Freecharge for 60Mn, Nearbuy & Little for 30?

In August 2017, Axis Bank acquired Freecharge for Rs. 385Cr (in an all-cash deal)! Cash!! The value, apparently, was driven by Freecharge’s 54Million+ user base. So, that’s more than Rs. 70 per Freecharge customer, approximately. The world since then, like us, has been busy congratulating or bashing the deal-makers.

Once the dust settled, we looked at a sample of 9,000+ users and their wallet footprint to make some sense of the deal.

So, how many of them had the Freecharge app on their phone? Compared to other wallets?

 

70% had Paytm while 9% had Freecharge!  Low app share on mobile devices automatically puts Freecharge at a disadvantage, we believe, unless Axis is ready to burn (discounts/freebies) and turn (user share) one more time. We don’t think Axis (or other banks, for that matter) will play that game which requires a hyper-funded growth startup mindset. Nevertheless, PhonePe is the one to watch out for, even though Freecharge is #3. And Jio Money – always, the joker in the pack!(1)

Moving beyond apps, ~85% of our sample had some Paytm relationship (across channels), while  only 18% had a Freecharge relationship. PhonePe, a much later entrant, had a 22% footprint.

 

But quality matters and not just quantity, right? So, we checked how many of these users had a Freecharge transaction in the last 30 days? 3 months? 6 months?

60%+ of the users sample had a Paytm transaction in last 180 days, while 40%+ have had a transaction in last 30 days. Au contraire, Freecharge had 18% versus 2% respectively.

The good news here is that there’s a large reasonable number of users who use Freecharge on the web, rather than an app. The bad news is that 8 out of 9 transacting Freecharge users dropped off (in their engagement) between the 180 vs 30 day window. In a business where transactions are a monthly reality, that should hurt. In general, you can see how abysmally some of the wallets are doing here, and are on the fringes of being relevant. The good news for Axis, is that Freecharge does come across as a top 3 player.

Lets keep a bit of faith here. How engaged are these transacting users, at least? The average transaction values? Number of transactions in a month?

We know that the digital transactions received a significant push through demonetisation. So, the difference between 180 day and 30 day averages would seem to be in line. However, the drop seems significantly more acute for Freecharge than other players.

 

This is where the rubber meets the road. When we looked at the average spend per wallet, what really hit us was the gap between Paytm and the rest. That large a gap clearly signifies how Paytm is the default wallet of choice for a large number of users across a variety of use-cases, while the others pop up for specific needs. For instance, Airtel Money usage is directly linked to airtel recharges/ bill payments where Airtel is incentivizing through cash-backs. In fact, in this rut, Oxigen wallet emerges as a stronger force to look at than Freecharge or PhonePe.

 

Anyway, we were not thoroughly convinced of the deal value at this point. Long ago, from traditional business practitioners, we learnt that dead, dormant and bad customers are not good for feeling good about our business!

 

Now, none of this values the technology platform that Freecharge has robustly built over the years, nor the fact that there is a ready access to a brand name that might still mean something to the 54Mn+ people who’ve at some point engaged with Freecharge. Going by the mobile fraud reports, the real number might be lower, but still significant. At this point, we believe the market had a few options – including letting Freecharge burn itself to the ground and become irrelevant. By the trajectory, and looking at a whole lot of other wallets, it was on track to hit zero relevance. Yet, Axis believed that the platform and the user-base is worth the kind of money that was paid for it. And they, of course, are privy to a lot more information than what we have with Algo360.

Lastly, we feel that there are two opportunities that are right here right now for Axis –

  • Creating a new “banked” segment because a large part of the wallet user base tends to be unbanked/ under-banked.
  • Create a pay-later/ wallet credit solution on top of Freecharge, which is incidentally a checkout mechanism on many ecommerce websites. As per our Algo360 estimates, ~8-10% of the Freecharge base is not going to have a credit bureau hit, but might still be creditworthy (for small ticket loans/ pre-approved line of credits).

 

Now, you must think about all this as you think about Paytm almost going ahead with acquiring Nearbuy and/or Little.

 

*(1) For some quality check purposes, Mobikwik is not included in this analysis. So, in some cases, MK can well be the number 2 player, as it places itself as.