Razorpay and Cashfree Rush to Onboard Merchants After RBI Lifts Licensing Restrictions, Increasing Competition in Payments Space
Analysis of the News for Layman
The Reserve Bank of India (RBI), India’s central bank, had previously prevented payment companies Razorpay and Cashfree from adding new merchants to their platforms while reviewing their license applications. This resulted in a backlog of merchants waiting to use these payment services. Now that the RBI has granted payment aggregator licenses to Razorpay and Cashfree, they are rushing to onboard these pending merchants and compete for new business.
A payment aggregator serves as an intermediary between merchants who accept payments and the banks/payment gateways that facilitate these transactions. The RBI mandates payment aggregators to obtain licenses for regulatory oversight and security.
With the removal of licensing restrictions, companies like Razorpay, Cashfree, Pine Labs, and PhonePe are expected to engage in competitive pricing and service offerings to attract merchants. Merchants can negotiate rates based on their transaction volumes and business sizes. It’s important to note that credit card payments typically incur higher charges. Ultimately, merchants seek the best rates and reliability.
Impact on Retail Investors
For retail investors in India, the increased competition in the digital payments space indicates significant growth potential. As more merchants adopt digital payments, payment companies are likely to see an increase in transaction volumes and revenues. Leading players like Razorpay and Cashfree are well-positioned to capture a larger market share. This growth forecast could positively impact the stock prices of their parent companies.
However, the competition to attract merchants may lead to margin compression in the short term. Investors should keep an eye on changes in MDRs (merchant discount rates) and shifts in market share among these competing companies. Razorpay and Cashfree might prioritize acquiring merchants and transaction flows over short-term profitability.
In the long term, India’s digital payments market appears poised for robust expansion, regardless of short-term fluctuations among providers. Patient retail investors could benefit from this upward trend by holding shares in listed payment companies like Paytm or SBI Card or in IT services firms that facilitate digital transactions, such as Infosys.
Impact on Industries
All consumer-facing industries in India that accept payments are expected to benefit from increased competition and innovation in the payment aggregator space.
- E-commerce firms should experience cost savings and higher conversion rates as an improved payments experience reduces transaction abandonment rates. Enhanced site traffic could result from discounts and offers leveraging the savings from reduced MDRs. Established e-commerce players like Nykaa and Delhivery may see increased revenue.
- Brick-and-mortar retailers accepting payments via QR codes or POS terminals will also benefit from increased reliability and improved rates. This is particularly valuable for labor-intensive sectors like restaurants and retail shops. Listed companies like Jubilant Foodworks in quick-service restaurants (QSR) and Trent Ltd in retail may witness overperformance.
- The travel and hospitality sectors are expected to gain from the seamless payment experience. Companies like IRCTC in travel bookings and LemonTree Hotels could attract more individual and corporate bookings thanks to frictionless payments.
- The increased consumption across sectors also benefits the partner financial services ecosystem. More transactions generate more data and lending opportunities for fintech companies like BharatPe and credit card lenders like HDFC Bank.
Long Term Benefits & Negatives
Over the long term, seamless and cost-efficient payments facilitated by aggregators like Razorpay and Cashfree are expected to significantly accelerate India’s consumption economy. When combined with increasing smartphone and internet penetration, low-cost digital transactions become a catalyst for financial inclusion and income mobility.
As both large and small merchants become integrated into the formal financial system, lending and credit underwriting are expected to improve through transaction histories. This presents a substantial long-term opportunity for payment companies, banks, and wealth management firms. Listed beneficiaries may include ICICI Bank, Axis Bank, PayTM, and CDSL.
However, in the 1-3 year timeframe, intense competition creates risks, and only the most well-capitalized payment firms may survive industry shakeouts. Merchant turnover may be high as various providers vie to undercut each other on pricing. Compliance costs related to KYC (Know Your Customer) and security best practices could also squeeze profit margins as aggregators expand.
Short Term Benefits & Negatives
In the next 6-12 months, India’s payments industry is expected to witness elevated merchant turnover and increased customer acquisition costs as companies compete for market share. This is likely to impact financial performance.
Leading companies like Razorpay and Cashfree are focused on rapidly onboarding pending merchant sign-ups. This initial push comes ahead of future monetization efforts and creates short-term cost pressures. Investors may observe temporary widening of losses for these private fintech startups and their parent companies, such as Temasek.
However, one clear short-term beneficiary is expected to be both offline and online merchants. Retailers, large and small, are likely to experience savings on payment acceptance fees, along with improved reliability. This could boost margins and cash flows for businesses.
Publicly listed sectors focused on merchants, including quick-service restaurants (QSR), e-commerce, and hospitality, should exhibit revenue and profit outperformance compared to global peers who lack the tailwind from this emerging market’s payment trends.
Companies Impacted by Razorpay & Cashfree Re-Entry:
Indian Companies that Gain:
- Razorpay & Cashfree (NSE: CASHFREEPAY): Regaining the payment aggregator license allows them to onboard merchants they couldn’t before, potentially boosting revenue and market share. This could positively impact their stock prices.
- Pine Labs (NSE: PINE LABS): While Razorpay & Cashfree’s return increases competition, Pine Labs already has a strong offline presence and offers broader solutions (POS systems, credit). Increased competition may push for better services and innovation, benefiting merchants.
- PhonePe (Walmart subsidiary): As a major competitor, PhonePe may see more pressure to maintain competitive pricing and expand its service offerings to retain merchants. This could benefit overall market development and drive innovation.
- Banks: With more payment aggregators, banks may have more options for partnerships and access to a wider merchant base, potentially increasing transaction volumes and fee income.
- Digital Marketing/Tech Companies: Increased competition and merchant activity could boost demand for marketing services and technology solutions to reach and manage customers, benefiting relevant companies in the ecosystem.
Indian Companies that Lose:
- Smaller Payment Gateways: Razorpay & Cashfree’s brand recognition and resources may make it harder for smaller players to compete for new merchants, potentially squeezing their market share.
- Merchant Aggregators: Companies solely focused on merchant onboarding and management may see reduced demand as Razorpay & Cashfree offer similar services directly.
- Visa & Mastercard: Increased online transactions via Razorpay & Cashfree could benefit major credit card networks through transaction fees.
- Global Payment Service Providers: While competition in India intensifies, global players may see opportunities for partnerships or acquisitions in a rapidly growing market.
The news is likely to be received positively by the overall fintech market, with potential upside for companies directly involved in online payments and related services. Increased competition might initially put pressure on margins, but it could also accelerate innovation and benefit merchants in the long run. Smaller players and companies solely focused on merchant aggregation may face greater challenges.
Please note: This analysis is based on the information provided and may not be exhaustive. Market dynamics are complex, and actual outcomes may vary depending on various factors.
Proper Citation: By, “As RBI Lifts Curbs, Razorpay, Cashfree Eye Lost Mkt Share”, Economic Times, December 21, 2023.