This article first appeared in Digital Edge, The Edge Malaysia Weekly on May 17, 2021 - May 23, 2021

Now that local fintech and loyalty platform Fave has been acquired by digital merchant commerce player Pine Labs, the two founders will be looking to close the payments loop, so to speak. 

Together, the companies are on course to provide solutions that would encompass both merchant payments on the one hand, as well as customer retention capabilities on the other. 

In an interview with Digital Edge, Pine Labs CEO Amrish Rao says he had been looking for the sort of unique value proposition that Fave had spent the last few years pioneering: a QR-code-based payment and loyalty service, capable of creating repeat customers for brands at large. 

“Today, we have roughly 65% market share when it comes to offline payments at enterprise-level merchants in India. Everyone from Apple and Samsung to McDonald’s — you name the brand — is with us as far as offline checkout payments are concerned. 

“For the longest time, we had believed that if we were to add real value to the merchants, we would need to start bringing regular customer footfall to them. 

“But we had never found a strong enough hook on our end to be able to build that intermediary relationship with the customer. With Fave, we have an opportunity for the first time to build a strong relationship with the customer, and consistently bring them back to our merchant community. 

“We believe creating that closed loop will ultimately benefit our merchants, which is why the acquisition is the right thing for us at this point.”

The acquisition is particularly timely, as India has seen a veritable explosion in the use of QR codes as a mode of payment, and Fave is uniquely positioned to bring at least some of those payments into the broader Pine Labs payments ecosystem. For clarity, what Malaysians refer to as QR codes, the Indian market refers to as Unified Payment Interface, or UPI payments. 

UPI payments are on a tear in India right now, Amrish says. “In April alone, roughly US$70 billion was transacted via UPI payments alone, not counting debit or credit card-related payments. 

“To add some context to these numbers, three years ago, there were no UPI payments in the country to speak of. In just three years, UPI payments and peer-to-peer money transfers reached US$70 billion in April this year, and I would say that, as a whole, digital payments in India are growing at roughly 100% year on year.” 

The shift, he explains, was largely a result of two major policy changes in India over the last few years: the unprecedented 2016 Indian banknote demonetisation, as well as the introduction of the Goods and Services Tax (GST) the following year. 

The implication here is that the UPI network was in part created to drastically reduce activity in the so-called “grey economy” — a term used to describe unrecorded economic activity that therefore is not taxed.

“For all the transaction activity we’re seeing via UPI payments, I don’t think the game has even started yet in India. We’re still very much in the early days of digital payments,” Amrish notes. 

The Indian payments provider also has its sights set on the broader Southeast Asian market. This is a space that Fave has spent the last few years building a presence in, according to founder Joel Neoh. 

“For our part, we’ve scaled the platform up to 40,000 merchants in the region, and we have more than six million users. For countries like Singapore, one in four restaurants are on the app, and one in three customers use Fave,” he says. 

This is not to say that Pine Labs is entirely anonymous outside India. While the company boasts roughly 500,000 merchants in India, it has 20,000 merchants in Malaysia alone. Post-acquisition, the two entities now have about 560,000 merchant touchpoints in India and Southeast Asia. 

“Given how widely available Pine Labs’ solutions are in India, one of our priorities going forward will be to eventually leverage those existing relationships and connect those merchants with a steady stream of repeat customers,” Neoh explains. 

“We’d like to get up to about 100,000 merchants over the next few years. That gives us a target of 60,000 merchants to sign up, and if we could get some of that from the Indian market, that would be great.” 

Given Pine Labs’ own recent launch of a buy-now-pay-later (BNPL) proposition in Malaysia, Fave will also be looking to launch BNPL-friendly customer loyalty programmes. Neoh confirms Fave’s plans to enter this space in the next 12 months. 

Pine Labs, meanwhile, has enjoyed success in its home market of India with its BNPL service. The company claims to have captured 95% of the BNPL market in the country.

The e-commerce explosion in Malaysia over the last few years means BNPL options are potentially decisive ways for merchants to enjoy relatively higher values per purchase. There is evidence to suggest that BNPL programmes create serious additional value for merchants. 

Data from Swedish fintech player and BNPL provider Klarna, for example, indicates 30% increased conversions from retailers offering its BNPL services to customers. It also reported a 45% increase in the average order value by retailers that offer customers instalment options. Customer purchase frequency was reported to be 20% higher among retailers that offered pay-later options.

According to Neoh, rolling out an effective BNPL service will require Fave to master two key services. First is a credit scoring process that would be applied at a much more granular level. 

“As far as the credit scoring process is concerned, this will entail a lot of data analytics, since we can only ever give out credit to a consumer if we have good data on that individual. In this regard, we will now be able to leverage Pine Labs’ relationship with one of its investors, Mastercard, and grow our BNPL proposition throughout India and Southeast Asia.” 

Second, Fave will need to quickly come to terms with a potentially drastic augment to its business model: As a BNPL player, it will soon be entering the credit services game. 

Currently, the company monetises by charging transaction fees for every purchase made with a merchant. It also imposes a so-called “success fee”, or a fee for every customer that a merchant successfully acquires via Fave’s vouchers, gift cards, cashbacks, or any other promotions it runs on the app.

In this regard, BNPL is going to have a twofold impact on Fave. First, the company gets to charge merchants a higher percentage per transaction on BNPL-related services. But second, in providing instalment payments to customers, Fave will now be taking on credit and cash flow risks as well.

“BNPL is not unlike credit card services, but at relatively smaller quantums. Suppose you want to buy a MacBook. Thanks to a credit provider, the merchant is willing to sell it to you on a 12-payment instalment plan. 

“The merchant gets charged a fee by the credit card issuer, and a bank then takes on the risk of providing the buyer with that short-term loan, which the merchant relies on to successfully convert the sale. 

“The BNPL service we’re working on operates in a similar way, except that transaction values will probably be lower than average, and payment tenures will be shorter. We charge the merchants a fee in exchange for providing them with the BNPL service. Meanwhile, for the customer, we might launch a value proposition that gives them a BNPL option with the ability to earn cashback on that purchase,” says Neoh. 

Regardless, while BNPL is a more profitable business, there are cash flow risks that Fave will now have to deal with. “We will be taking on some cash flow risk, in that we will be paying out immediately to the merchant, after which we structure an auto-collection process from the customer over a period of three to four months,” says Neoh. 

These risks may be offset by the collection of late fees and interest charges from consumers who either fail to pay on time or default entirely. This is the way BNPL providers in other jurisdictions are typically set up. It could be a significant additional source of income for Fave, although the company declined to provide specifics at this very early stage. 

According to Neoh, Fave achieved profitability for the first time in the fourth quarter of last year. That it happened at all is probably not entirely surprising. While Covid-19 devastated much of the economy, businesses with significant online and technology footprints came out stronger than ever. 

“Covid-19 has been something of a bittersweet experience for us. Initially, we took a major hit because our business is directly correlated to retail activity. April and May of last year were the worst months for us on record, as we saw a 70% decline in transaction volumes, in tandem with the drop-off in broader retail activity,” says Neoh.

But as in-person activity dwindled and cashless rapidly gained popularity as a safer means of transacting, businesses quickly migrated online. Companies like Fave saw huge increases in transaction volumes in the ensuing months. 

“Although merchants are not all back to their pre-Covid-19 transaction volumes, what has happened instead is cashless transactions as a percentage of all transactions in the economy spiked over the last year. As a result, our business has been able to grow,” says Neoh. 

But if it took a once-in-a-generation pandemic for Fave to turn profitable, what will it take for the company to stay in the black for the long term? 

For now, in the short to medium term, Neoh says the addition of a BNPL product would give the company a third, more profitable revenue stream. It would now be able to justify charging merchants higher fees on a BNPL product, in addition to its regular transaction and success fees. 

At present, Fave charges a transaction fee of roughly 1% on a purchase, as well as a success fee of between 1.5% and 2%. In time, there will be a 3% to 5% fee once Fave’s BNPL proposition goes live. 

Neoh is hopeful the margins will work for his merchants, as they will have the ability to play around with the combination of offerings that they would like Fave to present to their customers via the app.

“For example, if we consider that businesses in the F&B industry tend to make between 30% and 40% margins, we believe fees on our part that come up to 7% or 8% are quite reasonable. 

“If and when their margins are compressed, merchants may want to be a little more selective with their offerings on the app. They may then elect to just run a BNPL promotion, or a cashback service, which would be cheaper for them. 

“Our service offerings are definitely modular in that respect, and merchants have the freedom to mix and match and choose the services that best suit their cost structures and work within their margins,” he says. 

All told, Neoh believes Fave will stay profitable if the company clears between 5.5% and 8% on average per transaction. He believes this will be the case even after the pandemic has been successfully dealt with and cash-based transactions make a return to the economy. To be clear, this figure does not yet take into account any possible BNPL-related late fees and interest charges. 

Looking ahead even further, Fave is working on at least two key strategies to build on its profitability. First, the company wants to add larger and more prominent brands to its stable of 40,000 merchants across the region. 

“While we have been very successful in the SME (small and medium enterprises) segment, we would also like to court larger brands and collaborate to run their existing loyalty programmes and enhance them  with Fave’s solutions,” Neoh says.

Finally, Fave is looking at ways to turn its merchants into omnichannel sellers, which is to say, it wants its merchants to capture some portion of the strictly online e-commerce activity. 

“If we look at a company like Tealive, they are a very popular F&B brand, but increasingly, they are starting to think of themselves as a retail and FMCG (fast-moving consumer goods) player. This means they will not always be content to just sell at their outlets. They will want to sell their products online. 

“This is something we will want to facilitate for our offline merchants. We see ourselves eventually becoming an omnichannel platform that allows offline merchants to build and capture loyalty through online channels that they may not have previously explored,” says Neoh.

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