infibeam incorporation ltd Management discussions

MACRO-ECONOMIC SCENARIO

The Digital Revolution in Indias Macroeconomic Landscape

Introduction

India, with its vast and diverse economy, has witnessed remarkable transformations in recent years, particularly in the realm of macroeconomics. A pivotal factor contributing to this transformation is the nations embrace of digital technology, reforms that foster the growth of startups, and substantial tech investments. These advancements have played a pivotal role in propelling Indias digital economy and have set the stage for a surge in digital payments.

There are definite improvements in reforms in India that are aiding the digital economy, fostering a thriving startup culture, attracting tech investments, and consequently, driving the growth of digital payments.

Reforms Powering the Digital Economy

The Indian government has initiated a series of policy reforms aimed at promoting a robust digital economy. One such reform is the “Digital India” campaign, launched in 2015, which seeks to bridge the digital divide and provide digital access to all citizens. This initiative has laid the foundation for the rapid expansion of digital infrastructure, including internet connectivity, which is crucial for the growth of the digital economy.

Startup Culture and Tech Investments

India has witnessed a surge in startup culture, with a flourishing ecosystem of innovative companies. This phenomenon is largely driven by government initiatives such as “Startup India,” which offers incentives and support to budding entrepreneurs. Additionally, Indias vast pool of tech talent has been instrumental in attracting investments from both domestic and international sources.

The startups across various sectors, including e-commerce, fintech, health tech, and edtech are not only transforming industries but also creating employment opportunities and contributing significantly to the countrys GDP.

Digital Payments Revolution

One of the most striking outcomes of Indias digital transformation has been the surge in digital payments. The governments demonetization move in 2016 accelerated the adoption of digital payment methods. Digital acceptance of payments, through cards, payment through UPI (Unified Payments Interface), mobile wallets and many alternative forms of payments have become increasingly popular, making it convenient for individuals and businesses to transact digitally.

Moreover, the COVID-19 pandemic accelerated the shift towards digital payments as people sought contactless alternatives. This trend has further cemented the importance of digital payments in the Indian economy.

Opportunities Ahead

Looking ahead, the opportunities in Indias digital ecosystem are immense. With a large and increasingly tech-savvy population, the digital economy is expected to continue its rapid expansion. Here are some key areas where growth is anticipated over the next decade:

1. Financial Inclusion: Indias digital ecosystem can work towards bringing millions of unbanked and underbanked individuals into the formal financial system, promoting financial inclusion.

2. E-commerce Boom: The e-commerce sector is poised for substantial growth as more Indians shop online. This will drive the need for secure and convenient digital payment solutions.

3. Digital Infrastructure: Continued investments in digital infrastructure, including 5G networks, will provide the necessary backbone for the digital economy to flourish.

4. Data Analytics and AI: Leveraging data analytics and artificial intelligence will enable businesses to better understand consumer behavior and provide tailored services, including payment solutions.

5. Cybersecurity: As digital transactions increase, so will the importance of robust cybersecurity measures to protect financial data.

Conclusion

Indias macroeconomic landscape is undergoing a remarkable transformation, driven by reforms that support the digital economy, foster a thriving startup culture, and attract tech investments. This transformation has propelled the growth of digital payments, making them an integral part of daily life for millions of Indians. As the nation continues on this path of digitalization, the opportunities that lie ahead are abundant. With a proactive approach to innovation, investments, and policy support, India is well-positioned to become a global leader in the digital ecosystem and witness exponential growth in digital payments over the next decade.

FINTECH INDUSTRY

Introduction

Fintech is a broad category of software applications and different digital technologies deployed by the intermediaries that provide automated and improved financial services competing with traditional financial services. Fintech, as the name states, uses technologically advanced offerings in finance, enabling digitisation of payments, receipts or transfers, and includes Payment Technology, Digital Banking, FinTech Lending, Wealth management, InsurTech, etc. stylised in the following diagram (Source: RBI, Nov 2021). Like in any domain, even fintech businesses can be either business-to-business (B2B) category or business-to-consumer (B2C) category. B2B businesses are those that cater to other businesses with their products and services; whereas business that sell their products and services directly to end consumers are classified as B2C.

Infibeam Avenues operates in the B2B Fintech space offering digital payments and software platforms for eCommerce to small and large businesses, both private and public sector enterprises, including banks.

Cashless transactions set to rise globally

As of May 2023, there were 11,651 fintech (financial technology) startups in the Americas, making it the region with the most fintech startups globally. In comparison, there were 9,681 fintech startups in the EMEA region (Europe, the Middle East, and Africa) and 5,061 in the Asia Pacific (APAC) region. This has increased compared to the data we presented in our FY22 annual report; as of November 2021, there were 10,755 fintech startups in USA, 9,323 in the EMEA and 6,268 in the APAC (Source: Statista).

Fintech in India is a sunrise sector that will lead to massive innovation in the Banking, Financial Services and Insurance sectors

2015 saw the birth of Fintech in India, with the advent of many products and services, which gradually multiplied from 2016 onwards and eventually got a rapid unparalleled boost in the past two years. Fintech is probably one of the very few sectors that took colossal leaps forward when every other sector reached the nadir, while the world was held captive by the pandemic.

In absolute terms, India currently stands at the third place in the Fintech arena, behind USA and China, in just five years since demonitisation in November 2016. Yet, we became global leaders in 2020 in real-time payments, 62% ahead of China at number two, setting an example for the world to see our progress in such a short span. Also, India has the highest Fintech adoption rate of 87% versus an average global rate of 64%. India turning into a Fintech hub can be attributed to the explosion in this sector. The seeds of future global fintech ecosystem are already being sown in India, challenging the traditional financial sector and the legacy banking system. In 2021, India bagged around 40% of fintech deals in the APAC region. In 2021-22 fintech continued its lead doing 278 deals worth US$ 8.5 billion vs 240 deals in 2020-21 worth US$ 7.3 billion. Despite global challenges, as per data published by PwC, Fintech along with SaaS had the highest share of funding totalling more than USD 3.1 billion. India is host to around 2100+ fintech companies, as per 2nd edition of MEDICIs India FinTech Report, 67% of which have come into existence in the past five years. Organisations are reconceptualising this industry in the post pandemic world. Fintech is seen to be percolating through most verticals ranging from retail to education, from hospitality to health. Digital payment is the largest pie within Fintech, where Infibeam Avenues has been among the leaders and is constantly innovating and scaling its operations. Digital Lending is the next biggest and among the fastest growing opportunity within Fintech where Infibeam Avenues is making inroads through various initiatives to help merchants/businesses grow as well as help lenders reach a larger underserved and/or unserved audience.

Within Fintech, Digital Payments in India presents multi-year high growth opportunity

As per a recent (May 2022) report by BCG and PhonePe; 40% of payments (by value) are digital, contributing to a US$3 trillion digital payment market on account of rapid expansion in digital infrastructure, pandemic-led acceleration of shift in customer preferences, growing merchant acceptance network and disruptive innovations by the fintechs. Yet, certain segments of the market remain underpenetrated with considerable room for growth. The next wave of growth is likely to come from Tier 3-6 locations, as evidenced in the past two years wherein Tier 3-6 cities have contributed to nearly 60-70% of new mobile payment customers.

Expanding merchant acceptance, digitization of value chains, and establishment of financial services marketplace in underpenetrated segments are the primary factors that will spur the rapid growth of digital payments in India. The emergence of embedded payments via 5G and the Internet of Things (IoT), and the launch of Indias sovereign Digital Rupee are, together, expected to provide further impetus. Indias digital payments market is at an inflection point and is expected to more than triple from

US$3 trillion today to US$10 trillion by 2026. As a result of this unprecedented growth, digital payments (non-cash) will constitute nearly 65% of all payments by 2026 i.e., 2 out of 3 transactions (by value) will be digital.

India will become a digital payment economy and merchant payments will emerge as the most powerful driver of this growth. BCG expects that merchant payments will soon outpace person-to-person fund transfers.

Encouraging trends in Digital Payments in India

As per RBI, digital payments volume (comprising Debit & Credit Card Payments, Prepaid Payment Instruments and UPI) in India increased at a compounded annual growth rate (CAGR) of over 61% in the past five years from 9.1 billion in 2017-18 to 97.5 billion in 2022-23; over 10 times in 5 years. The year 2021-22 alone has seen a growth of 78% year-over-year while 2022-23 has seen a growth of 67% in volumes year-over-year, setting a stage for a strong digital payments growth

According to a report by the World Bank Development Research Group, “Integrating digital payments addresses crucial issues of broad economic growth and individual financial empowerment”. RBI in its Payment Vision 2025 expects digital payments to triple. Hence, Digital Payments will have a crucial role to play in Indias ambitious growth plans. in India. Additionally, in value terms, digital payments in 2022-23, was 163.6 trillion (USD 2.0 trillion), up, a strong 57% compared to previous year.

Indias Chief Economic Adviser (CEA) Mr V. Anantha Nageswaran said India would become a USD 5 trillion economy by 2026-27 and USD 10 trillion by 2033-34. Honorable Industry and Commerce Minister Mr. Piyush Goyal expects India to become $30 trillion in the next three decades.

Current trends in Digital Payments indicate a strong growth for 2023-24 and beyond as the country moves towards its vision to become a USD 5 trillion and USD 10 trillion economy.

Recurring transactions through Cards (Credit and Debit) for growing subscriptions to OTT platforms, journals and news portals, will contribute to an increase in transaction volumes. Further, the RBI mandate on expanding the scope of permitted devices and allowing card on file tokenisation will contribute to the growth of card payments. It will impart security and enhance the customer experience of card payments at e-commerce sites and through enabled devices at physical points. Card-based transactions are expected to continue to witness steady growth, at almost 16% year on year for the next four years (Source: PwC).

Prepaid instruments (eWallets and cards); Latest developments around wallet interoperability and the influx of online workspace could result in steady revenue flow for gift cards and the wallet industry. More corporates are entering into prepaid segments like expense management and food cards, which can also result in the overall steady growth of PPIs. Bill payments form a major component of retail payment transactions. Launched in 2016 and owned and operated by NPCI, BBPS is envisioned as a one-stop interoperable, accessible and cost-effective ecosystem for payment of all utility bills. Moreover, it is available 24x7. It provides a single platform that allows banks and non-banks in aggregation business, payment service providers, billers, retailers and customers to connect, present and pay bills.

Government initiatives towards building better infrastructure, particularly for rural areas, shall lead to more households with electricity and water supply, subsequently adding more demand for telecom and gas connections, and hence, increasing the customer base of BBPS users. By 2025·2026, new biller categories are expected to reach an estimated value of 1,179 billion (USD 16 billion) with existing categories still accounting for a majority of the transaction value at an estimate of 2,189 billion (USD 29 billion). International payments act as a catalyst for cross-border trade and investments, and have played an important part in shaping up the Indian economy. Despite the pandemic, there has not been a significant change in the volumes of cross-border remittances.

Expansion of merchant acceptance points will lead to an all-inclusive digital payments growth in India

India is the largest global market for inward remittance flow at approximately 6 trillion. Since 2016, the volume of Indias cross-border remittances has grown steadily at a CAGR of 4.5%.

The emergence of FinTech has eased cross-border payments. Indian banks have partnered with various international exchange houses to provide faster inward remittance services to Indians residing abroad. The International Financial System (IFS) and faster payments rails with more innovative approaches have been adopted by FinTechs in the cross-border payments space which is expected to reach 10,496 billion (USD 140 billion) by the end of 2025·26. The cost of cross-border remittances will keep decreasing as FinTechs continue to make technological advancements and operational innovations.

While India is progressing well on the payment issuance front (>900 million debit cards, over 75 million credit cards, over 2.5 billion wallets) there are challenges being faced on the acquiring side, that is, the payment acceptance side. The growth of digital payments as a safe and convenient medium for financial transactions makes it necessary to strengthen the acceptance infrastructure across the country and achieve the core theme set by RBI in Payment Vision 2025, E-Payments for Everyone, Everywhere, Everytime. Data from the RBI shows that the PoS acceptance infrastructure in India is currently concentrated in tier 1 and 2 cities (Source: PwC and SBI data). The RBI has announced the creation of a Payments Infrastructure Development Fund (PIDF) to encourage acquirers to deploy PoS infrastructure in tier 3·6 centres and north-eastern states. As the deployment of acceptance infrastructure gains pace, there will be a jump in digital payments and demand for PoS machines.

In 2021-22, the number of POS terminals across the country has only increased by 1 million to reach 6.1 million in March 2022 (Post-Covid) compared to 5.1 million in March 2020 (Pre-Covid), despite a significant growth in overall digital payments. Post-Covid, in FY23, number of POS terminals increased by 1.7 million to reach 7.8 million as consumers went back to offline shopping. However, this number is still low as compared to the large Indian population that still shops offline. Certain systematic challenges are preventing the growth of digital payments in urban as well as the rural and remote areas in India, like expensive POS, service issues, far away locations, high cost of upgrade, etc. The number of terminals per 100,000 inhabitants can be considered as one of the indicators of the level of financial inclusion in a country. In India, this number stood at around 279 in 2018, which means the density of population per PoS terminal is around 358. The figure below shows the increase in the number of PoS terminals per 100,000 inhabitants in the BRICS nations from 2014 to 2018 (Source: PwC and Bank for International Settlements: https://stats.bis.org/statx/ srs/table/CT14B?p=2018). Addressing these issues is a pre-requisite for growth of digital payments in India. Separately, India is largely a debit card market with the number of debit cards (961 million) being 11.3 times higher than that of credit cards (85.3 million) in March 2023.

There is huge opportunity for the credit sector as, our country is credit starved. There are millions of unserved and underserved MSMEs not able to secure credit due to ‘no credit or ‘insufficient credit and repayment history. Increasing digital volumes will allow merchants to be a part of ‘organised or semi-organised retail which can be leveraged by lenders to provide credit to boost growth at the grassroot levels. Hence businesses will have to adopt to tech-led trends and consumer demands to uplift their own standards. All this is possible only when acceptance infrastructure is disrupted with low cost, convenient and safe methods allowing digital payments to reach every nook and corner of the country. A typical PoS machine costs 12,000/- while a typical mPoS machine costs

5,000/- (RBI Notification: Card Payments · Relaxation in requirement of Additional Factor of Authentication for small value card present transactions, RBI/2014-15/601, dated 14 May 2015). Particularly for micro, small and medium sized businesses, and tier 2 and 3 cities, this cost of the PoS terminal, along with costs of maintenance and upgradation, often become a barrier to PoS adoption.

PoS devices supporting contactless payments from cards or near-field communication (NFC) enabled devices with payments application and authorisation have gained significantly in terms of value and are playing a crucial role in the steady growth of PoS devices, estimated to have increased by 15% compared to 2020 (Source: PwC, RBI). The adoption of contactless PoS terminals has positively impacted revenue growth in the merchant acquiring space. As an opportunity, India is home to 65 million MSMEs and 12.8 million retail stores.

India Digital Payments Growth Drivers

Indias young demographics and an ever-growing start-up culture among young Indians, sets a stage for tremendous growth through tech-led initiatives. This, coupled with cheap data, affordable smartphones, Governments BharatNet project, upcoming 5G technology, are some of the drivers that will make India Digital and leading to growth of Digital Payments. Considering the 65 million MSMEs in India, we estimate there are only about 20-25 million merchants using digital payments. Of these, only about 5-10 million effectively use broad-based digital payments features while most use it sparingly. This leaves 50% of all the MSMEs out of the digital ecosystem. We estimate that the number of MSMEs will increase to 75-80 million in the next five to seven years. There are about 300 million consumers using digital payments in India, where there are one billion mobile connections and nearly 700 million smartphone users. The cash in circulation has also increased to 14.5% reaching

31 trillion, one of the highest in the recent times. The government aims to make India cash-lite, thereby reaching to every person in India, and boost digital transactions for speed, productivity and transparency. Another important growth driver is the retail sector in India. India has 12.8 million retail stores across

To increase the acceptance infrastructure, Infibeam Avenues, has made this a purpose to drive infinite ecommerce. We aim to lead this transformation by offering the worlds first and most advanced omnichannel payment app (CCAvenue mobile app) featuring Indias first pin-on-glass SoftPOS solution- CCAvenue TAPpay, CCAvenue TAPpay. The launch of CCAvenue omnichannel mobile app will widen Companys customer reach to include all offline merchants apart from a wide online merchant coverage the company already enjoys.

various segments (groceries, fashion, electronics, toys, stationary, departmental stores, services, etc.). The retail sector in India is one of the top contributors to the economy and a key driver of growth. The demand for digital payments (offline and online) is linked to growth in the retail sector. The retail sector is expected to grow at a CAGR of 21% until 2026, with total market size of retail stores expected to reach USD 1,750 billion by 2026.

Collectively, this presents a big opportunity for digital payments growth in India. Some other key drivers of digital payments are highlighted below (Source: PwC analysis, RBI, MeitY).

FINANCIAL PERFORMANCE CONSOLIDATED FINANCIAL PERFORMANCE

The consolidated financial statements are prepared in accordance with Indian Accounting Standards (Ind AS) under the historical cost convention on an accrual basis except for certain financial instruments which are measured at fair values, the provisions of the Companies Act, 2013 (‘Act) (to the extent notified) and guidelines issued by the Securities and Exchange Board of India (SEBI). The Ind AS are prescribed under Section 133 of the Act read with Rule 3 of the Companies (Indian Accounting Standards) Rules, 2015 and Companies (Indian Accounting Standards) Amendment Rules, 2016. The discussions in this section relate to the consolidated financial results pertaining to the year ended March 31, 2023. The financial statements of the company and its subsidiaries are prepared in accordance with the Indian Accounting Standards (referred to as ‘Ind AS) prescribed under section 133 of the Companies Act, 2013, read with the Companies (Indian Accounting Standards) Rules, as amended from time to time. The significant accounting policies, involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Note 1-4 of consolidated financial statements.

A. Analysis of Revenue

1. Revenue from operations

( in mn)	FY 23	FY 22	Change
Operating Revenue	19,623.39	12,939.34	51.7%

Revenue grew from 12,939.34 million in FY22 to

19,623.39 million in FY23. The growth is aided by both higher number of transactions and higher value of transactions for payment processed. Details are given below:

Particulars	FY 23	FY 22	Change
Volume of transactions processed (Nos. mn)	360	299	20.4%
Value of transactions processed * ( in bn)	4447	2929	51.8%

Our Fintech offerings are in two broad business segments and segment-wise generation of revenue has been as follows:

Business Segment	FY 23	FY 22	Change
Payment Business	17,932.35	11,340.86	58.1%
E-Commerce	1,691.04	1,598.48	5.8%
Platform Business
Total operating revenue	19,623.39	12,939.34	51.7%

The increase is mainly attributable to

- Higher utilization of Payment Gateway.

- Increased transactions in Government e Marketplace (GeM).

- Payments expansion internationally (UAE).

- Higher transactions in Bill Payments (BillAvenue).

- Remittance & Assisted Commerce (Go Payments)

Our Fintech offerings can be further analyzed from the following perspectives:

Pers-	Revenue from operations	FY 23	FY 22	Change
pective	( in mn)
	India	18,446.50	12,133.44	52.0%
Geography	Abroad	1,176.89	805.90	46.0%
	Total	19,623.39	12,939.34	51.7%

 

2. Other Income
( in mn)	FY 23	FY 22	Change
Other Income	707.30	99.98	607.4%

The change is mainly on account of M2M gain and profit on sale of investment, interest income and net gain on account of foreign exchange fluctuation.

B. Analysis of Expenses

1. Operating expenses

( in mn)	FY 23	FY 22	Change
Payment gateway
processing charges and other operating expenses	16,339.68	10,345.45	57.9%
% of revenue	83.3%	80.0%

It primarily consists of costs incurred in operating online payment gateway with a real-time transaction validation process. Processing charges as a percentage of Revenue may vary due to several factors, such as our level of productivity and accuracy, changes in volume and size. We have reported processing charges of 16,339.68 million in FY23 as against 10,345.45 million in FY22. The Payment gateway processing charges as a % of Revenues has increased by 57.9% as transaction value has also increased significantly.

2. Employee benefits

( in mn)	FY 23	FY 22	Change
Employee benefits	1078.25	817.80	31.8%
% of revenue	5.5%	6.3%

Employee benefit costs primarily consist of cost of salary and other terminal benefits like, gratuity, provident fund contribution etc. along with cost of compensation of stock options issued to various employees. Our primary cost comprises of Technology costs to carry out technological research and development activities. Our prime requirement of employees is in various technological segments like application, production, design, maintenance, operation, and platform development for new and existing products and services and other technology infrastructure. We seek to invest efficiently in several areas of technology development so we may continue to enhance the customer experience and improve our process efficiency through rapid technology developments while operating at an ever-increasing scale. We expect spending in technology cost to increase over time as we continue to add employees and technology infrastructure. 31.8 % increase in employee cost during FY 2023 is because of annual increments and recruitment of new employees to take care of growing business.

3. Finance Costs

( in mn)	FY 23		FY 22		Change
Finance Costs	19.43		19.34		0.5%
% of revenue	0.1%		0.1%
4. Depreciation and Amortisation
( in mn)		FY 23		FY 22		Change
Depreciation and
		616.02		626.37		-1.7%
Amortization
% of revenue		3.1%		4.8%

There is a decrease of 1.7% in Depreciation and Amortisation as compared to previous year since the group follows WDV method of depreciation.

5. Other expenses

( in mn)	FY 23	FY 22	Change
Other Expenses	409.56	326.25	25.5%
% of revenue	2.1%	2.5%

Increase of other expenses by 25.5% in FY23 is mainly on account of

Increased expenses in Web Hosting & Web servers support expenses due to increased consumption of web services.

Increased legal and professional expenses for business expansion/customer acquisition and other technical consultancy charges.

Increased travelling expenses for business expansion/customer acquisition.

Increased rent and office expenses.

6. Income tax
( in mn)	FY 23	FY 22
Current tax	19.76	(247.46)*
Deferred Tax	439.71	394.52
Total tax expense	459.47	147.05
Profit Before Tax	1822.16	983.56
Tax as % of Profit before tax	25.2%	15.0%*

Income tax as % of Profit before Tax in FY 23 is 25.2% since the company has opted for section 115BAA of the Income Tax Act,1961.

*Income tax as % of Profit Before Tax in FY 22 is lower since company has reversed the excess income tax provision of earlier years and recognised deferred tax liability on difference in tax base on goodwill and deferred tax assets on unabsorbed depreciation under tax laws as per the amendment in Income Tax Act in respect of allowability on depreciation of goodwill by Finance Act 2021.

Key Financial Ratios
Ratio	Calculation	FY 23	FY 22	Variance	Reason for Significant Variance
Ratios-Financial performance
Operating margin	EBIT / Operating Net Revenue	36%	32%	13%	Increase in EBIT
EBIDTA margin	EBIDTA / Operating Net Revenue	56%	55%	(2%)	No significant variance
Net Profit margin	Net Profit / Operating Net Revenue	41%	32%	29%	Increase in net profit
Interest coverage ratio	EBIT / Interest	61	43	43%	In view of increase in operating efficiency and repayment of long-term borrowings

 

Ratios-Balance sheet
Return on Net worth	Net Profit / Average Equity net of Goodwill	10%	6%	49%	Increase in net profit
Current ratio	Current Assets / Current Liabilities	1.60	1.37	17%	No significant variance Improvement in view of
Debtors Turnover ratio	Operating Revenue / Average Debtors	27	17	60%	better trade receivables management.

 

Ratio	Calculation	FY 23	FY 22	Variance	Reason for Significant Variance
Return on Equity					Improvement in view of increase in operating
Ratio	EBIT/Total Assets less Total Liabilities	6%	3%	71%	efficiency resulting into higher operating profit
Net Capital	Income from Operations/Average Working Capital (Current Assets less	5.17	4.60	12%	No significant variance
Turnover Ratio	Current Liabilities)
Ratios - Per Share
Earnings per share	PAT / Weighted average number of equity shares	0.51	0.32	62%	Increase in PAT

CONCLUSION

Digital Payments Opportunity in India to Increase >3x to US$ 10 trillion by 2026

The growth of the digital payments ecosystem has been supported by an expanding e-commerce marketplace and the wider availability of acceptance infrastructure at physical stores. With changing customer preferences, new use cases are being made a part of product offerings, rendering traditional payments modes obsolete. New product offerings developed with technological and infrastructural advancements are ushering in an era of innovative and fast digital payments, and nurturing the growth of retail payments. India is one of the worlds largest growing FinTech markets, including Digital Payments. Its overall Digital Payments market opportunity is estimated to be US$ 10 trillion by 2026 (Source: BCG Phone Pe Pulse Analysis), growing more than 3x in five years. Banks and card networks are collaborating with FinTechs to redefine product offerings and enhance customer experience, in order to create effective solutions and thrive in the new payments landscape. Payment Service Providers (PSPs) are leveraging existing platforms to offer a plethora of innovative digital payments solutions. The pandemic has resulted in more users adopting digital payments, and this trend is expected to continue as economies worldwide continue to recover.

Additionally, to democratise digital payments, the payments acceptance infrastructure needs to improve, and Fintechs need to innovate and offer cost effectively PoS solutions that will increase the payment acceptance, as digitalising and including the Tier 2-6 parts of the country is integral to Indias ambitious growth targets. And SoftPoS makes for a good, cost-effective alternative. Further, the RBI has also issued regulatory guidelines supporting the softPoS ecosystem, which ease merchant acquisition via remote onboarding and encourage merchants and customers alike to turn to the use of contactless payments. Hence, the softPoS has the potential to revolutionize the merchant acquiring business, allowing merchants to accept payments via a simple app download, and thus increasing digital payments penetration in the country.

RISK FACTORS

Our business is susceptible to several risks and we believe in highlighting some of the key risks to maintain transparency with all our stakeholders. You should carefully consider these risks and all other information in the Annual Report. Any of these risks could adversely impact our business operations, financial position and prospects. For more risk factors, refer to our IPO prospectus filed with Securities and Exchange Board of India (SEBI).

1. We face intense competition in our business

Our web services industry, and especially the digital payments industry is intensely competitive and we expect competition in the industry to continue to increase. Our present and future competitors may range from large and established companies to emerging start-ups, Indian as well as large multinational companies, operating in India and in international markets where we have our operations. Since the barriers to entry for the companies are relatively low, we may also face increased competition from new entrants in our industry. We may respond by increasing advertising and promotions, which may increase our costs and may not reflect past trends.

Our competitors may have one or more of the following advantages compared to us · greater financial and other resources, advanced technology, larger sales and marketing networks, greater knowledge of the target markets, more extensive research and development and technical capabilities, logistics support, greater pricing flexibility, longer operating histories and/or strong branding and reputation. These advantages may assist them in attracting our merchants and customers.

The management of some of these competitors may have more experience in implementing their business plan and strategy. Our present and future competitors with requisite financial and other resources may be able to innovate and provide superior products and services more efficiently than we can. If our competitors leverage on these qualities to provide comparable or superior services and products, and we are unable to respond successfully to such competitive pressures, our customers could significantly decline, which would have a material adverse effect on our business, financial condition and results of operations.

There can be no assurance that we will have sufficient resources to respond to competitors investments in pricing and other promotional programmes or technological developments. We may be required to reduce our operating margins in order to compete effectively and maintain or gain market share. In the event that we are unable to provide superior services than our competitors, including superior technology, value added and user-friendly services, we may not be able to attract customers to us, which could have material adverse effect on our business, results of operations and financial condition.

2. The payment processing industry is intensely competitive in India

The payment processing industry is very competitive. We are facing competition from new players that are offering services below cost price to increase their market share. They are backed by significantly large investors providing strong financial support, despite these players burning heavy cash. Accordingly, these competitors may be able to offer more attractive fees to our current and prospective clients that we are not able to provide. Competition could result in a loss of existing clients, and greater difficulty attracting new clients. Furthermore, if competition causes us to reduce the fees we charge in order to attract or retain clients, there is no assurance we can successfully control our costs in order to maintain our profit margins. One or more of these factors could have a material adverse effect on our business, financial condition and results of operations.

3. Our financial performance may experience high degree of fluctuations and we may also experience decelerated growth rates

Our revenue growth may not be sustainable, and our percentage growth rates may decrease. Our revenue and operating profit growth depends on the continued growth of demand for the web services offered by us and our services offered through our agent network. Our business is also affected by general economic and business conditions in India and in the regions we operate. It is impacted by the macro factors prevailing globally as well. A softening of demand, whether caused by changes in customer preferences or a weakening of the India or global economies, may result in decreased revenue and growth.

Our operating results will also fluctuate for many other reasons, including some of the following: Unfavorable changes in regulation; Our ability to offer our web services on favourable terms; The success of our service line and expansions; Variations in the mix of services we sell; Factors affecting our reputation or brand image; Our ability to retain and expand our business network; Our ability to satisfy our customers demands and meet their expectations; Changes in usage or adoption rates of the internet, eCommerce, electronic devices, and web services, in the regions we operate and where we plan to expand; Timing, effectiveness, and costs of expansion upgrades of our systems and infrastructure;

The outcomes of legal proceedings and claims, which may include significant monetary damages or injunctive relief and could have a material adverse impact on our operating results; The extent to which we invest in technology and other expense categories; Our ability to collect amounts owed to us when they become due; The extent to which use of our services is affected by spyware, viruses, phishing and other spam emails, denial of service attacks, data theft, computer intrusions, outages, and similar events; and terrorist attacks and armed hostilities.

4. Our expansion into new technology, geographical regions, other web services is subject to additional business, legal, financial and competitive risks

We have in recent periods experienced significant and rapid growth in our business operations from organic growth and acquisitions, which has placed, and will continue to place, significant demands on our managerial, operational, and financial infrastructure. Our integrated Web Services business model involves wide range of modular, customisable solutions developed on an advanced technology platform.

We continue to rapidly grow our business operations, targeting rapid merchant and customer acquisition in India as well as internationally, particularly in the Middle East with our current operations there, and as we plan to grow in many more international locations. We have already announced to launch our operations in the KSA and USA where we will face challenges related to the local market. As our operations grow in scale and complexity, whether through offering of new services or expansion into new markets, we must continuously improve, upgrade, adapt and expand our technology systems and infrastructure to offer our merchants and customers enhanced services, features and functionality ahead of rapidly evolving consumer demands, while maintaining the reliability and integrity of our systems and infrastructure in a cost-efficient and competitive manner.

In addition, to effectively manage our growth, we will also need to continue to improve our operational, financial and management controls, and our reporting systems and procedures. In particular, continued growth increases the challenges involved in, amongst others, continuous training and development of skilled and competent personnel and employees and developing and improving internal administrative infrastructure. These systems, enhancements and improvements will require significant capital expenditures and management resources. Our capital expenditure in the past may not reflect our future.

5. We may not be able to expand our share of the existing payment processing markets or expand into new markets which would impede our ability to grow and increase our profitability

Our future growth and profitability depends upon the growth of the markets in which we currently operate and our ability to increase our penetration and service offerings within these markets, as well as the emergence of new markets for our services and our ability to penetrate these new markets.

Our expansion into new markets is dependent upon our ability to adapt our existing technology and offerings or to develop new or innovative applications to meet the particular service needs of each new market. In order to do so, we will need to anticipate and react to market changes and devote appropriate financial and technical resources to our development efforts, and there can be no assurance that we will be successful in these efforts.

Furthermore,inresponsetomarketdevelopments, we may continue to expand into new geographical markets and foreign countries in which we do not currently have any operating experience. We cannot assure you that we will be able to successfully continue such expansion efforts due to our lack of experience and the multitude of risks associated with global operations or lack of appropriate regulatory approval.

6. We may be unable to effectively manage our funding and liquidity risk arising from unsecured loan in Credit Card business we are entering into, materially affecting our funding, profitability, liquidity and ability to meet our obligations

We need funding and liquidity in our credit card business to effectively run and grow the business.

We may exhaust our own cash surpluses once we achieve scale, at which point we will have to access various funding options from multiple sources to get sufficient liquidity and/or credit line to scale the business. If we are unable to get funding or sufficient credit line from lending institutions we will not be able to grow the business.

We need to effectively manage our funding and liquidity in order to meet our daily cash requirements relating to operating expenses, extensions of revolving credit to our cardholders, payments of principal and interest on our indebtedness and payments on our other obligations. If we do not have sufficient liquidity, we may be exposed to maturity mismatches between our assets and liabilities, face liquidity shortfalls and may not be able to meet our obligations when due, particularly during a liquidity stress event.

We may also face issues in collection once we have offered credit to corporates who may not be able to make payment for the spends on the credit cards or may defer payment which can severely impact our growth and can also result in Non-Performing Assets (NPAs).

Disruptions, uncertainty or volatility in the capital or credit markets, such as the uncertainty and volatility experienced in the capital and credit markets during periods of financial stress and other economic and political conditions in the global markets, as well as the Government of Indias indebtedness levels and fiscal policies, may limit our ability to obtain additional financing or refinance maturing liabilities on desired terms (including funding costs) in a timely manner or at all. As a result, we may be forced to delay obtaining funding or be forced to issue or raise funding on undesirable terms, which could significantly reduce our financial flexibility and cause us to contract or not grow our business, all of which could have a material adverse effect on our results of operations and financial conditions.

7. Our credit card portfolio is not supported by any collateral to ensure repayment. We may be unable to collect the unpaid balance

We will extend revolving unsecured credit to our cardholders as part of our business operations. Unsecured credit card receivables present a greater credit risk for us than a portfolio of secured loans because they are not supported by realisable collateral that could help ensure an adequate source of repayment for the credit card receivables. Although we may obtain direct debit instructions from our cardholders for such unsecured credit card receivables, we may still be unable to collect in part or at all in the event of non-payment by a cardholder. Further, any expansion in our unsecured credit card receivables portfolio could require us to increase our provision for credit losses, which would decrease our profitability.

8. Government regulation is evolving and unfavorable changes could harm our business

We are subject to general business regulations and laws, as well as regulations and laws specifically governing the internet, eCommerce, electronic devices, and other services. We are also subject to regulations and laws in all the international regions we operate in. Existing and future laws and regulations may impede our growth. Unfavorable regulations, laws, and decisions interpreting or applying those laws and regulations could diminish the demand for, or availability of, our web services and increase our cost of doing business.

9. We may be subject to risks related to government contracts

Our contracts with the Indian government are subject to regulations and other requirements as laid out in the government contract. We may be subject to audits and investigations relating to our government contracts, and any violations could result in various civil and criminal penalties and administrative sanctions, including termination of contract, refunding or suspending of payments, forfeiture of profits, payment of fines, and suspension or debarment from future government business. In addition, such contracts may provide for termination by the government at any time, without cause.

10. Our business could suffer if we are not successful in growing our investments and acquisitions.

We have in recent periods acquired and invested in companies, and we may acquire or invest or enter into joint ventures with additional companies. These transactions create risk of loosing management focus on existing business, retaining key employees, potential impairment of tangible and intangible assets and goodwill, additional operating losses, difficulties in implementing at companies we acquire the controls, procedures, policies appropriately for a public or a private company, potential unknown liabilities in companies we acquire or invest in, difficulty in integrating new companys accounting, financial reporting, management, information security, and the lack of control if such integration is delayed or not implemented.

As a result of future acquisitions or mergers, we might need to issue additional equity securities, spend our cash, or incur debt, contingent liabilities, or amortisation expenses related to intangible assets, any of which could reduce our profitability and harm our business. In addition, valuations supporting our acquisitions and strategic investments could change rapidly.

11. We may not be able to protect our Intellectual Property or may be accused of infringing intellectual property of third party

All our trademarks, domain names, copyrights and other intellectual property rights are material assets and are integral and critical to our business operations. We depend on a combination of copyright, trademark laws, non-competition and confidentiality agreements with our employees, contractors, merchants and third-party service providers to protect our logo, brand name, domain names, merchant and customer database and technology infrastructure including customised Infibeam Avenues Limited that are integral to our advanced technology platform. Some of our trademark and patent applications are currently pending and there can be no assurance that these applications will be successful and these trademarks would be registered in our name. Confidentiality agreements with our employees require them to keep confidential and waive any rights to any of our trade secrets, works of authorship, software developed and other technology infrastructure upgrades made by them during their employment with us. However, there can be no assurance that our data or proprietary technology will not be copied or otherwise misappropriated or abused by third parties. There may be irreparable damage to our business in the event that our intellectual property are infringed by competitors, in which case an award of damages may not be an adequate remedy.

Third parties may claim that we infringe on their intellectual property rights as we acquire new technology companies. We may be subject to claims and legal proceedings regarding infringement of intellectual property rights. Such claims even if they lack merit or not may result in significant financial and management bandwidth, including satisfying of indemnity if required.

12. Failure to deal effectively with fraud, fictitious transactions, and poor customer experiences would harm our business, our brand image and result in losses

In the event that merchants using our payments web services do not fulfil their obligations to consumers or a merchants goods or services do not match the merchants description, we may incur substantial losses as a result of claims from consumers. We seek to recover such losses from the merchant, but may not be able to recover in full if the merchant is unwilling or unable to pay. In addition, in the event of the bankruptcy or other business interruption of a merchant that sells goods or services in advance of the date of their delivery or use (e.g., airline, concert tickets and subscriptions), we could be liable to the buyers of such goods or services on payment cards used by customers to fund their payment. We could also incur substantial losses from claims that the consumer did not authorise the purchase, from customer fraud, from erroneous transactions, and as a result of customers who have closed bank accounts or have insufficient funds in their bank accounts to satisfy payments. We have taken measures to detect and reduce the risk of fraud, but these measures need to be continually improved and may not be effective against fraud, particularly new and continually evolving forms of fraud. If these measures do not succeed, our business could be harmed.

13. We could be affected by changes to payment card networks or bank fees, rules, or practices could harm our business

We rely on banks or other payment processors to process transactions and pay fees for the services. From time to time, payment card networks have increased, and may increase in future, the interchange fees that they charge for each transaction that accesses their networks. Payment card networks have or may impose special fees for transactions that are executed through a many of our payment options, which could impact us and significantly increase our costs. Our payment card processors may have the right to pass any increases in interchange fees on to us as well as increase their own fees for processing. Any changes in interchange fees could increase our operating costs and reduce our operating income.

14. We could face the risk of security breach and loss of data

We offer software as a service to clients and that we process, store, and transmit large amounts of data, failure to prevent any breach could expose us to potential liability and harm our business. We use third-party technology and systems for variety of reasons, including encryption, authentication, employee email, back office support and other functions. Although we have developed systems and processes to prevent data loss and other security breaches, such measures cannot provide absolute full proof security.

15. Reliance on information technology systems, networks and infrastructure, and internet penetration

Our business is technology driven, and we rely on information technology and networks and related infrastructure. As such, our business operations and quality of our service depend significantly on the efficient and uninterrupted operation and reliability of our information technology systems and networks and related infrastructure, both internal and external. We cannot guarantee an uninterrupted operation and reliability of these systems.

Internet penetration especially broadband services in India is limited and, though it has been increasing over the past few years, there can be no assurance that internet penetration in India will increase in the future as slowdowns or disruptions in upgrading efforts for infrastructure in India could reduce the rate of increase in the use of the internet. Further, any slowdown or negative deviation in the anticipated increase in internet penetration in India will affect our ability to attract and add new merchants and customers.

16. Proper functioning of payments solutions and platform is essential

The satisfactory performance, reliability and availability of our websites, our transaction-processing systems and our network infrastructure are critical to our success and our ability to attract and retain customers and maintain adequate customer service levels. Our revenues depend on the volume of transactions we process and other service level agreements that we have in place. Any system interruptions caused by computer viruses, hacking or other attempts to harm our systems that result in the unavailability or slowdown of our website or reduced order fulfilment performance would reduce the volume of our services and the attractiveness of our offerings.

Our servers may also be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, loss of data or the inability to complete a transaction. We may also experience interruptions caused by reasons beyond our control. There can be no assurance that such unexpected interruptions will not happen, and any such future occurrences could damage our reputation and result in a material decrease in our revenues.

17. A decline in the use of any payment option as a payment mechanism or adverse developments with respect to the payment processing industry in general could have a materially adverse effect on our business, financial condition and results of operations

If consumers do not continue to use the payment options as a payment mechanism for their transactions or if there is a change in the mix of payments between cash, alternative currencies and technologies, which is adverse to us, it could have a materially adverse effect on our business, financial condition and results of operations. Moreover, if there is an adverse development in the payments industry in general, such as new legislation or regulation that makes it more difficult for our clients to do business, our business, financial condition and results of operations may be adversely affected.

18. Our risk management framework to mitigate our risk may not be fully effective against all types of risks.

Our risk management framework seeks to mitigate risk and loss to us. We have established processes and procedures intended to identify, measure, monitor, manage and report our risks. However, as with any risk management framework, there are inherent limitations to our risk management strategies such that there could be risks that we cannot anticipate or identify. If our risk management framework were to become ineffective, we could experience unexpected losses that could have a material adverse effect on our business, financial condition or results of operations.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

We have well-documented policies and procedures, which cover all financial and operational functions, thereby ensuring an adequate system of internal controls in place. These aid in providing a reasonable assurance regarding maintenance of proper accounting controls to ensure that financial reporting is reliable, operations are monitored, assets are protected from unauthorised use or losses and regulations are well complied with. As always, our processes and controls are in alignment with the best global practices.

Some significant features of the internal control systems are: At all locations of IAL, the Internal Auditor monitors and evaluates not only the efficacy and adequacy of existing internal control systems, but also their compliance with the operating systems, accounting procedures and policies. On the basis of the report prepared by the Internal Auditor, respective process owners carry out corrective actions, thereby strengthening the existing controls. Major audit observations and the respective corrective actions taken up are presented before the Board.

As per the listing requirements, documentation of major business processes and testing thereof are conducted, which includes financial closing, computer controls and entity-level controls, as part of our compliance programmes. We are very strict with our security policy and update our IT systems on a periodic basis.

As part of the established practices for all operating and service functions, detailed business plans for each segment, investment strategies and year-on- year reviews, annual financial and operating plans and monthly monitoring are carried out.

An independent, well-established and multi-disciplinary internal audit team operates in line with the best practices of governance. It reviews and reports to the management and the Audit Committee on compliance with internal controls and the efficiency and effectiveness of operations as well as the key process risks. The scope and authority of the Internal Audit Division is derived from the Internal Audit Charter that is duly approved by the Audit Committee as well as the anti-fraud programmes, including whistle blower mechanisms that are operative across IAL.

Throughout the organisation, the Board takes responsibility for the overall process of risk management. As per IALs objectives, our business units and corporate functions address risks via an institutionalised approach through an Enterprise Risk Management programme, after which an internal audit is carried out. The Risk Management Committee reviews business risk areas covering operational, financial, strategic and regulatory risks. The business risk is managed through cross-functional involvement and communication across businesses, the results of which are presented to the senior management. During FY 2022-23, we conducted an assessment of the effectiveness of the internal control over financial reporting and have determined that our internal control over financial reporting as on March 31, 2023 is effective.

HUMAN RESOURCES

Employees are the ultimate force behind our Companys success. We consider it our responsibility to provide our people a favourable, secured and supporting work environment. At the same time, we have in place a well-defined Code of Conduct and ensure that ethical business practices are followed at all levels of the organisation. To maintain a constant connect between the organisational goals and employee performance, we have put in place a fair and objective performance management system. Our appraisal mechanisms help in identifying the best performing employees and rewarding them accordingly in terms of the best-in-class compensation packages. To sharpen the existing skills and for the overall development of our employees, we conduct training programmes from time to time. This also helps us in identifying the loopholes in our existing talent and the taking necessary steps to address them in the best manner possible. It is because of this consistent involvement with our employees that we have been able to maintain our position as one of the most sought-after employers. As on March 31, 2023, we had an employee strength of 713 people.