MobiKwik IPO: Can ‘Buy Now Pay Later’ Lending Save The Wallet Company?

Mobikwik recently filed its Draft Red Herring Prospectus for an IPO. The company plans to raise around Rs 1,500 crore through the fresh issue, while the remaining would be an offer for sale.

The company has been around since 2009. Initially, the focus was on building a better mobile recharge platform, but soon it pivoted into a website with a full-fledged wallet facility. The demonetisation in 2016 came in at an opportune moment as payment companies were struggling to gain wider acceptance. After demonetisation, merchants adopted these payment apps almost overnight.

However, within a few months, the Indian government launched the United Payments Interface (UPI), that allowed people to transact from their bank accounts directly rather than having to move money into their wallets every few days. UPI transaction volumes rose manifold while wallets began dying a slow death.

In any case, Mobikwik was lagging behind its competitors even before the UPI payment mechanism was introduced.

In what seemed to be a case of sour grapes, Mobikwik’s management jibed at FreeCharge and Paytm through blogs and interviews. For instance, in 2016, Mobikwik’s CEO Bipin Preet Singh was quoted as saying, “Paying at a paan shop is good for marketing yourself, but that’s not real business.”

The comment was in reference to Paytm’s ambition of onboarding every Paanwala in the country. Despite starting in the e-wallet segment, around the same time, Paytm raced miles ahead while Mobikwik grew at a much slower pace.

The difference between the two companies is stark; Mobikwik has 101 million registered users, while Paytm has 333 million registered users, as of March 2021. Mobikwik’s management had also forecasted that it would break even by 2018, but the introduction of UPI, along with the entry of several new competitors, meant that profitability wouldn’t come easily. The company has continued being a loss-making entity till date.

To be fair, Paytm’s growth was a result of having marquee investors like Ant Financial, who happily financed the cash burn. Paytm spent immense amounts on trying to get people to use its payments wallets and other services. Cashbacks happened to be the main source of driving greater adoption.

For the year ended March 2019, Paytm had spent Rs 3,408 crore on marketing and promotional expenses. The amount was higher than its revenue for the year. With these huge investments, Paytm has certainly managed to capture higher mindshare and develop a larger network compared to smaller players.

Lending: A Risky Bet?

Like other e-wallet companies, Mobikwik had to find a way to sustain its revenues. It soon followed Paytm and began diversifying into financial services – wealth management, lending, insurance brokerage, among others. It acquired ClearFunds to enter the mutual fund space; however, the acquisition has not yielded any results. The reasons are obvious – many direct investment platforms have sprung up in recent years, from Zerodha’s Coin platform to Paytm Money. These competitors have a much wider audience and allow users to buy mutual funds at no charge.

Recently, it has shifted its focus to lending. The IPO prospectus describes the company as: “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 gross merchandise value (“GMV”) and BNPL GMV, respectively, in Fiscal 2021.”

The shift to lending is evident by the importance given to the Buy Now Pay Later (BNPL) category - the prospectus has 238 mentions of the term “BNPL”, despite being the second-largest revenue centre.

The BNPL transactions occur through MobiKwik Zip and ZipEMI.

MobiKwik Zip is an interest-free product with a Rs 500 to Rs 30,000 credit limit available in the user’s wallet in 15-day cycles. At the end of the cycle, a user must pay the due amount within five days, failing which a late fee is charged. The user also pays a one-time activation fee. Mobikwik is meant to be a low-value purchase platform.

ZipEMI is the upgraded version of the product where users can borrow for higher-value purchases between Rs 25,000 to Rs 100,000. The users can pay back the money in six, twelve or eighteen monthly instalments.

While the product is promising (with a 79 per cent repeat use rate), it opens up new risks for Mobikwik. Unlike Paytm and other digital start-ups that do not appear to keep any credit risks on their own books, Mobikwik has entered into contracts where it would reimburse the financial partner in case of defaults.

While the model can provide higher returns to MobiKwik, it can impact MobiKwik negatively in case the delinquencies rise. These financial guarantee expenses have been rising for MobiKwik; for FY21, it paid out financial guarantees of Rs 58 crore that ate up 21 per cent of the company’s revenues. These expenses have grown at a rapid pace from Rs 11 crore in FY19, to Rs 58 crore in FY21. While the high delinquency rates might be attributed to Covid, the BNPL space remains intensely competitive.

Is There A Silver Lining

Coming to the positives, the company has managed to grow its consumer payment business revenues at a rapid pace, despite spending less on customer incentives and promotions. For instance, in FY20, promotional expenses grew by 32 per cent while consumer payments business revenues grew by 161 per cent. During the same year, Paytm cut down on its promotional expenses, and revenue growth fell from 100 per cent to 11 per cent for the payments business.

MobiKwik’s payments gateway caters to Uber India, Indian Railway Catering and Tourism Corporation, Indiamart, among other high-quality customers. The realisations from the businesses have continued growth in terms of revenue as a percentage of the gross merchandise value. The company also plans to leverage its user reach and get into insurance broking, another crowded space with many web aggregators.

Despite the positives, losses have continued to pile up. The company continues burning cash, though cash burn has lowered from Rs 138 crore in 2019 to Rs 34 crore in 2021.

As of now, no payments platform has managed to develop sustainable profitability yet. Consumers have been the biggest beneficiaries of the multi-year cash burn by technology start-ups. Right from highly discounted food to free payments, venture capital has funded the growth of the digital economy. Whether Mobikwik can grow while lowering losses remains to be seen.