PhonePe Has Turned Walmart Into A Serious Payments Player

Walmart Inc's biggest acquisition gave it access to India's $670-billion retail market. With that, it also struck a digital payments goldmine.

PhonePe Pvt. Ltd., which came with the Flipkart buyout, is now India's second-largest platform offering cashless transactions. And it's helping the world's largest bog-box retailer gain expertise that it's deploying overseas.

PhonePe is already worth $1 billion and among the league of India's tech unicorns. A report by investment adviser KeyBanc Capital Markets estimates that Walmart's stake in the subsidiary could be worth more than $14 billion in the medium term. That would cover more than 80 percent of the $17 billion it paid to buy Flipkart Group.

Walmart is in the right place as India is the next big available cashless market. Digital payments, according to PwC Research, are estimated to grow 20 percent in the next four years, with the net transaction value more than doubling to $135.2 billion in 2023. PhonePe and peers like Masayoshi Son and Warren Buffet-backed Paytm, Google Pay., Amazon Pay, WhatsApp and the upstart BharatPe are chasing this opportunity.

Founded in 2015 by three former Flipkart executives, it has over 50 million monthly active users who send and receive money, recharge mobile and make utility payments, among other tasks. Last month, the company said it's enabling cashless payments at more than 5 million physical stores using QR code.

Its UPI-based Android application was launched in August 2016, months before Prime Minister Narendra Modi's cash ban led to a spike in cashless transactions. It has since then acquired more than 150 million users, second only to Paytm, and is morphing into a financial services provider. PhonePe sells gold, and in March launched a tax-saving funds. Transaction data reviewed by BloombergQuint revealed that PhonePe was No. 1 by volume in April and second after Google Pay in value in April.

Unicorn Status

Walmart infused fresh funds twice into PhonePe in the last nine months. Through a Singapore arm, it ploughed Rs 1,242.3 crore and Rs 743 crore (nearly $280 million) in in September last year and February, respectively, according to filings with the Registrar of Companies. The last funding, BloombergQuint's calculations show, helped the mobile payments company turn a unicorn, joining the likes of Paytm, Ola, Byju's, Swiggy and Zomato.

Walmart and Flipkart are also exploring ways to find a strategic investor for PhonePe, two people privy to the details told BloombergQuint on the condition of anonymity as they are not authorised to speak to the media. While Flipkart will have control, the investor could add more value to the payments venture, the people said, adding that PhonePe could valued at around $6-7 billion. That would be a sixfold jump in valuations.

Going Global

Still, the investments by Walmart underline the retail gaint's commitment to the payments business. After acquiring Flipkart in May last year, Walmart said it was surprised and impressed with PhonePe's growth.

“One of the things they're (PhonePe) really doing for us is I know much more about the payments business than I did 10 months ago,” Judith McKenna, president and chief executive officer of Walmart International, said during the company's annual shareholder meet in June.

The PhonePe team is also helping Walmart with its payments business in markets like Mexico with its wallet Cashi. “…The team… advise us about what might be the right routes to go through for that as well,” McKenna said.

Richard Mayfield, executive vice president and chief financial officer at Walmart International, had said at a Deutsche Bank conference in June that the retailer has already started leverage learnings from PhonePe and is thinking about redeploying technology.

Walmart and PhonePe didn't respond to BloombergQuint's queries.

The collaboration has worked both ways. Walmart India started offering PhonePe as a payment option at its cash-and-carry wholesale stores in February. That helped the payments firm expand offline as the retail giant's Indian customers are mostly small businesses, including mom-and-pop stores.

PhonePe is an under-appreciated asset within Walmart's portfolio and shows significant long-term growth opportunities, Edward Yruma, managing director for equity research at KeyBanc Capital Markets, said in a June 24 note. “PhonePe underscores Walmart's openness to innovate and continue to seek new growth opportunities beyond physical retail.”

Crowded Market

Yet, it would need to do more to achieve dominance in India's highly crowded market.

“There's no clear winner in this space at this point,” Sanchit Vir Gogia, chief analyst and founder at Greyhound Research. told BloombergQuint over the phone. “What defines a winner in this category (is someone) who is able to make the experience easier for customers, including the kind of partnerships players do with card companies and banks.”

PhonePe, Gogia said, needs to carve out its journey.