Bajaj Finance fortifies its digital fortress

With Bajaj Pay, the country’s largest NBFC aims to strengthen its position in an increasingly competitive consumer finance market

When Bajaj Finance announced its foray into the payments business along with its December quarter results a few weeks ago, the business development took centrestage over quarterly results. Stock market analysts were quick to call it the start of a new growth phase for the lender.

Emkay Global Financial noted that the company has begun a transformation process, while analysts at JM Financial said the strong digital footprint with a marketplace approach will help capitalise parent company Bajaj Finserv’s group synergies. Those at Bernstein surprised the Street the most, upgrading its rating on Bajaj Finance to “outperform”, adding the “fintech” premium to its 12-month forward target price, which more than doubled from ~3,300 a share to ~7,240 .

Termed Bajaj Pay, this product is expected to be rolled out in the current quarter and is targeted at its existing customers with an integrated payments solution of unified payment interface (UPI), prepaid payments instruments (PPI), similar to what banks such as HDFC Bank and ICICI Bank offer, and monthly instalments (EMIS) and credit cards.

For a lender with a 46 million customer base which is larger than RBL Bank, Indusind Bank and even Axis Bank, the question is whether this foray into the payments segment is driven by necessity or as an add-on. Bajaj Finance’s performance in the post-pandemic months suggests the former (see table). For one, the consumer finance business has turned into a favourable hunting ground for most banks, whether through partnerships forged with e-commerce players or EMI conversion options on debit and credit cards.

“Covid-19 led us to structurally question the way our business is conducted,” said Rajeev Jain, MD & CEO, Bajaj Finance, in a call with investors. “The position that we are taking, as we are a regulated business and not a pure payments business, means an omnichannel is what would work. You will need to transition between offline to online in a seamless manner,” he pointed out. With Bajaj Pay, this is exactly the intent.

“In a click of a button, 10 per cent of customers may get money and 90 per cent will need a call to help them complete the journey,” he explained. “That's really where the omni-channel framework starts to play out”.

Nilesh Shah of Envision Capital puts a context to Jain’s remarks — that of ring-fencing. “All the guys have come into my space, now how do I get into theirs?” is how Shah describes Bajaj Finance’s attempts to strengthen its digital fortification. To that extent, Suresh Ganapathy of Macquarie Capital calls Bajaj Pay a “hygiene product” to offer to customers so that Bajaj Finance can stay relevant in the game.

To be fair, with over two million customers acquired in December quarter (Q3), twice more than previous quarter, Bajaj Finance made a strong comeback. Yet when seen against its peak quarterly customer acquisition rate of 2.2–2.4 million, Q3’s performance indicates a lag. Bajaj Finance aspires to hold a 3-3.5 per cent market share in India’s total credit market (against 1.29 per cent in FY20) in four or five years. To get to that scale, it's critical not to let go business in any form.

The lender will extend Bajaj Pay to its 1,00,000-plus merchants, to help it expand market in the medium-term. This segment has been slow to return to the precovid-19 levels in terms of demand and repayment abilities, though it has become a hot-bed for banks and fintechs with supply chain financing gathering steam.

That Bajaj Finance wants to guard its territory in this segment is understandable, given it was the first-mover a decade ago. There could be a few other motives as well. For a company that has become an undisputable leader in the consumer finance market, drawing 24 per cent of its liabilities from deposits, and with retail deposits accounting for 76 per cent of total deposits, other businesses under its parent company, Bajaj Finserv — life and general insurance — are far from market leadership positions. The attempt at building five proprietary apps — marketplaces, EMI Store, Insurance Marketplace, Investment Marketplace and BF Health — with the help of its group companies may help customer retention across the value chain and also set the base for an impactful cross-sell platform for its sister concerns.

Alongside, Bajaj Finance plans to improve its productivity and efficiency digitally through sales, merchant, collection and partner apps. Planned to be rolled out by May 2021, the intent is to save cost.

Jain has emphasised that growth in FY22 will be independent of these initiatives. But being the segment leader, the pandemic and the slowing economy that predated it has encouraged Bajaj Finance to reengineer its business. Given Bajaj Finance’s feet-on-theground approach to offering credit products such as bridal salon loans and digital lifestyle product loans about two years ago, it has grabbed every opportunity. But can it replicate the success through payment apps?

“Bajaj Finance has grown on scale and will constantly attract regulatory attention whether on product introduction or market segmentation,” said an analyst who requested anonymity. Just its size may not limit the free hand that the lender enjoyed in the previous decade.

“The question now is, how will Bajaj Finance’s marketplace drive traffic?” Gautam Chhugani of Bernstein pointed out. It’s often an aggressive interplay of merchant deals and incentives, he explained. “The space has dominant incumbents and Bajaj Finance being a listed business has limited ability to burn money for longer periods to sustain a challenge”. Chhugani refers to Google Pay and Phonepe, which transact payments volume multiple times larger than Bajaj Finance. The central bank, too, hasn’t been comfortable with banks handing out huge discounts and cashbacks to make a cut in the payments space.

With regulations set to tighten for non-banks, and Bajaj Finance being “systemically important”, its payments and digital foray would, therefore, be a tightrope walk.

Termed Bajaj Pay, the new product is expected to be rolled out in the current quarter and is targeted at its existing customers