Rules, red tape, and the unexpected moat behind Razorpay growth

This article summarizes an episode of Y Combinator’s video series  featuring Harshil Mathur, co-founder and CEO at Razorpay.

Harshil Mathur, co-founder and CEO at Razorpay/ Photo credit: Razorpay

Harshil Mathur, co-founder and CEO at Razorpay, refuses to replace his customer support teams with AI.

As the leader of an Indian payment platform processing over US$180 billion annually, Mathur says the tech industry’s obsession with cost-cutting risks weakening customer trust.

He emphasizes that protecting your reputation requires real humans to take responsibility for inevitable system failures. Surviving this sector requires dealing with huge red tape, but Mathur sees this as a hidden strength.

Government rules as an advantage

Founders often complain that brutal regulations kill innovation, missing the huge hidden benefit: navigating strict red tape builds a nearly impenetrable wall against competitors.

Mathur says these barriers are painful, they protect you once you cross them. He recalls the pressure of going through Y Combinator’s three-month program without processing a single payment due to pending banking approvals.

“It took us a year after that to do our first live transaction,” he says. However, because every future competitor will face those exact same delays, he explains that “the hurdles become a moat over time.”

The same rules apply to everyone
The grueling process guarantees a level playing field where patience beats raw money. “The regulation can seem unfair, but the best part is it’s actually very fair,” Mathur argues.

“No company, no matter how big or small, can clear a different set of rules,” he says, adding that very few companies have the patience or energy to go through the process.

The hidden risks of banking partnerships

Even with government licenses keeping competitors out, financial startups still face huge vulnerabilities. They rely on legacy banks to process payments, meaning a startup can write flawless computer code and still be destroyed by a sudden bank decision.

Mathur recalls the terror of their first major outage: “Two weeks after Demo Day, the bank that had enabled us pulled the plug. They completely stopped our platform. We had at least 50 customers live. One day, all of them were shut down.”

This kind of failure threatens total destruction. “In a payments business, trust and reliability are so critical,” Mathur says. “Once these guys go out and say, ‘Razorpay duped us,’ we’ll never be able to establish trust.”

Handling the mess of sudden shutdowns

When banking partners pull the plug, startups must explain the mess to angry users. Many hide behind vague PR statements, which only drives customers away faster. Mathur says the better approach is facing the anger directly.

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