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Business News/ Money / Instamojo opts out of payments gateway bid
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Instamojo opts out of payments gateway bid

Will continue to focus on building software and bringing more merchants on the platform, says founder Sampad Swain

Sampad Swain, co-founder, Instamojo.Premium
Sampad Swain, co-founder, Instamojo.

Mastercard-backed Instamojo might not re-apply for a payment aggregator (PA) license, after its application was returned by Reserve Bank of India in September 2023.

Instamojo, a direct-to-consumer (D2C) technology platform backed by Mastercard, has shelved its plans to apply for a payments aggregator licence, after the Reserve Bank of India returned its application last September for not meeting the eligibility criteria.

Instead, the full-stack digital solutions provider for small businesses is focussing on upgrading the back-end infrastructure of its platform to assist clients, and has partnered with licensed payment aggregators and banks to facilitate merchant transactions. Under the revamped payment system, the funds of merchants are now settled directly by the bank in their nodal account instead of Instamojo’s nodal account, said Sampad Swain, co-founder, Instamojo.

“In the last three-four months, we have been working with banks and looking at what we have co-built together. We realized that the reason of having a licence is diminishing because the ability to hold money doesn’t give me enough advantage. For instance, we will not be able to earn interest on this money at all, nor can we use the money to lend to anybody."

“I might as well work with banks and regulated PA (payments aggregator) partners and let them take the regulatory path and all the diktats that come. We will continue to focus on building software and bringing more merchants on the platform. Today, I’m more like Microsoft than HDFC Bank," Swain added.

Payment aggregators help merchants. accept payments from customers, using multiple payment methods on a single platform. Instamojo had stopped its payment gateway operations soon after RBI refusal to entertain its application.

That said, the company has time till September to submit a fresh application for a payments aggregator licence.

“(Fiscal) 2024 would have been the best year for Instamojo as it would have posted double digit profit. But in the last three-four months, the business went down by 30-40%. I’m hoping over the next couple of quarters we’ll go back from red to black to green." In 2023, it reported three profitable quarters, before witnessing a downturn in financial performance in October-December. In Q1 it reported 5% earnings before interest, taxes, depreciation and amortization (Ebitda) growth and profit before tax of 4% , rising to 9% and 4% in Q2, before peaking at 15% and 10% in Q3, respectively. However, Q4 saw a sharp decline to -22% Ebitda and -28% PBT.

Founded in 2012 as a payment solutions provider for small and medium enterprises, Instamojo diversified its offerings in 2021 with the launch of an e-commerce software platform to assists businesses set up online stores, besides offering branding, analytics and shipping services.

Instamojo’s decision to shut down its payments business last year sparked panic among its merchants, who were unable to access funds after selling their wares. Consequently, in addition to losing merchants to competitors, the company’s profitability was affected.

According to Swain , there is a need to ensure a balance between innovation and compliance in the fintech space, and the Paytm episode has only accentuated the need to take regulations seriously. “Going ahead, there is a sense of optimism amid the challenges. There’s a recognition of the need for better collaboration between fintech platforms like Instamojo and regulatory bodies like Reserve Bank of India. While acknowledging the burden this may pose on institutions like RBI, there’s a shared belief in the potential of a more supportive framework that facilitates innovation while ensuring compliance."

RBI had released guidelines for payments aggregator licences in March 2020, mandating payment gateways to obtain aggregator licences to acquire merchants and offer digital payment solutions. Razorpay, Cashfree, Open were the first to get a regulatory approval in December 2023. Paytm and PayU India are still awaiting final approvals for a PA licence.

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Published: 16 Feb 2024, 06:15 AM IST
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