Mastercard-Backed Instamojo May Pull Out Of Payment Gateway Bid, To Focus On Scaling Up Back-End Infra

Fintech startup Instamojo, which counts Mastercard, Gunosy Capital, Kalaari Capital and Blume Ventures as among its marquee investors, might pull out of reapplying for payment aggregator license after the Reserve Bank of India returned its application last year.

Instamojo has shelved its plans to apply for a PA licence, after the central bank returned its application last September for not meeting the eligibility criteria.

As per Mint’s report, the startup is now focusing on upgrading its back-end infrastructure to assist clients. 

It has also partnered with licensed payment aggregators and banks to facilitate merchant transactions.

The revamped payment system will facilitate settling merchants’ funds directly by the bank into their nodal account instead of Instamojo’s nodal account, Sampad Swain, co-founder of Instamojo, told Mint.

Swain said, “In the last three-four months, we have been working with banks and examining our collaborative efforts. We realised that having a license is becoming less important because merely holding money doesn’t provide enough advantages. For example, we won’t be able to earn interest on this money or use it for lending purposes.”

Swain expressed his interest in collaborating with banks and regulated payment aggregator partners, allowing them to handle regulations and rules.

Payment aggregators aggregate various payment methods on a single platform, enabling merchants to accept payments from customers. 

Instamojo had halted its payment aggregator PA operations soon after the RBI refused to entertain its application.

Instamojo’s choice to close its payment service last year created panic among its merchants. They couldn’t get their money after selling items. As a result, Instamojo not only lost sellers to rivals but also saw a slump in its profits.

On September 27, last year, a financial maelstrom swept through India’s vibrant fintech landscape when the Reserve Bank of India (RBI) cracked its whip on Instamojo among dozens of other startups by rejecting their payment aggregator licence application. 

The central bank’s whip fell on 25 existing payment aggregators (PA) licence holders and 47 applicants who saw their applications rejected. This also included Ezetap’s (acquired by Razorpay in 2022) licence withdrawn.

As per the notice, the existing aggregators were granted a 180-day sunset clause to gradually wind down payment aggregator operations. In November 2023, Instamojo announced it was shutting down its PA business.  

According to the RBI’s guidelines on Regulation of Payment Aggregators and Payment Gateways, licence holders must maintain a net worth of INR 15 Cr for the first two financial years and a net worth of INR 25 Cr after that.

Furthermore, this criteria is not a one-time requirement for the licence. Payment aggregators must consistently adhere to licensing prerequisites. 

They are required to produce a certificate of auditors on their Escrow balance, a certificate of bankers on Escrow account credits and debits, and customer complaints reports quarterly as well as a yearly net-worth certificate by 31st of December every year. 

Though this is not an exhaustive list of compliance, non-compliance can lead to penalties and potential license suspension. Some of the PAs, including Instamojo, failed to meet the criteria.

Originally established in 2012 as a payment solutions provider for small and medium enterprises, Instamojo diversified its offerings in 2021 by introducing an ecommerce software platform. The company offers software to assist businesses in establishing online stores while providing essential services such as branding, analytics, and shipping.

Since its inception, Instamojo has successfully secured $15.2 Mn from notable names such as Mastercard, Gunosy Capital, Kalaari Capital, and Blume Ventures. But being rejected by the RBI in the PA game was a big blow.

Instamojo is currently at a critical turning point, with payments accounting for three-quarters of its revenues. The RBI’s order has compelled the company to reassess new revenue streams.

While Instamojo has been able to bring down the share of payments in its total revenue from 90% earlier to around 75%, a significant share of this revenue will now have to be shared with its payment partners. As such, the company is staring at a big challenge.  

In March 2020, RBI set rules for payment aggregator licenses, mandating payment gateways to obtain aggregator licences to acquire merchants and offer digital payment solutions.

Payment gateways like Razorpay, Cashfree, and Open got approval in December 2023 to offer digital payments. However, Paytm and PayU India are still waiting for final approval to get their payment aggregator licenses.