labs into its next phase of growth and towards and IPO.
The Merchant Strategy
With peer-to-peer transactions now heavily digitised, a number of firms have shifted their focus towards to peer-to-merchant payment options. While point-of-sale machines have been the mainstay of this segment, this still means high initial costs and fees for merchants.
And so, a number of firms are pushing other options including QR-code based payments to bring a larger number of small merchants into the digital payments fold.
Pine Labs hopes to do the same by going beyond the traditional PoS offering to its merchants.
The company aims to achieve this in a couple of ways. It is working to offer merchants services to set up digital stores and take their commerce online. It will also offer software and -added services to these merchants.
We want to democratise the technology available to large-format retailers and make it available for smaller merchants as well. These are typically solutions they want to consume and they don't have or are too expensive for the smaller merchants.Nitish Asthana, Chief Operating Officer, Pine Labs
According to Asim Parashar, partner at PricewaterhouseCoopers India, the inability to convince a larger number of merchants to use digital payments has been the weakest link in the payments ecosystem so far.
"Multiple banks have tried to grow in this space but have not had much success," Parashar said. "If a company is able to push up their merchant acquisition strategy with some initial cash burn, they can really take benefit of the first mover advantage."
For this, the payment service provider would have to focus on three main things—ease of payments and quick reconciliation, -added services and a strong service network. "Some PoS providers take up to a week to resolve problems with the payments network, which can put off merchants from accepting digital payments," Parashar said.
Typically, the entire ecosystem earns 1-2% of the transaction amount as fee, he said. This is split between the merchant's bank, the card issuer and the service providers. As more -added services are offered to merchants, companies like Pine Labs can charge a premium on their services, Parashar said.
The expansion of the merchant network, however, may come at a cost and Pine Labs has already been making losses.
According to the last annual returns it filed with the Registrar of Companies, Pine Labs' total income rose 43% to Rs 701.6 crore for the year through March 2020. But expenses rose to Rs 765.6 crore, up 56% year-on-year, partly due to a one-off acquisition cost.
The company has reported losses since FY18. In FY20, the net loss rose to Rs 58 crore compared with a loss of Rs 4 crore the previous year. Financials for FY21 are not yet available on the RoC.
According to a June 17 note by Bernstein Research, Pine Labs expects that fee earned via channeling merchant credit services through the network will help profitability.
Loans, Loans, Loans
Alongside the focus on merchant payments, Pine Labs is going after the rapidly expanding buy-now-pay-later market.
When customers swipe their cards for large- transactions at physical store, the Pine Labs terminal shows them the option to split the payment into installments. The company achieves this through its tie-ups with brands, original equipment manufacturers and lenders who have a pre-approved list of customers that can avail buy-now-pay-later credit.
It has tied up with 35 lenders and has a list of for 100 million pre-approved customers who can avail interest-free financing on their purchases and break up the repayments over a few months, the company claims
Typically, customers do not pay a processing fee on these transactions. However, lenders and brands do pay Pine Labs a fee for enabling this service.
Here too, Pine Labs does not do any lending on its own balance sheet, but is a service provider to lenders and merchants, enabling such loans to go through.
According to estimates by Bernstein Research, Pine Labs processes approximately $2 billion worth volumes on its pay-later platform.
The pay-later option has seen a tremendous increase in demand from the pandemic as Covid changes consumer buying and payment behavior. We expect Pine Labs' pay-later platform to benefit from the increased demand for installment loans.Bernstein Research
The company also plans to introduce a pay-later product for online transactions, as it currently is available only at physical stores, according to Asthana. Through this, merchants can start selling their products online and Pine Labs will enable the buy-now-pay-later option for the buyers.
For Pine Labs, the pay-later product is key to expanding in the domestic as well as international markets, he said.
In the last 18 months, the company has added 25-30 original equipment manufacturers to its roster in India. It has also added a few two-wheeler manufacturers in the list of companies which can offer their products on EMI through the pay later model, Asthana said.
International expansion has also started with an entry into Malaysia in March this year. There are more South East Asian markets where we can use this solution in, Asthana said.
A Relatively Unique Play?
In its 23-year history, Pine Labs has not really faced a direct challenge, although it competes with a variety of players in individual segments, such as the point-of-sale business. The combination of its portfolio, however, has so far been unique.
Competition may now start to emerge.
In January, Bajaj Finance Ltd. announced that it is setting up a payments ecosystem called Bajaj Pay. That will enable Bajaj Finance customers to transact, borrower, invest and save on the same platform.
"We believe Bajaj Finance and Pine Labs could be classified as ‘Frenemies’. Pine Labs acts as a partner to BAF to facilitate credit for its loyalty base (EMI cards). But Pine Labs does provide new customers a ‘Pay-later’ alternative by working closely with its 30+ banks and lending partners," Bernstein Research said in its note.
Pine Labs' strength has been its largely urban enterprise-merchant base, according to Bernstein Research. In comparison, Bajaj Finance has a deeper network of merchants in smaller regions, including rural India, Bernstein noted.
Large lenders such as State Bank of India and ICICI Bank Ltd. have also made large investments in capturing a larger share of merchant payments.
Pine Labs says it isn't worried yet.
"A brand might think that it has an option between Pine Labs and another player. But when the brand really thinks about it, they see that here is a platform with access to 35 credit issuers, 100 million pre-approved customers and operates credit at a 150,000 outlets, I think the decision is clear that nobody operates at the scale that we do," Asthana said.
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