INDIAN INSTITUTE Of MANAGEMENT RAIPUR

PhonePe
Authors: Chirag Gupte, Arpit Dongre, Natasha Dhoke, Gajagntarao Abhinav

PhonePe is an Indian e-commerce payment system and digital wallet. It was founded by
Sameer Nigam, Rahul Chari and Burzin Engineer in 2015, headquartered at Bangalore.
Phonepe is the first payment app in India that is built on Unified payments interface. The
company was acquired by Flipkart in 2016 and it was rebranded as PhonePe wallet. Within 3
months of launch, the app was downloaded by over 10 million users. In 2018, PhonePe also
became the fastest Indian payment app to get a 50 million badge on the Google play store.
PhonePe is an UPI-based App launched by e-commerce giant Flipkart, to provide a cashless
and a seamless payment experience. The PhonePe app is based on the Unified Payment
Interface (UPI) platform.UPI payment system allows money transfer between any two bank
accounts by using a smartphone. UPI allows a customer to pay directly from a bank account
to different merchants, both online and offline. In UPA system to send money, we don't need
to give credit card details, IFSC code, net banking passwords etc.

Utility uses of PhonePe

Customers can use PhonePe app to pay your postpaid and utility bills. You can use
PhonePe app for the following:
1. Recharging prepaid mobile number
2. Recharge data card and DTH
3. Send or request money from friends entering their number, name or VPA
4. Split bills between people
5. Check the bank account balance
6. Scan QR codes to pay

Key Drivers
The exponential growth of the digital payment sector is driven by multiple factors including
1.Convenience to pay
2. The ever-growing smartphone penetration

3. Rise of non-banking payment institutions (payments bank, digital wallets, etc.),

4.Progressive regulatory policies

5. Increasing consumer readiness to the digital payment platform.

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The convenience to pay along with the availability of lucrative offers, are two key factors that
have been driving the growth of digital payments in India. This coupled with the increasing
smartphone penetration is proving to be a boon for digital payments sector.
India, currently, has third largest internet user base in the world with 300 million users. 50
per cent of these users are connected to internet through mobile only. These 150 million
mobile only internets users are playing a key role in the growth story of digital payments.
The advent of next-generation payment systems like payment banks, digital wallets and
BharatQR, is fueling digital payments furthermore. It is projected that digital payments in
India will supersede cash by 2022, according to the IDC Financial Insights report titled The
Future of Payments in India: More Spectacular Growth Ahead.
Another key driver of digital payments is positive policy framework changes and government
initiatives like launch of new payments systems like - UPI, Aadhar linked electronic payments
and improvement of the digital infrastructure.

Digital Wallets in India:

Digital wallets are virtual wallets that store user’s payment information. With the increase in
internet penetration and smartphone usage in India, digital wallets ecosystem has seen
major changes in the last 5 years. Features of digital wallets like security from theft
compared to traditional currency and the ability to make transactions throughout the day,
attracted a lot of consumers to use digital wallets. A lot of fin-tech companies emerged,
changing the digital landscape of financial transactions in India, forcing other major players
in the banking sector to invest in digital wallets.

Mobile wallet providers can be broadly classified into two types viz., banking entities and
non- banking entities. Banking entities include major banks like ICICI, Axis etc., whereas non-
banking entities include platforms like PayTm, PhonePe etc.,

Digital wallet market in fragmented and highly competitive with companies coming up with
new and innovative offers to attract more customers. The timeline of major events in digital
wallet ecosystem in India is as follows:

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Source: cbinsights.com

According to Consumer Payments Insights survey, India is one of the top markets to adopt
mobile wallets. Mobile wallet transactions in India have increased with a CAGR of 120% in
the last 5 years and is expected to grow to 32 billion transactions by 2021. One of the biggest
reasons for increase in digital wallet usage in India is demonetisation. The digital wallet
platforms saw a major boost in traffic after the demonetisation of major denominations.

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PhonePe Business Model

Components of a Business Model

The main components of a business model are Capabilities, Customer Value Proposition,
Market Segments, Revenue Model & Growth Model. Below is the basic analysis of
components of PhonePe’s business model.

Analysis of Business Model using TEECE Framework

Complementary capabilities and Imitability are two main factors to be considered for making
money from invention or discovery.
TEECE Model takes these factors into consideration and predicts the profitability aspect from
innovations.

PhonePe:
Complementary assets: Tightly held and important
Imitability: High
The services offered by PhonePe like mobile recharge, paying bills of telephone, electricity
and gas are highly imitable. In fact, Paytm too offers similar services.

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TEECE Framework

High

Run Team up

Holder of
Diffiicult to complemen maketary assets moneymake
money
Imitabilit

Party with
Inventor
both technology and assets makes money
makes money

Block Block
Team up

Low High
Complementary Assets

PhonePe should Team up to form a Strategic Alliance with other parties in course of
innovation.
It is rightly doing so by creating an open platform for SMEs to create a digital footprint
in this space without high acquisition cost.

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Profitability potential of PhonePe

VARIM Analysis

Monetization:
 Bill payments are the major source of revenue generation for PhonePe. Offline and
Online merchants pay a commission on all the payments through PhonePe made by
customers on their sites, apps or physical stores. UPI transactions are IMPS based and
not NEFT hence there is no additional payment to be made to the banks

 In the year 2018-19, PhonePe has reported a loss of about ₹1,904.72 crore which can
be attributed to its ongoing rivalry against rivals like Paytm, Google Pay and Amazon
Pay. The company's reported losses of ₹791.03 crore for the fiscal year 2018,
according to regulatory documents.

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 Revenue from operations has increased to ₹184.22 crore in FY19 from ₹42.79 crore in
the previous year. Currently, the average ticket size of offline payments stands at
₹225 to ₹250, with the platform seeing close to seven million transactions in this
category every month. Further, the founders are optimistic that this number will
grow to 100 million, over the course of this year. The number of merchants in the
unorganized space is estimated to cross 65 million in December 2019

 Increasing internet usage, availability of low cost smartphone and convenience

contributed to a rapid growth of Indian digital wallet ecosystem. The convenience
offered by the digital wallets alongside the lucrative promotional offers help attract a
lot of customers, especially in a market where a lot of users are first time users. This
coupled with the enormous untapped market of India forecast a high growth
potential for digital wallets. A majority of Indians access internet through their mobile
phones, which is a good sign for the future of digital wallets, and this number is
increasing at a rapid rate.

Entry into wealth management

In an attempt to shift consumer mindsets, PhonePe is planning to expand the scope of its
services beyond metro cities. With almost 30 payment transactions as a monthly average
from a customer on its mobile app, PhonePe believes that it will be able to realize good
progress in the wealth management category in the coming days.

The company has been working to bring new products exclusively on its platform, a strategy
even some of its competitors like MobiKwik are adopting. PhonePe already enabled features
like buying digital gold on its platform from precious metals company MMTC-PAMP, as well
as digital platform SafeGold.

Hyperlocal strategy to boost stickiness

PhonePe is relying on a hyperlocal strategy with an aim to not just increase its offline
transaction volume, but also to keep its users engaged. To achieve this, it is aggressively
going after categories and stores with higher payment value, including lifestyle and
consumer electronics. The company is also planning to release its CRM solution, ‘PhonePe
for Business’ app, which will allow offline merchants to get a digital view of their earnings
and also add additional services like credit and insurance in the future which is another
reason why the company is focussed on the offline retail sector.

Recently, PhonePe made an announcement that its offline merchant base in India has
crossed the one million mark. This is six months after the company started doubling down on
the sector. The company has employed nearly 4000 people as its feet-on-street team to
manage its offline expansion and plans to double this headcount by the end of three months.
At present PhonePe’s offline merchants are concentrated in metro cities including
Bengaluru, Mumbai and New Delhi.

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Potential of Digital Payment

Source : https://www.ibef.org/blogs/digital-payment-industry-in-india

The digital payment industry is gaining momentum and is projected to grow at an

exponential rate. 81 per cent of existing digital payment users prefer the medium over other
non-cash payment methods like cheques or demand drafts. Online shopping, payment of
utility bills (like electricity, mobile bills, water bills, etc.) and movie tickets are the three
things that an Indian user primarily pays for through digital platform.
According to a report by Google and Boston Consulting Group (BCG), the Indian digital
payments industry is estimated to touch $500 billion by 2020, contributing 15 per cent to the
country’s GDP.
An interesting angle to India’s digital payment story is that it is going to be dominated by
micro transactions (tractions of value lower than Rs 100). In fact, 50% of person-to-merchant
transactions are to be under Rs.100, says the Google-BCG report. Alternate digital payment
instruments like digital wallets, UPI, payment banks, Bharat QR are expected to grow fiercely
and estimated to double their contribution to 30 per cent in the digital payment industry.
Mobile/Digital wallets: The digital payment industry growth will be led by the digital/mobile
wallets. According to the Capgemini’s World Payment Report, mobile wallets will witness a
compound annual growth rate (CAGR) of 148 per cent over the next five years and will be
$4.4 billion by 2022. The digital wallets are also supposed to outshine UPI.

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Strategies to become profitable

The current revenue generation model of PhonePe is based on Commissions. The digital
payment system is expanding exponentially with more number of people preferring digital
payment systems over traditional methods. Also, there is high customer loyalty in this
ecosystem. Hence the focus of the Digital wallets is currently on gaining market share
through which they can collect the consumer data to analyze the buying behavior and
patterns of their customers.

PhonePe can adopt the following strategies to generate profits:

 Business services – Phonepe can partner with businesses to provide them a platform
for hassle less transactions. PhonePe should develop an ecosystem for business
services where they can earn commissions from the transactions performed.
PhonePe should target SME’s for partnership and bring them aboard. PhonePe can
also create a premium segment where they can also include additional services like
paying on credit to premium customers and charge premium for registration and
additional interest for the credit provided.

 Partnerships with retail chains – PhonePe should partner with retail outlet chains.
Credit card and debit cards are the most used non-traditional mode of payments.
With the rise of digital wallets, consumers are more inclined towards using digital
payment systems than credit/debit cards. PhonePe should use this to its advantage
by partnering with multi-brand retail outlets, which will boost its revenue.

 PhonePe can also partner with other websites that provide services like travel,
leisure, ecommerce etc., For example, they can partner with ticket booking service
providers like Ixigo where a majority of transactions are done through credit/debit
cards. This will enable PhonePe to generate revenue by replacing the dominant
methods of transactions.

 PhonePe should also look into emerging technologies like NFC payments through POS
machines. Though this technology are still in nascent stage in India, they are
dominantly used in developed countries. In a matter of years, these will also be
adopted in India. NFC’s provide even faster payment transfer compared to QR code
that is currently used. This can provide a competitive edge to Phonepe in future if
they start investing in this technology.

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