Here’s why three of India’s unicorns are backing this one-year-old fintech startup

Over US$1.2 billion of investor money has gone to fintech in India this year, making it one of the hottest verticals for venture capital. The reason is that ecommerce, mobile, and internet businesses are taking off, and their toughest pain-point is the difficulty in accepting payments. Often, a customer will give up because a card or netbanking transaction fails because of a connection problem or some other hitch.

A number of players have come up in the last few years – from Sequoia Capital-backed CitrusPay to Flipkart’s in-house attempt PayZippy (which has since shut down) – to try making online payments smoother and more efficient. One-year-old Razorpay, one of the few companies from India to get backing from iconic seed accelerator Y Combinator, is among the rising stars in the space.

The startup today announced a series A funding round of US$9 million from Tiger Global and Matrix Partners, and disclosed an earlier seed round of US$2.5 million from Matrix Partners, Y Combinator, and angel investors, taking its total investment to US$11.5 million. The angels include the founders of Snapdeal and InMobi, as well as the chief product officer of Flipkart – three of India’s unicorns.

The Razorpay team

Razorpay has focused on developing the technology to solve India-specific problems. The biggest one is the failure rate of card and netbanking transactions, which is as high as 30-40 percent on the web and nearly 50 percent on mobile devices. This is what the startup is striving hard to reduce, Razorpay co-founder Harshil Mathur tells Tech in Asia:

We have focused especially on mobile success rates where our patented technology allows transactions to work at 2G speeds, perform auto-OTP reading and reduces the overall checkout time.

India has a two-stage authentication process for online payments. This involves receiving an OTP (one-time password) on a registered phone and entering it in a textbox to complete the transaction. Connections are slow and many users are simply unable to read and punch in the numbers in time before the transaction fails. So an auto-OTP reader makes life easier.

Big opportunity in the high failure rate

Razorpay is an online payment gateway. In other words, it’s the middleman between an online merchant or marketplace and the payment issuing institutions like banks or instruments like digital wallets. For instance, if you want to buy a pair of silver earrings from a niche ecommerce site, the merchant will send encrypted credit/debit card information to the payment gateway, which will then authorize the information with the bank. The money will get transferred from your account to the merchant’s account after that, again via the gateway.

The high failure rate in this online payment process is one of the main reasons for the popularity of cash-on-delivery, digital wallets, and other such instruments in India. According to Harshil Mathur, the lack of technical innovation in payment gateways and a sales-focused approach by the biggies in this space has made it a laggard in the midst of an ecommerce and mobile business boom.

5 problems Razorpay aims to solve