[YS Exclusive]: If PhonePe gets an external partner, it will be purely for strategic reasons, says CEO Sameer Nigam
Digital payments firm PhonePe recently made the headlines as reports suggested that the Bengaluru-based company was on its way to being hived off from parent Flipkart, after an in-principle approval from the board.
Amid these reports, in an exclusive interaction with YourStory, the leading digital payments player made it clear that it would remain under the Walmart umbrella. What is instead under discussion is a capital runway to secure PhonePe’s long-term future, given growing competition and the need to scale to stay ahead of the curve.
Now, the ball is in Flipkart’s court to determine whether it will fund PhonePe’s ambitions or get a strategic partner to do the same.
In a conversation with YourStory, Sameer Nigam, CEO of PhonePe, gives a candid take on the strategic value that PhonePe can deliver to parent company Flipkart, and how the group companies are strategically planning to play to each other’s strengths.
After all, as Sameer says, PhonePe hopes to become a digital payments behemoth, just as Flipkart will continue to be the leader in e-commerce.
Edited excerpts from the interview:
YourStory: It was recently reported that PhonePe is hiving off from the Flipkart Group as a separate entity, and the board has given in-principle approval for the separation. What is your take on this?
Sameer Nigam: I think the board acknowledges that we have gotten to a certain size, where we definitely need to secure our long-term future. Since we need the long-term capital for this, the board is open to the idea of getting other partners in.
But I would like to clarify that there is no dearth of capital at present, since we just raised back-to-back funding of $300 million in the last three quarters. We are not really riding in for the capital, and if we will be getting a partner in, it will be purely for strategic reasons.
YS: How much capital are you looking to raise to secure your runway for growth?
SN: If PhonePe can raise $1 billion in one shot and can get 3-4 years of capital runway, that is the discussion we are having today. However, that’s up to the board. And Flipkart, which is a 100 percent shareholder, can take a call on whether it wants to give that option, and if it thinks we need it.
But of course, we want that runway, and don’t want to worry about raising funds, but rather focus on growing it really fast.
YS: At what valuation will you be raising this capital?
SN: We believe that in a fundraise, capital is more important than the valuation. We have seen this play out in our domestic ecosystem - when a company’s valuation keeps rising too fast, it puts a lot of pressure. There is a certain pace PhonePe would need its valuation to go to, which should be healthy.
YS: Media reports peg you as a decacorn. Is your valuation around that?
SN: We haven’t rolled the dice on valuation since we became a part of the Flipkart Group. And I can assure you there has been no internal benchmarking in terms of valuation that has happened.
But, we can safely say that we are definitely above a billion dollar valuation.
(Note: An internal benchmarking of capital, in line with the markets, is important even if a certain subsidiary is looking to raise capital externally.)
YS: Hive-offs aren’t new to finance and commerce partnerships. We have seen it happening both domestically and globally. How true is this for PhonePe?
SN: We are open to that ambition. Also, at present, payments flows to a much bigger market than ecommerce.
But it really depends if we will become bigger than Flipkart. When PayPal had reached 100 million users in the US, Amazon was still at 10-15 million, after which the market just exploded.
In the short run, our guess is that our distribution will be larger than that of Flipkart because payments is a basic use case, and PhonePe has a lot more places where it can be used. It is the same reason why WhatsApp will have a larger distribution base than ours. Because, messaging is a bigger use case than payments.
And in the long run, we hope to be the behemoth when it comes to digital payments, and Flipkart will continue to be the leader in ecommerce.
YS: PhonePe has been expanding its commerce play through the in-app and hyperlocal strategy. How does these synergies fit in with your parent company, Flipkart?
SN: The real synergies will start on the ‘PhonePe for Business’ platform, which was launched in November last year, and already has a million downloads. At present, it is just being used by our merchants to manage their transactions and the listing page on our apps.
But the long-term vision is to allow businesses of all kinds to build mini-apps on various partner platforms. Through this capability, we can help Myntra onboard a fashion merchandiser or help Flipkart onboard grocery partners through the new platform. And this way, ‘PhonePe for Business’ becomes a marketplace. There are already conversations starting to happen around this.
Next is eKart logistics, where our merchants can opt to become pickup centres for the delivery of items. On the other hand, players like Dunzo and eKart can opt to be delivery partners for these stores.
Our vision on the merchant side is that any service provider or aggregator (including Zomato, Swiggy, or Dunzo) who wants to be with these stores, should be able to talk to them through our platform.
Also, these merchants should be provided with value added services. For example, allowing them to discover accounting solution, Tally, or help them with delivery fulfilment and working capital needs.
Even Walmart should be able to deliver wholesale goods and sell inventory to kiranas through eKart. This way, the entire Walmart-Flipkart ecosystem will come into play.
We can also start leveraging eKart heavily for KYC operations since they are pan-India.
YS: There is an overlap between PhonePe and Flipkart for categories like ticketing, credit, and other products. Is there a competition coming in?
SN: Flipkart started as a horizontal marketplace, and globally, horizontal marketplaces at scale always see more skin than vertical marketplaces. Vertical marketplaces need to have an inventory or a private label to last.
Similarly, payments itself is a broad economy. So, we will end up competing on many tracks.
But Kalyan (Krishnamurthy) and me think it is healthy, because we have very separate pools of data, and different strengths. And this might mean that we will leverage less than we should from one another.
YS: What other categories do you see yourself competing with, or overlapping with Flipkart?
SN: We believe in facilitating consumer lending. Even with payments, Flipkart has had a robust payment gateway, although they have us for UPI, and we are the exclusive partner for Flipkart for UPI-related payment.
Flipkart has one of the largest EMI programmes, their loyalty programme Flipkart First, as well as the ‘Buy Now Pay Later’ option. And it could externalise these products to other consumer apps.
So, if they say pay using Flipkart, they might be leveraging a composite of EMI, reward points, and ‘Buy now Pay Later’. And that composite will compete with PhonePe, Paytm, and others.
There will be adjacencies, but it will be a travesty if we do not exploit that opportunity.
YS: What synergies do you have with Walmart, now that it has your payment option at their ‘B2B Cash & Carry’ stores?
SN: If I’m not mistaken, Walmart has 1.4 million merchants. So, there’s an opportunity for us to onboard these merchants from the cash and carry stores. This way, we expand our network as well.
Similarly, Walmart can leverage our merchant base as customers to help replenish its monthly inventory through PhonePe for Business. Also, eKart can service these customers by being delivery partners for cash-on-delivery purchases from Walmart stores.
We started discussing it strategically and these things might be on the roadmap.
YS: Is PhonePe looking at an international foray?
SN: Well, that is something we have set off for the next three years.
But if I can’t demonstrate what I can do with the Walmart ecosystem here, then I wouldn’t be able to do much on an international level. We are too young, and it is too early for the company to think international.
YS: PhonePe has been with Flipkart since 2016, but we see synergies coming in only now. What took it so long?
SN: Yes, you are right. We haven’t extracted a lot of value from each other. But when you are 1/150th of its base, there isn’t much strategic value one can extract. All the above examples can be real now because today, PhonePe has reached a certain base, and these synergies are playing up.
It was naïve on our part to think they would be integrating with us on all these touch points when we were really small.