Inc42 UpNext: Mswipe Turns To MSME Sector For The Momentum To Reach The Unicorn Club

To celebrate India’s rising startups, Inc42 is profiling a new soonicorn every Friday in the Inc42 UpNext: Unicorns Of Tomorrow series. For the next few months, we will be speaking to these potential unicorns and shining light on their journeys and growth stories. Here’s a look at mobile point-of-sale and payments platform Mswipe.

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Payments and transactions in India have seen a sea-change in the past three years. With digital payment companies going from being niche to mainstream — all in the span of a few years thanks to demonetisation — has altered the payments space.

Even the traditional points of sale (PoS) providers benefited from the surge of digital payments and while the tailwind that saw these companies soar has slowed down a bit, players in the payments space are looking around for new avenues of making money and consolidating their business after focussing on aggressive customer acquisition for years. And there is a new element  to go along with it — micro, small and medium enterprises (MSME) or what is commonly known as the backbone of the Indian economy.

India’s MSME sector, which although accounts for 29% of India’s GDP, has been underserved by big banks and the same was the case in the early days of the fintech wave in the country. But somewhere in the past three years since the November 2016 demonetisation, startups began waking up and taking notice of this sector, especially as internet penetration increased in semi-urban and rural areas.

ICICI Bank recently launched a new digital platform curated specially for MSMEs, SBI planning to double the PoS units to 1.2 Mn and with the likes of Reliance Jio, Paytm and other new-age digital payment companies are entering the traditional card payments space, PoS players are finding themselves fighting battles on many fronts.

“2019 is pretty much a defining year for us,” – Manish Patel, founder, Mswipe.

Inc42 caught up with Patel and Mswipe, the Mumbai-based card payments company which develops PoS machines and services. The 10-year old startup which started life as a provider of PoS machines and which today offers end-to-end services that include a payment gateway, contactless card payments and even an applications store (‘Money Store‘) for PoS devices and businesses.

The Money Store which currently hosts productivity and other utility apps for merchants to manage inventory management, track invoices, monitor spending and purchases and more. Starting from a singular point, Mswipe has created a complete fintech ecosystem through its platform.

Some of Mswipe investors include US-based hedge fund Falcon Edge, Facebook Co-founder Eduardo Saverin’s B Capital Asia, late-stage technology investment firm Epiq Capital and consumer-focussed fund DSG Consumer Partners.

Why MSME Matters For Mswipe 

Patel claimed that 2019 is a huge year for Mswipe as it is taking its biggest bet when it comes to going beyond payments and into territories usually reserved for non-banking financial companies, smaller cooperative banks and unorganised lenders. Its plans involve MSME merchants and this is expected to play a huge role in the company’s overall growth as well as in revenue.

According to Patel, Mswipe has over the years come to look at the small and micro merchants as an exciting opportunity but until recently it hadn’t really explored how it would take advantage of the 30 Mn – 60 Mn merchants that this sector comprises of. Mswipe competes with the big banks in the large to medium-sized merchants and counts more than 2 Mn merchants as customers in this segment.

Mswipe, which raised $31.5 Mn in March, is not only counting on diversifying its customer base to drive growth but it is also hoping that its early mover advantage towards providing higher-grade features such as contactless card payments for mobile and cards will help attract more merchants on board.

“We brought smart PoS terminals (the merchant can run applications like billing, customer-invoice management, etc) to market two years ago and now we are seeing mainstream adoption. This is the year we will take on some of the established banks on the sheer basis of our technology,” said Patel.

Mswipe will also be rolling out EMI services soon that will be at around one-tenth of the cost that commercial banks currently charge merchants. This would allow merchants to offer EMI payment options on many products that are traditionally not sold under such plans.

“EMI is largely available at only around 30K-40K locations across the country. Doing it on a PoS is a challenge and apart from smartphones and TVs, you can’t really buy too much on EMI. Tomorrow, if you go to a showroom and want to buy Nike sneakers, you can’t do it via EMI. I think with our distribution and technology we can make it a viable proposition, said Patel.

Risk Of Cannibalism And UPI Challenge

In the Union Budget, the government announced that no merchant discount rate will be charged on businesses with a turnover of over INR 50 crore or their customers. Those in this bracket will not be charged any fee on accepting payments through digital means like “BHIM UPI, UPI-QR Code, Aadhaar Pay, certain debit cards, NEFT, RTGS.

Which means that big retailers like Big Bazaar or Pantaloons will benefit from accepting UPI payments as they would pocket more money by not having to pay MDR. Mswipe does offer UPI services as part of its suite but doesn’t that risk cannibalising its core service?

“I don’t think there is going to be any cannibalising, 50 Mn merchants in the SME segment and not even one million have terminals.”

According to him, customers should have all the options and he doesn’t care if it’s QR code or card or apple pay, as Mswipe enables each service. For him, it is up to the customers to decide how to pay but he believes UPI is a service that customers are going to gravitate towards.

Why Is The SME Opportunity Difficult To Crack?

“It’s a tough nut to crack — not from an acquiring perspective — but it’s a bigger challenge if you want to own the ecosystem. When Paytm started the wallet rollout, they wanted to own the customer, the merchant and everything in between and what that essentially meant was that they had to create a large ecosystem which had to be self-sustaining and that has meant a lot of expenditure in setting up the infrastructure. India is not China, there are multiple ecosystems, and a vibrant card and mobile payment ecosystem,” said Patel.

For Patel, the challenge is that nobody is looking at what the merchant wants. According to him, most merchants don’t want anything more than being paid on time by their debtors, and in the easiest way possible.

Expanding into a price-sensitive segment MSME sector means that Mswipe not only has to reassess its offerings but also the number of services it offers. It appears counterintuitive because Mswipe may have to increase the subscription rate for MSMEs in the long run, but Patel told Inc42 that the company is in no hurry to raise prices.

“The way we look at it is that we haven’t increased our fee in the past five years. In the initial days it sounded like a large amount, INR 300 per merchant per month, but looking at the plethora of services we offer today, I believe it is a great value for money. Periodically we are going to deliver enhanced services and I think at a unit level we are profitable,” said Patel.

Mswipe’s PoS Opportunity And Challenges

Analysts at Beige Market Intelligence expect the global PoS terminals 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 points of sale (PoS) and mobile point of sale (mPOS) companies.

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 players in this field, along with Mswipe, are Ezetap, Pine Labs, Innoviti, Mosambee, Payswiff (earlier known as Paynear), among others.

It is no wonder then that this space is seeing immense competition.

In March, Google Pay and Pine Labs tied up to give Google Pay access to 330K PoS terminals in over 3K cities and towns in India. PhonePe recently said that its offline merchant base had crossed the 5 Mn mark. Similarly, Paytm had announced a mPoS device and platform last year, which was eventually replaced by QR code interoperability. And in what could be a big threat from the left-field, Reliance is also mulling a mobile point of sale (mPoS) play.

There is also a bitter legal dispute which is taking place between two big wigs of the industry where the Bengaluru-based digital payments provider, Innoviti Payment Solutions has filed a legal suit against competitor Pine Labs for infringement of its patent.

The payments startups and companies also face an uphill battle with the government over the abolition of MDR (merchant discount rate) which is the charge levied for making card transactions both offline and online and is distributed among all the parties involved. The government has also proposed creating a dedicated payment platform for MSMEs to enable filing of bills and facilitate timely payments.

But despite some of the uphill battles, the opportunity is just too big to not be indulged in.

According to a recent note circulated by SBICap Securities, the brokerage arm of the SBI Group, the Indian retail industry has a market worth of about $710 Bn, of which close to 90% is unorganised, dominated by 15 Mn kirana stores.

The note further adds that just around 15% of these 15 Mn merchants can afford a PoS terminal, so the technology and the market is “significantly” fragmented with only two to three large players and hundreds of small regional players. And this is how Patel summarised his opportunity:

“Not even 10% of our GDP transactions are done digitally. Wishing cash away unless we take dramatic initiatives is just wishful and we still don’t have the infrastructure. We need to have about 800 Mn-900 Mn smartphones which have a good 4G connection to move the needle considerably. The number of digital transactions will not go beyond 20% in the next five years but that is still a big number. In 10 years it could be a $2 Trln market.”