Finding supper in “Gateways” – Aravind G R

The last time, I bought a movie ticket queuing up in a theater was three years ago. I have never visited telco offices to pay my bills. If only they had managed to sell clothes and shoes online (in a neat environment though), I would have bought them online as well. I hazarded a guess on how much of our economy today is captured by online transactions, I am trying to include not just ‘e-commerce’ but all ‘online transactions’ such as paying bills, buying airline tickets to transferring money to other bank accounts online. I could not find any ‘authentic’ source to support me on this; however, estimates ranged from 0.2 percent-3 percent of the economy. That throws up a large absolute number -$ 2.4 bn to $40 bn market.

All these transactions go through a ‘payment gateway’. The gateway authenticates and routes payment details in an extremely secure environment between various parties and related banks. It functions in essence as an “encrypted” channel, which securely passes transaction details from the buyer’s Computer to banks for authorization and approval. On gaining the approval, it sends back the information to the merchant thereby completing the “order”, and providing verification.

Payment Gateways in India charge a service fee called merchant discount ranging from 2 percent to 7 percent on every transaction plus annual charges of up to a few lakhs every year. This translates to system wide gross revenue of $ 500-600 mn (range of $80 mn to $1.2 bn based on the absolute number above). Now, one would assume that the market with a size of $ 500-600 mn a year will be severely competitive with a host of companies trying to out-do each other. However, our research suggests that a major share of this market is currently being served by only four major players in the market.

Except for an investment by Greylock, the sector which is quite obviously a greater play on e-commerce growth in India, hasn’t seen a single investment or an M&A transaction in many years. Are investors missing out on a great opportunity? For one, companies are growing at an incredible pace- according to Deloitte Fast 500 list, one of the companies in the space has grown by 350 percent Y-O-Y over the past 3 years on a decent base. Also owning a payment gateway will boost net margins by 2-3 percent. This becomes a very attractive proposition for companies in the internet domain- E.g. an airline aggregator who makes wafer thin margins on large volumes –wonder what Makemytrip would have been valued at, if it was profitable at the time of its IPO?

We at Viedea have been working with a few players in this space and have witnessed significant interests from both the buy-side and the sell-side. With a certain large & harassed ‘pal’ on the lookout in India, we are expecting a ‘crazy’ if not a large transaction in the next few months.


About Deepak
Venture Capital and M&A advisor, Entrepreneur, Startup enthusiast..

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