How we launched, scaled, and exited a digital wallet startup in 3 years
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In early 2017, a team of 2 co-founders, failed in scaling a specialized social network where users would share their homemade cooking recipes via written and video content. While the startup had accumulated 10,000 active users in 3-4 months, it couldn't convince investors of the revenue model and future returns in the market that we had launched considering global players of scale such as Instagram and YouTube.
Despite the setback, the team was highly ambitious to launch its startup rather than become employees at a big tech firm. So we went to the drawing board and looked into different industries and verticals to discover pain points and how the team could potentially address them.
Now a team of 3, with 2 of the team members' previous experiences in developing and launching products in the payments sector, we focused our attention on the Payments and PayTech industry to identify niche opportunities for entry.
The opportunity: digital mobile payments
Growth in market liquidity
In 2017, when we initiated our market analysis, we knew that the total market liquidity in the Iranian financial markets was growing between 8–20% per quarter year over year reaching ~$350B in December 2017 in a country of ~80 million population at the time. This positive and healthy growth at the macro level was a positive sign for entry and potentially many players of established and new origins finding space to work along with each other.
Migration of transactions to digital channels
A massive trend in the payment market back in 2017 was the adoption of digital and electronic payments through Internet Payment Gateways (IPGs), Mobile Payments (USSD), and Point of Sales devices ((m)PoS).
This growing share meant a large growth in the value of transactions moving to digital and electronic means of payments, indicating opportunities for new entrants with new solutions and innovation in transactional experiences.
Cash was losing shares, but still growing in value
As digital payments were growing, cash was still circulating, but despite losing its share of the total liquidity, it was still growing year over year and consumers depended on cash payments, due to several reasons including the lack of penetration of digital payment devices into micropayment sectors and mobility required sectors.
Cash vs. digital payments
It was clear to the team in 2017 that the future is going to be digital and solutions that could help alleviate cash transactions and further democratize access to digital payment modes stand to win in the massive payments market of the country.
Number of electronic payment devices
In 2017, PoS payment devices had monopolistic power over the digital payments market due to the massive push from large-scale and deep-pocketed Payment Service Providers (PSPs) that were largely owned by banks and the penetration of commercial banking in the country.
However what was obvious was that due to the penetration of online businesses and growing demand for e-commerce, IPGs and mobile payment solutions will be the segment of growth in the next 5–10 years, which happened with PoS device share dropping from 94% in 2017 to 76% in 2021. This would have been the sector of play for any new entrants into the digital payments marketplace.
Digital transactions by payment medium
What was rather less predictable in 2017 was that despite growth in the number of IPGs, PoS devices would still carry a substantial share of the volume and value of the market transactions. This was a key insight because as a payments services provider, a startup in the PayTech sector would only make money per transaction, and the larger the volume and value of the market, the larger the business opportunity. So taking a share from the PoS payments market would be key to survival.
Focus on microtransactions
Furthermore, it was obvious that the majority of digital payments were centered around micropayments for day-to-day transactions. This meant in consumption terms, consumers required a traditional cash wallet to pay for their groceries, commute and transportation, and daily shopping needs, but in a digital format — or a digital wallet.
Internet and smartphone penetration
In 2017, the internet had penetrated more than half of the adult population and with the reduction of smartphone prices, we knew that the next frontier would be to deliver a PayTech solution on the smartphone, where mobility features would help create innovative solutions that could meet and exceed new consumer expectations and change consumption habits.
The opportunity: a mobile-first digital wallet solution
With payments quickly becoming digital and the growing penetration of the internet and smartphones, there seemed an opportunity to deliver a digital wallet and mobile-based payment service as a standalone solution to replace debit and credit cards, cash, and physical wallets.
The solution
To provide a solution that would create value for customers, a digital mobile wallet needed to be quick in transactions and easy to use.
Our digital wallet was set up by holding multiple escrow accounts at various banks so that we could allow users easy and quick direct debit top-ups and deposits along with access to ACH payment rails.
With top-up, peer-to-peer transfers, and financial institution access resolved, we decided to use a QR-based payment interface to target vendors and merchants who couldn’t afford PoS terminals, expanding digital mobile presence into offline, face-to-face, and cash-based segments that carried 3–4% of the total market liquidity, before moving towards capturing share from the main digital payments market.
The initial solution had both a merchant (receiving) and a user (paying) mobile application — it was modeled as a payments marketplace.
Launch and go-to-market strategy
To launch the product, we identified three low-hanging segments of the market for entry:
- Payments in inner-city taxi commutes
- Payments in mom&pop grocery stores and bakeries
- Payments from street vendors
Payments in inner-city taxi commutes
With 79,000 public taxis in the city of Tehran and more than 5 million daily taxi commutes (20% of total daily commutes in the city), we estimated a total of 15–20 million daily transactions in the taxi space and the potential of $20–30M of monthly revenues (if all transactions were to be digitalized) or $300M annually.
To make this niche more interesting, most if not all of the payments in the inner-city taxi commute in 2017 were typically made by cash, leaving a blue ocean for us to work on.
Scaling a double-sided marketplace
Any digital wallet is simply a double-sided marketplace with payers on one side and merchants on the other. Therefore, our product needed to deliver the payment infrastructure and solutions for both the payers and the payees.
To solve the chicken and egg problem, we initially focused on the merchants, in this particular case, the taxi drivers.
To deliver value and scale our merchant base, we focused on two solutions:
- Software: The software solution, or in this particular case, the merchants’ mobile application, focused on informing merchants of transactions, their balance, and immediate settlements via our escrow accounts to the extent possible unless we needed to resort to the ACH railing that would require 4–14 hours for settlements. The immediate settlement was a key differentiating feature of our product that no other players in the marketplace, including bigger tech players and banks, were offering at the time.
- Hardware and operations side: our launch operations team was focused on the ground operations of onboarding merchants and making them ‘transaction-ready’. This entailed finding geographies of density for the daily commute, onboarding municipal and regulatory stakeholders, pitching value and signing up drivers and registering their information (including names, IDs, vehicle information, licenses, bank accounts, etc.), installing our QR-based PoS terminals, installing the merchant mobile apps, providing promotional gifts and items for onboarding their clients, and providing them with later support.
Considering the lack of PoS devices in taxis the difficulty of managing cash transactions and the need for a digital payment solution from the drivers, the signup process was easy and quick and merchants (i.e. the taxi drivers) were extremely receptive.
Within the first month, we realized that our internal operations team was not going to be enough to scale the merchant side and we recruited promoters and launchers from 3rd party partners with the internal operations team taking the role of an operations management and control unit, using a variety of software and monitoring mechanisms to manage growth.
Operations and merchant growth structure
The Merchant Operations and Growth team was divided into two subgroups:
- Merchant onboarding: that consisted of 1 coordinator and 10 launchers
- Support: that included 5 support staff
An Operations and Growth Manager controlled these two subgroups providing them with the necessary coordination to prepare items for launch programs. The Operations and Growth managers were also in charge of the required coordination with the regulatory bodies and public sector stakeholders as needed for the acquisition of required licenses before taking the recruitment team to the field, training them, and providing a weekly plan until the specific market has been launched to the extent where network density is reached.
The launchers would spend 1–2 weeks at an intended location and onboard around 80% of the estimated attainable merchants. Through experience, we realized that in 2018, around 65% of the total drivers in the city had the necessary digital and technical understanding and willingness to adopt our solution and if we were able to onboard ~30%, then our market share was defendable and network effects would help the rest of the merchants to adapt and onboard organically.
It takes time for a merchant to become a loyal user
Through experience, we learned that when a merchant is onboarded, it would take them 14–21 days to truly adopt the service, understand our value-add, and become loyal users that organically promote the service to the other side of the marketplace (i.e. the payers) during rides. In the first year of our launch, the merchants were going to bring payers to the marketplace and we have little intention to spend money on payer acquisition.
The Operations and Growth Managers along with the data intelligence team created a dashboard to track the daily performance of merchants and benchmarked them against their regional and geographic cohorts to determine the performance health level of each merchant.
Then, the support team would get in touch with laggard merchants to try to understand the pains and problems they were experiencing.
If the problem was not resolved via telephone calls, then the support team would be shipped to the location to resolve problems that varied including providing further education or solving technical problems via replacing QR-code stations or reporting product bugs.
Unlike the onboarding team which was generally young males, hyper-actively aggressive, high energy, and aggressive towards hitting scale KPIs, the support staff was generally female with high emotional intelligence, the ability to listen and empathize, tolerant, and structured in identifying and addressing merchants’ problems.
Growth in year 1 of launch
While we were growing at tremendous speeds in the first half of the first year, we somewhat plateaued in the second half and the unit transactions of our users were somewhat stagnant.
There were a few drivers for this decelerated growth performance:
- First and foremost, we had somewhat acquired most of the easily attainable segments of the taxi market. Any massive growth would have required marketing expenditure, which we didn’t have at the time, and needed to raise capital for Stage B. Any massive growth would have required us to move to other market verticals including those with high daily frequency in transactions such as grocery stores which also required additional investment into our product, infrastructure, and personnel resources
- Second, an active passenger normally takes 1–2 taxi rides per day. The average consumer may only use a cab 1–2 times per week. Therefore, the frequency of taxi payments and transactions per unit user was originally quite low. Again, to grow healthily, we need to diversify and move to other payment verticals
The pros and cons of competition
By the end of 2018, we had been the sole player in the market as the only QR-based digital wallet and had managed to grow inexpensively at quick rates for a whole year. But now, the competition was about to pounce on our growth and demand its share.
Competition in the taxi sector
Two main competitors entered the market in early 2019:
- Established tech players: from a variety of backgrounds including the financial services and internet sectors who were focused on the taxi payments sector and wanted a share of the market we had established
- PSPs and banks: With the traction of QR-based payments, PSPs and banks that had customer-facing applications launched their digital wallets on a national scale, which due to the scale of their users, expanded the market adoption rate in the short run but also put us in disadvantage of scaling to the mass market
The competition helped us grow
With deep pockets entering the space, additional marketing and educational content helped us scale our merchants and user base by 100% within the first 6 months of 2019.
By expanding our services into verticals that had higher daily transaction frequency rates such as grocery stores, our number of weekly transactions grew by 10X in the same period.
Targeted growth
Our huge growth in transactions per user was driven by our loyal base of users who would utilize our services in all aspects of their lives, wherever we were available. To achieve this, before moving into new verticals, we studied our customer base, found geographies of scale and density where our customers were living, and quickly brought our payment portals and services online, to serve their daily payment needs and grow the scale of our transactions.
And then, it became ugly…
There were 12 PSPs in the market with 5 of them controlling ~70% of the total market transactions. Banks owned 4 out of the 5 and the 5th was also a publicly traded FinTech company. These 5 players also owned +85% of the physical PoS devices in the market, running the entire value chain from import of components to manufacturing, distribution, sales, and support.
Midway into 2019, considering our very quick growth rates, these big players started to hit us at points of sales via promotional campaigns that gradually impeded our long-term growth due to our lack of access to finances and monetization lags at the time.
The bigger players in the payments market were cutting their margins at the cost of our profits to kick us out of the market.
Exit in Q2 2020
2019 was a tough year for us. While we had shown product-market fit and were still growing, competing with deep-pocketed PSPs and banks was going to be a major challenge. It was time to find the right investor for the next layer of play for our solution to compete in the market and grow sustainably.
Furthermore, Venture Capitalists did not want to enter a cash-burning competition and did not have the power to spend compared to the competition.
Assessing opportunities for an exit
Therefore the time had come for us to find an exit and enter a partnership with a player that could help us to:
- Guard our current market shares within the payments ecosystem
- Grow the business in customer scale and interaction rates, sustainably
For this to occur, we needed to identify partners for whom we could:
- Help reduce operating and financial transaction costs
- Help improve customer experiences, substantially
- Provide our tech-savvy team as a desperately desired asset to add to their current operating model and business ecosystem
Market data after 2017
Market liquidity
However, this growth did not continue into 2018 and onwards due to growing inflation and currency devaluation due to the high rates of growth in market liquidity.
Despite the loss of local currency value, market liquidity in IRR was still growing indicating opportunities for local players and new entrants.
Digital payments
This migration pattern continued and grew strongly after 2017, due to the many benefits of digital payments to society including reduced transactional costs and ease of access.
Cash vs. digital
Digital payments continued to grow while cash payments dropped as the total share of market liquidity.
