Ambitious fintech now gropes for a comeback after new RBI rule

Three weeks later, the confidence gave way to sudden panic. On 20 June, a Reserve Bank of India (RBI) circular barred companies from loading PPIs such as prepaid cards or mobile wallets using credit lines issued by non-banking financial corporations (NBFCs) and banks. The central bank said any such practice, if followed, should be stopped immediately, and non-compliance may attract penal action under the Payment and Settlement Systems Act, 2007.

Overnight, the circular killed the business model of Uni—which tied up with NBFCs to offer BNPL products that effectively worked as ‘shadow’ credit cards.

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The RBI laid down a clear red line—a payments instrument can’t be  used  as a credit  instrument. It was worried by the increasing risk in the system from fintechs aggressively extending unsecured lines of credit in various forms.

That sent fintechs scurrying for cover. Business operations at Uni stopped. The focus of the company shifted from growth and revenues to compliance, said a former product executive. “The first thing we did was change the language on the Uni app, where words like credit and credit line were replaced with ‘estimated spend limit’," he said.

The company, which employs around 300-400 people (on-roll and contractual) and operates out of two offices in Bengaluru, is currently “busy at keeping its existing user base engaged". “The sales team has been constantly calling customers to see if they are facing any issues in an attempt to keep the customer base intact," an employee from the sales team said.

Even before its launch in May 2021, Uni was the talk of the investor ecosystem.

It raised $18.7 million in one of the largest seed funding rounds months before it was up and running. Gupta started the card-based company when the BNPL space was heating up, with many players such as Slice, Zest Money and Simpl. He quickly became the VC (venture capitalists’) darling. A few months later, in December 2021, Uni raised $70 million in Series A at about $350 million valuation; and more than $6 million in debt recently. “We want to become like HDFC Bank and State Bank of India," Gupta would often tell employees during Thursday company townhalls.

That ambition is now on hold. The company is in a limbo, trying to chart its new journey. The sales team is undergoing training as it prepares to launch a new product, several employees informed Mint. So, what lies ahead for the company? Its strategy in the last year might offer some clues. Mint sent detailed queries to Gupta on Uni’s customer base, customer acquisition cost, spends on customer interest, the amount spent on acquisition of the PPI company cited above, and future plans, but he declined to comment. 

Inside Uni

The first product Uni launched was called Pay 1/3rd , which allowed customers to pay for goods in three EMIs over three months, with no extra charges. If the customer paid early, she would get ‘1% cashback’. But not everyone could sign up for the card. Only those with a credit bureau score of 750 and above were eligible for Uni Pay 1/3rd cards. “This was to create a hype and exclusivity around Uni cards— something on the lines of how Kunal Shah’s Cred started," a Uni employee, who quit recently, told Mint.

But the company quickly scaled up. “From customers in a few metro cities, we expanded to cities across India in three-four months. That’s when the team went from 25 to 250," a former sales executive added.

In three months, it was issuing 5,000 cards a month; it currently has issued 400,000 cards till now. The minimum credit line was ₹20,000; those with good credit scores even getting around ₹3-4 lakh. The average credit line was about ₹1-1.3 lakh.

The company also launched Uni Pay 1/2 earlier this year. “The first allowed users to pay within two months at zero charge," another sales executive informed. Aimed at expanding its user base, Uni Pay 1/2 targeted customers with credit score in the 680-740 range. The cashback was 1.2% if a customer paid within a month. In May, the company launched Uni Cash, where users can transfer a credit line directly onto their bank account or to load their Amazon wallet.

Credit card or wallet?

Most users of Uni cards believed they are using credit cards—not surprisingly, since they can pay for purchases later. But these are actually prepaid cards. It’s useful to think of them as card versions of mobile wallets, where users load money from their bank accounts or credit cards. The difference: Instead of users, the fintech pre-loads the credit line onto the cards while issuing it to the customers.

But what enabled Uni to offer credit? A fintech needs to have two to three partnerships in place to offer such products. First, it needs a tie-up with a bank, which will enable it to issue prepaid cards. Second, it needs an NBFC that will offer the credit line, which is used to load the customer’s card.

In Uni’s case, it partnered with RBL Bank and SBM Bank India for prepaid card partnerships. It extensively rolled out cards through RBL Bank’s PPI. As of now, the company has about four-five NBFC partnerships, which include Liquiloans, DMI Finance, Lendbox and Northern Arc. Sometime in April-May this year, it was “in the process of tying up with Aditya Birla Capital," a person aware of the development said.

According to this person quoted above, the fintech gave a credit line of over ₹500 crore since it started operations. Of this, about 60-70% was on Liquiloans, a peer-to-peer (P2P) NBFC that is also favoured by fintechs such as BharatPe and Cred, the person said. A Liquiloans spokesperson declined to comment on this.

Liquiloans is also on the cap-table (capitalization table) of Uni. NBFCs seeking a seat on the cap-tables of fintech lending platforms in return of supporting their ambitious book size has been a trend in India for quite some time now.

As is the case with every other lending fintech in the country, the partnerships between Uni and its lending partners had FLDG (first loss default guarantee) arrangements in place. That is to say, in case a borrower defaults, the fintech would compensate the NBFCs. “Some 9-15% of the book size, ₹500 crore, was spent on FLDG," the person added.

The game plan

The company had two lines of revenues— one was interchange revenues or a cut on MDR (merchant discount rate, which is something a merchant pays on every transaction) and the other was non-interchange revenues, which included late fees and carry-forward fees.

If a Uni Pay 1/3rd user spent ₹10,000, and if he could not repay that amount within three EMIs or on the due date, then a flat late fee of about 4% of the transaction cost was charged. And, if the user didn’t pay the minimum billed amount, then a carry-forward fee of 4-5% was charged and the credit score was affected. 

In a response sent after this story was published, Uni said, “The credit score will not be affected."

Out of the total 400,000 Uni users, 60% were active users, the person cited above said. Those who availed Uni Cash and transferred their credit line onto their bank account were charged a convenience fee of 4-7%, depending on the user.

The interchange revenue was about 75-80% of the company’s earnings. “Nitin’s focus was always to increase the non-interchange revenues as these fees were not shared with the lending partners. The target was to double this revenue every month," the person quoted above said. Uni has clarified that the lending revenue was shared with the lending partners.

About 90% users paid three installments on time—which also means the ‘interest’ was coming from Uni’s pocket. Uni, according to the person, was burning close to ₹2-3 crore on interest every month.

The customer acquisition cost (CAC) was somewhere about ₹1,800-2,000 per customer. 

Uni, however, now claims that it was under ₹1,500.

On an average, a user spent ₹13,000-14,000 per month. The company’s annual recurring revenue was approximately ₹3 crore. 

Uni has contested this as well and said, “The company's gross ARR is in tens of millions of dollars."

Uni’s gameplan was to keep growing the non-interchange revenue, bring down the CAC from ₹2,000 to ₹500 and become contribution margin positive by FY2024.

And so, in order to bring down costs, Uni made its first bet in the form of acquiring a PPI.

It acquired PPI-licence holder Weizmann Impex Service Enterprise Ltd in June. In March, Uni co-founders Nitin Gupta, Prateek Jindal and Laxmikant Vyas were inducted as directors of Weizmann. A RoC (Registrar of Companies) document, dated 1 June, shows that Gupta took over as its CEO.

While the acquisition amount is not clear from the RoC documents, the deal is expected to be in the range of ₹30-40 crore, according to two people aware of the development. Uni would have used this PPI entity to issue prepaid cards to its users—cutting cost and its dependence on RBL Bank and SBM Bank India. Uni funded this acquisition from the debt it raised from Stride Ventures, according to people aware of the matter.

The deal was closed just three weeks before the RBI’s circular. The acquisition is of no use to Uni now.

Plan 2.0

So, what lies ahead for Uni? Several people in the know say that Uni is planning to come up with credit card and personal loan (under Uni Cash brand, where the loan will be directly transferred to the customer’s bank account) products —again a space catered by the likes of Cred, Paytm, BharatPe and many others.

According to people aware of the matter, Uni was supposed to offer loans at zero interest payable at 3 months/6 months/ 9 months. “Uni won’t sacrifice the USP of interest-free EMIs. Slice started charging interest post RBI’s circular and it created a bit of chaos. So, Uni won’t change unless something really bad happens on the regulatory front," the product executive said.

“The vision of Uni is to become a big lending and fintech company, where it will have multiple products catering to multiple customer categories. They were even planning to come up with a metal card, which will get them a verified customer base, with benefits like travel, luxury and lifestyle," another former employee claimed.

Parijat Garg, former vice-president of Crif High Mark credit bureau, explained that the credit market is underpenetrated. Despite many players, digitally there is huge unmet demand. “Uni is now recognized as a cards company. Users don’t have a nuanced understanding of what is a prepaid card or a credit card. But if tomorrow Uni comes up with a credit card, then users will relate with it. With that thought, it’s a right strategy to go after."

While the personal loan business is a natural course of action for Uni, the credit card segment involves a much higher burn and a nine-month net negative business for anyone, Garg added. “Due to a lot of compliance cost and higher CAC involved, this will delay the breakeven target as you have to constantly spend on marketing so that customers keep using your card and come up with offers to keep them intact. Uni has created a position for itself as a BNPL and what they have to look at is cracking the credit card space in a cost-effective manner," Garg said.

In addition, with the RBI’s credit card co-branding guidelines (issued in February this year) in place, unregulated fintechs will not be able to access customer transaction data—which means fintechs’ USP of customizing solutions and offers for customers will go away. In order to keep the data access intact, most of these companies will look for NBFC licences which will help them work in the regulated environment. Uni, according to several people aware of the matter, applied for a fresh NBFC licence in December last year, as it wanted to bring down its cost of capital below the current 12-15%.

Only time will tell if businesses that attract customers by burning cash can be sustainable or not.

This story has been updated to reflect the responses sent by Uni on the customer credit score, customer acquisition cost and the company’s annual recurring revenue.

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