An analysis of merchant payments firm Pine Labs’ 56% revenue growth in FY2023 and associated outlook for the fintech industry.
Source and Citation: Article from ET Bureau published on Dec 30, 2023 originally titled “Pine Labs Nears ₹1,600 crore in Revenue, Up 56% from Last Yr”
Analysis of this news for a layman
Pine Labs is an Indian company that provides merchant payment solutions. It offers point-of-sale (PoS) terminals and payment gateway services to both online and offline retailers.
According to the financial results for the fiscal year 2023, Pine Labs has reported an impressive 56% year-on-year growth in revenue, reaching nearly Rs 1,600 crores. Additionally, the company has managed to reduce its losses slightly from the previous year to Rs 227 crores.
This remarkable growth can be attributed to the increasing adoption of Pine Labs’ payment terminals by small merchants, as well as its recent expansion into the e-commerce gateway segment through its Plural platform.
However, despite these strong growth numbers, Pine Labs has not yet turned profitable. This highlights the challenges of customer acquisition costs and long working capital cycles in India’s merchant payments market, which require substantial capital and operational expenses.
Pine Labs had previously deferred its plans to list on the US stock market, citing unfavorable conditions. This decision indicated that even niche fintech segments were experiencing corrections amidst fluctuating global markets. Nevertheless, Pine Labs’ growth metrics demonstrate the significant potential in the market.
Impact on Retail Investors
For retail investors in the Indian fintech sector, Pine Labs’ growth figures carry several implications:
- Pine Labs’ growth showcases the untapped potential of the Indian market, especially among small merchants who have yet to fully embrace digital payments despite the success of UPI in peer-to-peer transactions.
- It underscores India’s attractiveness to major payment service companies like Visa and Mastercard, who may consider investing in and expanding their presence in the country to capitalize on the surge in electronic transactions.
- Concerns about profitability persist due to high marketing and operational costs, despite achieving scale. This indicates challenges related to customer retention and price competition from traditional banks.
- The public market’s appetite for investments may take time to recover, especially if realistic growth expectations are not met. This could reduce interim liquidity options for existing private investors until Pine Labs solidifies its IPO plans, likely in a few years.
While Pine Labs demonstrates the market’s potential, investors should consider the risks of a potential correction phase in the niche fintech sector before favorable listing conditions reemerge.
Impact on Industries
Several related industries will experience tangible impacts from Pine Labs’ strong revenue growth trends:
MSME Lending Platforms:
The transaction data insights generated by payment platforms like Pine Labs can lead to better risk-scoring models for small business loans. This benefits fintech lenders like Lendingkart and FlexiLoans, enabling them to maximize credit penetration using aggregated data.
POS Equipment Manufacturers:
The increasing adoption of digital payments by small merchants provides opportunities for POS terminal suppliers in India, such as Mswipe and EPS, to expand their installed base and reach more merchants.
Transaction data analytics combined with business account services allows for working capital solutions tailored to the needs of SMEs and startups. This synergy could lead to collaborations between Pine Labs and neobanks like Open and RazorpayX.
Thus, Pine Labs’ expanding merchant network is expected to foster cross-linkages within the broader financial services sector, enabling better access to credit for businesses.
Long Term Benefits & Negatives
The long-term impact of Pine Labs’ sustained strong growth in the merchant payments industry includes:
- Pine Labs’ success can help expedite the formalization of India’s vast unorganized retail sector by promoting transparency and the adoption of cashless systems. This builds consumer trust and encourages tax compliance over time.
- The expansion of the digital payments ecosystem goes beyond card networks, including UPI and other interoperable platforms. This levels the playing field for entrepreneurs who previously lacked access to traditional banking services.
- The rich data sets created by Pine Labs on consumption patterns and credit behaviors support the customization of financial service offerings tailored to the unique needs of historically underserved SMEs.
However, there are potential downsides that need to be addressed, such as:
- Overreliance on merchant transaction fees for revenue makes business models vulnerable to pricing pressures and regulatory caps on charges in the public interest over the long term.
- Sustaining losses due to high customer acquisition costs may test investors’ patience, prompting them to seek a quicker balance between growth and profitability.
- As digital payments adoption expands to less tech-savvy merchants in smaller towns, there is an increased risk of cyber threats. This requires robust safeguards and fraud awareness programs.
So, while Pine Labs demonstrates the potential for growth, a thoughtful evolution beyond payments into integrated financial services for small businesses is crucial to manage risks.
Short Term Benefits & Negatives
In the short term (2023-24), Pine Labs’ growth trends signal momentum in the fintech sector with several implications:
- It validates the opportunities in India for investors, attracting capital to fund innovations such as EMI options at checkouts and cross-border remittances. These solutions address unique pain points for SMEs and businesses beyond just payment processing.
- The government may feel encouraged to expand digital merchant coverage through fiscal measures and awareness-building campaigns to achieve its goals of a cashless economy.
- Pine Labs’ success fortifies the overall startup ecosystem by showcasing the depth of the market despite global tech fluctuations, encouraging more entrepreneurs to enter the fintech space.
- Scaling user acquisition requires a careful balance between conversion tactics and avoiding misrepresentation. Maintaining the integrity of expansion amid intense competition is crucial.
- Merchant payments in India still primarily rely on feature phones. Upgrading infrastructure and technology will be necessary as 5G networks roll out, requiring contingency planning to manage transitional uncertainties.
In conclusion, while Pine Labs heralds growth, its thoughtful evolution beyond payments into integrated financial services for small businesses is essential to manage risks and ensure long-term success.
Impact of Pine Labs Financial Performance:
Indian Companies Likely to Gain:
- Payment Gateway Providers:
- Companies like Razorpay, BillDesk, and Paytm might face increased competition from Pine Labs’ Plural platform, but also benefit from a growing online payments market.
- Market Sentiment: Neutral to slightly negative for established players, positive for the overall sector.
- Digital Lending Platforms:
- Pine Labs’ expansion into lending through its Dukaan app could potentially benefit lending partners like Bajaj Finserv and Axis Bank.
- Market Sentiment: Neutral to positive, depending on partnership agreements and market share gains.
- Startups in Merchant Services:
- Companies offering niche solutions for offline and online merchants, like inventory management or loyalty programs, might see increased collaboration opportunities with Pine Labs.
- Market Sentiment: Positive, potential for increased investment and partnerships.
Indian Companies Potentially Impacted:
- Traditional Point-of-Sale Terminal Providers:
- Companies like Verifone and Ingenico might face stiffer competition from Pine Labs’ POS terminals, especially in the small and medium business segment.
- Market Sentiment: Neutral to slightly negative, depending on their ability to differentiate and target specific market segments.
Global Companies Likely to Gain:
- Global Payment Networks:
- Companies like Visa and Mastercard might benefit from increased payment volumes processed through Pine Labs’ network.
- Market Sentiment: Positive, with potential for transaction fee growth.
- Global Technology Providers:
- Companies like Amazon Web Services and Microsoft Azure could see increased cloud infrastructure adoption from Pine Labs.
- Market Sentiment: Positive, potential for cloud service contracts and revenue growth.
Global Companies Potentially Impacted:
- Competing Global Payment Solutions:
- Companies like Stripe and PayPal might face stiffer competition from Pine Labs in the Indian market, especially for online payments.
- Market Sentiment: Neutral to slightly negative, depending on individual market share and competitive strategies.
Disclaimer: This analysis is based on available information and future outcomes might differ. Always consult with a financial advisor for personalized investment advice.