MobiKwik’s public defiance

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MobiKwik has lived through a painful existence marred by challenges that would have
sunk a lesser startup. In its desire to go public, it continues on the path of pain.

Things couldn’t have been worse for MobiKwik. In the fiscal year ended 31 March 2021,
the company’s operating income dropped 20%, from Rs 355.68 crore in the previous year
to Rs 288.57 crore. The company recorded a loss of Rs 111.30 crore in 2020-21, compared
to Rs 99 crore in 2019-20. It would seem COVID-19 battered the hell out of MobiKwik’s
fledgling business. Cash on hand dropped to Rs 60 crore as of 31 March, just about
enough to cover a year’s wage bill; it managed to to raise $5 million (around Rs 37 crore)
in April from a handful of small-time investors, and then another $20 million (around Rs
150 crore) in June from the Abu Dhabi Investment Authority as pre-IPO funding.

And yet with the worst numbers on the scoreboard, MobiKwik has decided that it will go
public. The move gives rise to several questions—most importantly, why now?

Bipin Preet Singh and Upasana Taku’s digital wallet company is 12 years old. The
Gurugram-based company was once a serious contender in the digital payments fight,
when wallets were the rage. It was backed by marquee investor Sequoia Capital, and also
raised funds over the years from big names in financial services, including American
Express and Bajaj Finance. It eventually lost in the wallet play to Vijay Shekhar Sharma-
led Paytm, which became an overnight sensation after onboarding the Alibaba group as
an investor back in 2015. And that’s how MobiKwik’s struggle began.

In the years to come, digital wallets as a concept were completely overtaken by the
National Payment Corporation of India’s Unified Payments Interface, or UPI, which led to
the rise of PhonePe and Google Pay. While Paytm had a number of other business lines

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and was also able to get into the UPI game as a No. 3 to the market leaders, this left
MobiKwik in the unfortunate position of being an also-ran in an also-ran industry.

Through all of this, though, MobiKwik and its founders, Singh and Taku, were best known
in the industry as survivors, weathering each setback and somehow managing to hang on.

Digital wallets are still the company’s bread and butter, but in recent years it has
expanded into offering payment gateway services and, more importantly, digital lending,
one of the hottest spaces in fintech right now.

MobiKwik on Monday filed its draft red herring prospectus with the capital markets
regulator; the company is looking to raise Rs 1,500 crore from the IPO, which will also see
the founders and some investors selling part of their stakes for a total of Rs 400 crore.

The public markets are on a high right now, and it seems like MobiKwik is in no position
to raise any more funds from the big private market and venture capital investors. While
the company had a very strong 2019-20—revenue from operations rose 2.4x year-on-year,
while net losses dropped by nearly a third—the pandemic and lockdowns across India in
the first half of 2020-21 clobbered the business, and MobiKwik needs fresh capital to keep
going. With the market awaiting a slew of tech IPOs, it is an opportunity for which the
company has been waiting at least a year.

But even if it does secure the capital, as well as a neat payoff for the founders and
investors, challenges and headwinds remain across much of its business. MobiKwik’s
struggle for survival and sustainability will continue.

We took a look at the company’s draft prospectus and the state of its three business lines:

Consumer payments, which is what the company is calling the mobile wallet
business, and accounts for most of its operating revenue
BNPL, short for “buy now pay later”, the buzzword globally in fintech credit (even
Apple may be getting into the business); this includes a 15- to 30-day credit line for
digital payments along the lines of Simpl and PayU’s LazyPay, as well as a 6- to 18-
month EMI product for big-ticket purchases
Payment gateway services, under subsidiary ZaakPay, which is MobiKwik’s smallest
revenue line and a minnow in an industry with a number of large players, including
BillDesk, Paytm, PayU and Razorpay

For the potential public market investor, where does the company stand today? The
payment gateway business is minor, while the wallet business is in a tricky place, though
with recent regulatory changes, there seems hope for a revival of sorts. The big sell,
though, is lending, which is where we’ll start.

Digital credit story on sale

MobiKwik has been selling the digital lending story since its last fundraise in 2018. The
founders projected it as the company’s “path to profitability”. Since then, it has evolved
through different shapes, but remains the biggest bet going forward.

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MobiKwik’s prospectus reads:

We are a fintech company – one of the largest mobile wallets (MobiKwik Wallet) and Buy
Now Pay Later (BNPL) players in India based on mobile wallet GMV and BNPL GMV,
respectively, in Fiscal 2021. We are focused on addressing the unmet credit needs of the
fast-growing online transactors by combining the convenience of everyday mobile
payments with the benefits of Buy Now Pay Later (BNPL). We are a technology-first
company leveraging big data analytics and deep data science (including machine learning)
to continuously delight users and merchants on our platform.

…India’s online transacting users has rapidly grown at a CAGR of approximately 15%
from 180 million in Fiscal 2018 to over 250 million in Fiscal 2021. However, India had
only 30-35 million unique credit card users resulting in a low credit card penetration of
3.5%, as of March 31, 2021. In addition, India’s online BNPL market has rapidly grown to
reach $3-3.5 billion in disbursals in Fiscal 2021 and is expected to grow to US$ 45-50
billion by Fiscal 2026 driven by user growth, according to RedSeer Report.

MobiKwik started out its lending play with small-ticket instant loans, and India’s biggest
consumer lender Bajaj Finance as its strategic partner and investor—a perfect combo to
rule the market, on paper. “MobiKwik had everything in place to capitalize on the digital
lending and payment gateway, but somehow, they were not able to,” says one former
MobiKwik executive, who had worked on the company’s lending product.

Back then, MobiKwik launched its instant credit product, in partnership with Bajaj
Finance and two more lenders. The company was giving out personal loans, starting from
Rs 10,000, on its app to the ”new to credit” customers. There was a lot of juice in the Bajaj
deal then because Bajaj’s operation was mostly offline and MobiKwik was online and this
was a nice sweet spot for both. “Initially, MobiKwik was quite gung-ho about the Bajaj
partnership, however MobiKwik was not able to leverage the Bajaj partnership because
they had a lot of issues initially. Whatever lending scaled up, there was no phenomenal
contribution from Bajaj,” according to a person aware of the matter, whose account was
corroborated by at least two others. All of them asked not to be named.

“The average ticket size of personal loan products was around Rs 40,000. However, Bajaj
was not the lending partner for this product, instead there was a separate product with
Bajaj that was an EMI card. Bajaj wasn’t the lender for personal loan as the personal loan
product required end-to-end integration and the NBFC had other priorities then. Bajaj
was not ready initially with full integration and when they were ready, MobiKwik was not
ready,” says the former MobiKwik executive quoted above.

“Then there was some tiff on the control of the customer and the data. Bajaj had invested
Rs 225 crore, so they wanted control of data and users; but MobiKwik wanted to do things
differently. At one point, MobiKwik was very keen on getting its own NBFC [non-banking
financial company] licence, but that didn’t go through for reasons known to the founders,”
this person adds.

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A former Bajaj Finance executive shares that MobiKwik did try getting its own NBFC
licence, but it apparently didn’t get an okay from Bajaj Finance, which owns a 13.86%
stake in MobiKwik.

“Initially, we were disbursing Rs 50 crore in personal loan and about Rs 40-50 crore for
Bajaj EMI card,” says the former Bajaj Finance executive. For the personal loans,
MobiKwik would have got a cut of the interest, while for the EMI card it would have
received only an origination fee, for which the industry norm is 1-2%. However, the
instant loans offering saw far higher bad loans or non-performing assets, NPAs in banking
parlance. According to the people we spoke with, MobiKwik saw about 7-8% of its loans
turning into NPAs. The company decided to move away from handing out instant loans, a
business that many fintech apps had got into only to realize collections were hard, and
focus on credit for purchases.

“Buy Now Pay Later was started 9-10 months later on 100% FLDG and we were doing
some Rs 2-3 crore a month initially,” says the former MobiKwik executive. FLDG is
industry speak for “first loss default guarantee”; this is usually an agreement between a
fintech and a lender (either a bank or an NBFC), wherein the fintech company says it will
bear the losses in case the borrower defaults, up to a certain percentage. In the case of a
100% FLDG deal, the fintech company is essentially willing to take on all the losses.

Under its buy now pay later, or BNPL, division, MobiKwik actually has two products.

MobiKwik Zip is an interest-free product that competes mainly with the likes of Simpl and
PayU-owned LazyPay. A user can get a Rs 500-Rs 30,000 credit limit available in their
MobiKwik wallet with a one-tap activation in 15-day cycles; they can spend this on
purchases online or offline at merchants that accept it. At the end of the cycle, a user is
required to pay the due amount within five days, failing which a late fee is charged. The
user also pays a one-time activation fee. This product works as a combination of credit
and payments, with MobiKwik charging merchants (e-commerce sites, food delivery
services, etc.) a payment fee, usually 2-3% for this kind of product.

Users with “satisfactory repayment history” on MobiKwik Zip are then pre-approved for
the company’s other product under BNPL, which is called Zip EMI. This is a classic EMI,
or equated monthly instalment, offering along the lines of what banks, NBFCs such as
Bajaj Finance and several fintech lenders such as ZestMoney work on. It’s focused on
users who want to buy high-value products between Rs 25,000 and Rs 100,000. The users
can buy what they want up front and pay MobiKwik in 6/12/18 monthly instalments.

The company works with IDFC First Bank, InCred, Fullerton India, DMI and Faircent as
the lending partners for its BNPL products.

Globally, large fintech companies such as Affirm in the US and Klarna in Europe have
emerged over the past few years in the BNPL segment and have built billion-dollar
businesses. (Affirm went public in January and currently trades at a valuation of over $15

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billion.) Even Apple may be getting into the business, Bloomberg reported just yesterday.
There’s no shortage of love among fintech companies and their investors for BNPL as an
idea.

“At least 3-5 years are needed to know whether the product is here to stay or not because
you need to see 2-3 credit cycles to understand the trend. This product is still evolving and
is too early to say how it is going to play out in the market. Some players have also burnt
fingers,” says the founder of one of MobiKwik’s lending partners, who also works with
other fintechs in the pay later and EMI segment.

There is competition aplenty and e-commerce giants such as Amazon India and Flipkart
are coming up with their own BNPL and EMI products; and because of that the fintechs
have relaxed their underwriting rules. In addition, it’s difficult to go after defaulting
borrowers.

“Traditional lenders don’t get into this category because they are busy servicing their own
customers and new players are trying to get into this service. Despite the demand, no
lender is giving too much exposure on one partner or one category. This is a high NPA
model somewhere above 10%. This model works on defaults and late fees, just like credit
cards. The company doesn’t make money if you are paying on time. We all think there’s
too much stickiness, but in reality, there is no stickiness in these products,” says the
founder of the lending firm.

The risks inherent in the business were clearly illustrated in MobiKwik’s latest fiscal year.

According to its prospectus, COVID-19 was a black swan event that severely impacted its
segmental GMV and revenue in the first half of fiscal 2021. (GMV is short for gross
merchandise value, an e-commerce term that in MobiKwik’s case basically refers to the
total value of payments made or the total loans/credit disbursed.) However, in the second
half of fiscal 2021, BNPL GMV and revenue recovered. Overall BNPL revenue was still
down 20% year-on-year, but at the same time, MobiKwik’s credit guarantee losses shot
up.

In the charts from the prospectus below, ignore the adjusted EBITDA figure for the
moment, and focus on “segment results”.

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In analysing all of MobiKwik’s three business lines, the “segment results” figure is very
important, since it effectively represents the company’s net revenue of sorts. That is, for
BNPL, this is the income it has left over after deducting the cost of capital from its lending
partners and the cost of guaranteeing defaults (remember the FLDG arrangement).

The founder of the lending firm quoted above notes that BNPL may look like an untapped
opportunity, but the product also needs to be sustainable. “COVID is not just one factor,
product has to be sustainable because there will be either COVID or any crisis such as
demonetization or IL&FS or a global crisis every now and then, so you will always get an
excuse to give for a product failure in the financial market. But models have to be
sustainable. It’s not that you will say I was doing Rs 100 crore and now doing Rs 5 crore,”
he says.

The company was able to generate promising segment results or net revenue from BNPL
in 2019-20—of a total revenue of Rs 74.35 crore in the segment, it was able to keep Rs
24.6 crore for itself. That’s not quite enough to cover its other costs for the segment,
including employees, tech, etc., but had the pandemic not derailed it, it’s fair to say that
the business would only have grown.

BNPL and EMIs are still a thoroughly competitive space, even though the market is not
insignificant. MobiKwik says that its BNPL GMV rebounded strongly to higher than pre-
pandemic levels in the last quarter of 2020-21 and the first quarter (April-June) of the
current fiscal year, so the company has hope.

On the whole, though, MobiKwik’s main revenue generator remains the wallet business.

Of wallets and gateways

It’s important to note at the outset that the company’s mobile wallet and payment
gateway business segments are, in a way, intertwined.

The “consumer payments” or wallet business generated Rs 241.17 crore of revenue in

2019-20, which fell to Rs 221.77 crore in 2020-21. This revenue is essentially the payment
fees that MobiKwik charges to merchants who accept its wallet as a payment option
online or offline.

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The net revenue—segment results above—from this business comes at a lower margin
than the BNPL business, except of course when the BNPL business sees heavy defaults
and credit guarantee losses as in 2020-21. The pandemic year also put some pressure on
wallet margins as competition heightened and struggling merchants demanded lower
fees.

Again, the future of the wallet business is a little dicey, given that the industry has been
overshadowed by UPI.

With new revised guidelines, though, digital wallets, or rather prepaid payment
instruments, as the Reserve Bank of India calls them, have regained interest in the
market. A PPI or digital wallet licence is now seen as only one step down from a bank
account, in that it will be part of the UPI network and have a maximum deposit limit of Rs
2 lakh (the only limitation is that a PPI cannot offer interest on deposits).

We’ve written before about how some fintech companies are now looking at PPI licences
for neobanking. Read more here.

With a decent user base and brand recall, credit offerings and cross-sell tie-ups for
insurance and mutual funds in place, MobiKwik might want to leverage its position in the
space—something that most neobanks want to do. (It had also acquired investment app
Clearfunds in late 2018.)

“Today, MobiKwik’s entire business is on MDR, they have MDR on all entry and exit
points,” says the former Bajaj Finance executive quoted earlier; MDR or merchant
discount rate is what companies charge merchants as payment fees. “What I last knew
was they had an active user base of 1,000,000. They have a PPI licence… Their brand tie-
up is strong. All customers who don’t have a great credit history and access to bank credit
and credit cards, they use MobiKwik services by paying 2% MDR, and these are the people
who need wallets to revolve money.”

But whether MobiKwik will be able to crack the code here or will it again fail to capitalize
despite raising funds is the bigger question.

Which brings us to its third and smallest business line: payment gateway services.

A brief aside: Technically, most companies that are referred to as payment gateways in
common parlance are what the regulator classifies as “payment aggregators”; we’ll be
using the terms somewhat interchangeably since payment gateway is the more commonly
known term, and also what MobiKwik uses.

ZaakPay, a wholly owned subsidiary, is MobiKwik’s payment gateway/aggregator

business. Zaak ePayment Services was incorporated by Singh and Taku in 2010 for
payment gateway business—that also fetched seed investment from Sequoia in November
2011. This was well before any of the top payment gateway players such as Razorpay or
Citrus Pay (merged into PayU) existed in the market.

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ZaakPay, which was converted into a wholly owned subsidiary of MobiKwik in 2015, has
applied for a payment aggregator licence from the Reserve Bank of India. The RBI has
mandated a positive net worth of Rs 25 crore to be maintained by 31 March 2023, under
its recent regulations for payment aggregators and gateways (earlier, payment gateways
were essentially regulated by banks and there was no formal licence for it).

While the company claims nearly 4,551 merchant partners for its payment gateway
service, most industry executives are clueless on MobiKwik’s PG business.

“Not sure about how their PG business is performing, their name doesn’t come up in any
industry/ecosystem conversations. They recently inducted Siddharth Dhamija from
PayPal as CEO of Zaakpay, he might have got some merchant partners, but it is difficult to
say that they are the primary payment gateway partners for any known big merchant,”
says a former senior executive at PayU, one of the largest payment gateway/aggregator
companies in India.

Looking at the chart above, it seems as though payment gateway services generate far
more revenue than BNPL, at Rs 193.98 crore in 2019-20 and Rs 159.62 crore in 2020-21.
But most of that revenue actually comes from payments processed for the MobiKwik
wallet—that is, ZaakPay’s biggest client by far is the parent company. These revenues are
eliminated from the consolidated figures.

The payment gateway business only generated Rs 19.32 crore in revenue from operations
(i.e. excluding its revenue from the parent company’s wallet payments) in 2020-21, down
from Rs 51.1 crore in 2019-20. The silver lining is that this means the company’s margin
figures for the payment gateway business are also misleading, since it won’t earn much of
a margin if any on payments it processes for the MobiKwik wallet.

So this is a higher gross margin business than it lets on, but smaller in reality even than its
younger BNPL business line.

Now what?
To sum up, for the potential investor, MobiKwik may be a little difficult to place. The blow
it suffered in 2020-21 on account of the pandemic muddies the waters, after strong
growth and a reduction in losses in 2019-20. While COVID-19 might be a one-time

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calamity, the risks inherent in the business, especially in lending, are only highlighted by
it.

It’s important also to realize that if one looks at the company’s “segment results”,
MobiKwik generated only Rs 33.11 crore in net revenue from its three businesses in 2020-
21. This is after stripping out direct costs (payment processing charges for the wallet and
payment gateway, cost of capital and credit losses for BNPL). In 2019-20, the same figure
was Rs 69.3 crore, which is probably closer to reality, to be fair to the company.

“They started well and even got the licence before Paytm. Sequoia was the first investor
but somehow, they were not able to capitalize on that. Even on the payment gateway side,
they were the early entrants, but still they were not able to capitalize. MobiKwik was the
only company as a standalone wallet despite stiff competition from Paytm. It’s a difficult
industry and offline merchant play is also difficult, still they somehow survived. They
pivoted also. Most of the time they were always struggling for funding, investors sort of
wrote off this bet,” recalls another former senior MobiKwik executive.

India’s capital markets may have been going through a different phase altogether, but
does it make sense for a company like MobiKwik—which is neither a leader, nor a
complete failure; which is just surviving somehow in a cut-throat market—to go for an
IPO?

“I heard recently that MobiKwik did not have to pay the rent of their office before the $20
million funding round from Abu Dhabi Investment Authority came. This is not out of
desperation to list before Paytm or so, but this is only to save the company. The company
has gone to nuts. It has to move to the retail investors now because this is the only way
out for MobiKwik, otherwise there is no chance of survival. To raise Rs 1,900 crore in the
retail market is not a big deal, the point is the founders were not able to do anything
despite trying hard, still it is a name in the market. They do have better coverage than
some other fintechs,” says an executive who works in digital payments and lending, asking
not to be named.

MobiKwik had a good set of investors in the beginning, but it failed to get subsequent
rounds by existing investors. However, this IPO will be good for the company’s existing
investors. Its early backer, Sequoia, will sell some stake worth Rs 95 crore in the IPO;
whereas Singh and Taku will sell their stake worth Rs 189 crore and Bajaj Finance will
take out Rs 69 crore. The Capital Quest estimates that Sequoia in particular will see an
outsized return if the IPO goes through.

Sequoia had backed MobiKwik from its third and fourth India venture funds, and was the
first institutional investor in the group. Sequoia’s third fund, in particular, will see record-
breaking returns as it had picked up shares at a nominal sum. It will pull out around Rs
20.8 crore with a return of over 700 times its initial investment. This would be a bonanza
for the Limited Partners (LP) of its third fund as its Rs 27 lakh investment is likely to be
worth close to Rs 200 crore.

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From Sequoia set for multi-bagger as MobiKwik eyes $900 mn valuation in IPO • The
Capital Quest

At this stage, any company would expect some liquidity. With struggling times and no
investors, one can’t really always have the window. “With the current market right now,
there are a lot of players like big traditional players and small players who you never
heard of are going for IPO. For tech, it is springtime. Everybody is raising funds and their
round, if compared with Zomato and Paytm, is less risky. The money MobiKwik is raising
can be easily justified in this market but not too sure how they are caveating and building
their case on. Paytm and MobiKwik need funds and the capital market is always cheap,
but it brings a lot of scrutiny. IPO is not only about funding,” says one of the former
MobiKwik executives quoted earlier.

“They [Singh and Taku] are very resilient people, moved offices, cut burns and I have seen
them doing very drastic stuff. They have definitely faced a lot of tough times, but they
have always made a comeback. You can question that they are not leaders like Paytm in
the market but they have found a way to stick to it at tough times. In fintech, at one point
everyone became a wallet but going forward what will make the difference is will they find
their niche to keep the engagement with users on repeat case. Their intent is to keep going
with whatever the challenges come,” this person adds.

Having said that, experts say IPO is the first milestone and it will be good for existing
investors but it is still to be seen how the upcoming tech IPOs fare after listing and in the
months and years thereafter.

“First time in my 20 years of working on the internet, a phenomenon I have never

witnessed where revenues and users have been coming down for three years and still
companies are going for record IPO ambitions. Loss-making is still fine but top line and
users should always be up—but with these three IPOs, even these two metrics have gone
for a toss,” says the founder of an NBFC.

In the end, even if they convince the markets today, the slog will continue for MobiKwik
and its founders, to get back on the growth and profitability track.

Cover image: Bipin Preet Singh, CEO, Mobikwik. Picture credit: @RedditIndia

About the author

Arti Singh

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