Bloomberg recently reported that Wirecard AG, a software and systems provider for online payments and fraud prevention based in Munich, overtook Germany’s biggest bank — Deutsche Bank, in terms of market value. Wirecard’s market value currently stands at $24.1 Bn and is likely to rise even higher, spurred by investor interest in the sector.
Analysts at Beige Market Intelligence expect the global POS terminal market to grow at a CAGR of 12.53% during the forecast period 2016–2022. In comparison, the Indian POS terminal market is pegged to reach $450 Mn at a CAGR of over 10% from 2017 to 2024. This is indicative of the growth potential of the point of sales (POS) and mobile point of sale (mPOS) companies.
For the uninitiated, the point of sale (POS) or point of purchase (POP) is the time and place where a retail transaction is completed. A digital retail point of sale system typically includes a POS terminal that can read debit/credit cards and enable payments through a swipe. Service providers that provide both POS hardware and software solutions are called POS companies.
Globally, POS is a booming market, but in India it was the demonetisation in November 2016 that opened up serious opportunities for startups in this space, also drawing VC attention and substantial investments.
According to Inc42 DataLabs, so far, a total funding of $406 Mn has been raised by Indian digital POS terminal startups. Some of the notable POS terminal providers here are Ezetap, Mswipe, Pine Labs, Innoviti, Mosambee, Payswiff (earlier known as Paynear), among others. Pine Labs has so far secured the highest funding of $227 Mn with more than half the amount — $125 Mn — being raised this year.
The reason behind investor interest in this sector is the Possibility of sustainable returns owing to a low-risk business model. But, are Indian players being able to monetise this opportunity and create a sustainable revenue model for themselves? Or is investor’s money the only fuel they have to burn?
In this edition of Inc42’s weekly series What The Financials, the Inc42 DataLabs team decided to swipe through the financials of leading startups in the Indian POS market — Ezetap and Mswipe — to figure out how these startups are gearing their business model to compete with one of the country’s oldest and profitable players — Pine Labs.
An email sent to the companies did not elicit any response till the time of publication.
Here is a brief overview of the companies:
Understanding The Monetisation Model Of POS Companies
POS companies worldwide operate on the same premise — offering a hassle-free payment mechanism to merchants — but their monetisation models differ widely, depending on their target markets.
Inc42 DataLabs did a deep dive into the monetisation models of Ezetap, Pine Labs, and Mswipe.
Ezetap: POS Devices For Sale And On Lease
Ezetap currently provides POS terminals to retailers who can either purchase them (at a cost of INR 5,782 or $80) or take them on lease (initial cost of INR 1,500 or $20 plus a monthly recurring cost of INR 295 or $4). Other than that, it provides enterprise software services.
The company uses payment partners to provide integrated payment gateway services to its clients. Merchants using Ezetap can connect their respective bank accounts to provide end-to-end service to their customers. While Ezetap earns its revenue from the lease/sale of its devices, payment gateways partners and merchant bank partners impose transaction charges.
Mswipe: Tapping Into A New Source Of Revenue
Since Mswipe acquired Payment gateway services provider PayU India’s offline business in 2017, it has been offering in-house payment gateway services for merchants. This has helped Mswipe to create a new stream of revenue — payment gateway charges — which used to earlier got to its partners. This has also helped the company streamline its offering, creating an end-to-end payments service system.
On the other hand, Ezetap, which uses the services of a payment gateway, is missing out on this particular stream of revenue. The Mswipe POS terminal also provides insights on payment-related data, which act as another minor revenue source for the company.
Mswipe does not offer devices for sale. Instead, the company charges a one-time fee for its device along with a subscription fee for its services. According to its website, it offers three different devices and subscriptions across two separate monthly plans.
Pine Labs: Higher Subscription Fee Than Its Peers
Pine Labs offer services similar to Ezetap but has a higher monthly subscription fee than Mswipe and Ezetap. It charges an initial fixed cost of INR 2,500 ($34) along with a monthly variable cost (for maintenance and value-added services) ranging between INR 500-650 ($7-9). It also earns its revenue by selling enterprise solutions.
Pine Labs, which has been around since 1998, had a first-mover advantage in the sector and counts many large corporates among its clients. Mswipe, by comparison, caters to the large MSME user base and also provides different value-added services which are a major revenue source for the company.
Similar to Ezetap, Pine Labs uses payment partners to provide integrated payment gateway services and enables merchants to connect their respective bank accounts to provide an end-to-end service to their customers. Pine Labs earns its revenue by leasing its devices and from subscription charges, while its payment gateway partners and merchant banks impose transaction charges.
Analysing The Financials: How Do Ezetap, Pine Labs, And Mswipe Stack Up Against Each Other?
Revenue Growth: All Positive So Far
In FY17, Ezetap registered a total revenue of INR 47.9 Cr ($6.67 Mn), a 103% growth from its FY16 figure, while Pine Labs recorded a total revenue of INR 195 Cr ($27 Mn), a 59% growth over its FY16 figure. In the same year, Mswipe clocked a revenue of NR 141 Cr ($19.6 Mn), a 140% growth over FY16.
Being from a time of pre-VC money, when revenue was the major driver of growth, Pine Labs has been able to keep its revenue growth consistent over the years and remains the top player in the market.
Meanwhile, the two newer players came up in an era of much faster growth. Mswipe, which has been in the industry for just nine years, saw a revenue growth of 572% in FY16, raking in INR 58.7 Cr ($8.18 Mn) as compared to INR 8.7 Cr ($1.2 Mn) in FY15.
This growth can be attributed to Mswipe’s $25 Mn Series C fundraise in July 2015, which gave the company enough spending power for more than one financial year.
Ezetap, on the other hand, is a steady mover. Although the company’s financials for FY17 reflect positive growth, its operating revenue has been on a continuous decline since FY16 (140%) and FY15 (407%).
Major Expense Components For POS Companies
The major expense components of POS companies are employee costs and cost of service and maintenance of devices.
FY17: A Year Of Controlled Employee Costs For Mswipe And Ezetap, Not So For Pine Labs
In FY17, Ezetap and Mswipe managed to achieve a much tighter control over their employee costs as compared to FY16.
In FY17, Ezetap recorded a 23% growth in employee costs, spending INR 29 Cr ($4 Mn) on the head. This was much lower than the 134% growth it saw in employee costs in FY16 over the previous financial year (FY15). Its employee expenses were INR 23.5 Cr ($3.2 Mn) in FY16 and INR 10 Cr ($1.3 Mn) in FY15.
On the contrary, in FY17, Mswipe recorded INR 53.7 Cr ($7.4 Mn) in employee costs, 78% higher than FY16. However, this was much lower than the 163% growth it registered in FY16 when it spent INR 30 Cr ($4.1 Mn) against INR 11.4 Cr ($1.5 Mn) in FY15.
Pine Labs spent much higher on its employees in FY17 (INR 83.3 Cr) than in FY16 (INR 57.9 Cr). This may be attributed to the company’s aggressive expansion in international markets in FY17.
POS Companies: Cost of Service And Maintenance
The cost of service and maintenance for POS companies include heads such as device purchase and repair, payment gateway charges, setup cost, software cost, and SMS costs.
In FY17, the cost of service and maintenance for Ezetap was INR 34.4 Cr ($4.8 Mn), largely owing to purchase of devices that amounted to INR 22.84 Cr ($3.1 Mn).
For Mswipe, the cost of services in FY17 was INR 9.34 Cr or $1.3 Mn (not counting the merchant discount rate or MDR charges and switching charges that are supposed to be transferred to the bank directly).
Pine Labs clocked total expenses of INR 38.97 Cr ($5.4 Mn) for the cost of service and maintenance and INR 15.16 Cr ($2.1 Mn) as miscellaneous expenses.
Overall Expense Chart Of The Trio
On the expenses front, in FY17, Pine Labs recorded a total expense of INR 191 Cr ($26.6 Mn)and Mswipe recorded INR 154 Cr ($21.4 Mn), a growth of a 44% and 81% respectively over their figures in FY16. Ezetap, on the other hand, clocked expenses of INR 81.5 Cr ($11.3 Mn) in FY17, a 24% increase from FY16.
Looking at the expense as a ratio of revenue gives us an idea of how profitable these companies are. Pine Labs is profitable — in FY17 its expense was 98% of its revenue, suggesting that it has just broke even. On the other hand, Mswipe is on the road to profitability, with its expense in FY17 being just 109% of its revenue.
Ezetap, which has recovered from its expense being a whopping 279% of revenue in FY16 to 170% in FY17, is still far from being profitable.
Is Strong Growth An Indication Of Net Profits In The P&L Books Of The Trio?
Well, not exactly. But, it is definitely an indication of the increased penetration of these players in their target market, which will further pave the way towards a profitable and sustainable business model in the long term.(
As observed by Inc42 DataLabs, in FY17, only Pine Labs marked its entry into the profitability club with a net profit of INR 3.9 Cr ($543.5 K) . It must be noted that the company had been recording high losses since FY15 but it seems like its association with big corporates has finally started paying off.
Mswipe is also steadily moving towards gaining net profit. In FY17, it registered a loss of INR 12.7 Cr ($1.76 Mn), almost 51% lower than its INR 26 Cr ($3.6 Mn) loss in FY16.
Ezetap, as we can asses from the above analysis, will take some more time to achieve net profitability. However, the company has already started taking baby steps towards this, as seen by the decline in its losses in FY17. In FY17, Ezetap registered a net loss of INR 33.6 Cr ($4.6 Mn), which was 22% less than its INR 43 Cr ($6 Mn) loss in FY16.
Indian POS Market: Preparing For A Global Opportunity
As of now, the sector is witnessing significant competition among mobile wallets such as Paytm, MobiKwik and Unified Payments Interface (UPI)-based solutions. But one should note that while mobile wallets and UPI offer just a payment mode, even a basic POS offers a combination of a payment mode (debit and credit cards) and analytics, thereby increasing the overall selling efficiency of a retailer.
The advantages of technology-enhanced security, free floor space, and minimised customer wait times — are further driving the growth of POS players in India.
Another major challenge is the narrowing margin per transaction, owing to the nascent digital payments industry in India. Also, network connectivity, low debit/ credit card penetration and lack of infrastructure are some other issues hindering the growth of POS players in rural and semi-urban India.
Meanwhile, the rise of virtual POS devices, adoption of new-age technologies, and the government technology stack, including UPI, QR code-based payments, and a host of other settlement mechanisms, have opened doors of Indian POS companies to overseas markets. Companies such as Pine Labs, Innoviti Payments, and Ezetap, among others, are already testing the waters in cross-border markets.
With so many players — even from slightly different verticals — jostling for space in the POS market, will Mswipe and Ezetap be able to make the brick-and-mortar retailers swipe more to enter the profitability club this year and join their older peer Pine Labs? Let’s wait and watch.
[This is part of the What The Financials (WTF) series of Inc42 Datalabs, in which we explore the financial health of startups and discuss their key metrics of growth. The data has been taken from MCA filings. To read more articles click here.]