Paytm Crisis: Can Founder Vijay Shekhar Sharma Still Save the Fintech Major?

Paytm Founder Vijay Shekhar Sharma is back in the trenches after RBI’s recent action left him without a banking platform. There are still some opportunities, but he will have to move swiftly to grab them

Vijay Shekhar Sharma’s digital payments journey has weathered many a storm over the years. Now, the 46-year-old’s situation is akin to rowing a boat constantly springing leaks. Sharma fixes one hole, only for another to spring up. 

Let’s go back a bit. Sharma’s One 97 Communications Ltd (OCL), founded in 2000, pioneered the use of QR codes at merchant outlets much before the demonetisation in 2016, giving its brand, Paytm, a head start. Soon after QR codes became popular, the government came up with the Unified Payments Interface (UPI), sparking a revolution in the digital payments space. UPI levelled the playing field, and service providers such as Google Pay and PhonePe cornered a lion’s share of this. While demonetisation did give a boost to payments firms, it became clear that Paytm’s UPI business was financially unviable because of the near absence of the merchant discount rate (MDR)—a fee that a merchant is charged for accepting payments.

“ We expect profitability to improve, because many of the relationships we have with PPBL… are solvable
through third-party partnerships ”

 

MADHUR DEORA
President & Group CFO
Paytm, During a call with investors

Sharma then diversified Paytm, which has SoftBank and Alibaba as investors, into a loan distribution and investment products firm, using the payments insights of customers and merchants. Just as things began to normalise after Covid-19, regulatory scrutiny over Chinese ownership created uncertainty. Sharma quickly reduced Alibaba affiliate Ant Financials’ stake and increased his own to 19.4%. 

Then earlier this year, OCL suffered a major blow when the Reserve Bank of India (RBI) took action against its associate entity, Paytm Payments Bank Ltd (PPBL), for persistent non-compliance with KYC norms and other issues. PPBL was barred from accepting fresh deposits or top-ups in any customer account, prepaid instruments, wallets, FASTags, etc., after March 15. Will Sharma be able to put Paytm back on track this time?

Some experts like Barnik Chitran Maitra, Managing Partner of Arthur D. Little (ADL), India and South Asia, feel that Sharma lacks focus. “He has not been able to scale up any business to market leadership with several bets such as Paytm Mall failing spectacularly. He needs to focus on the one or two businesses that he believes has the potential to scale and achieve market leadership,” says Maitra, adding that there is also the issue of credibility in the financial sector. “He has to work hard to earn that trust back. The banking system operates on trust. Your loan partners need to trust you, your mutual fund (MF) partners need to trust you, and everyone in the ecosystem needs to trust you, particularly regulator RBI.” 

Paytm’s core focus is on acquiring customers for payments (currently at 100 million-plus monthly transacting users) and leveraging that data to build a financial services business. How has RBI’s action affected Paytm, that has more than three dozen subsidiaries and associates, and connects retail customers and merchants? RBI’s moves have impacted one of Paytm’s three business lines, namely payments. (Financial services and marketing are its two other business lines.) Revenues from payments, that make up more than half its total revenues, may experience a hit due to RBI’s restrictions. But Paytm insiders claim that minus payment gateway costs, the share of the three businesses is one-third each.

Days after RBI’s move, Sharma termed the PPBL action as “more of a big speed bump”. He assured investors that in partnership with other banks and the capabilities that Paytm had developed, the company will be able to get through. “And from here on, we are very clear that we will work with other banks… OCL has already been working with other banks for the past two years,” he told investors in a February call. Sharma declined to participate in this story because of Paytm’s silent period—its FY24 results will be out soon.

Back to Paytm. There are multiple businesses within its ecosystem. There is an unsecured lending business: buy now, pay later (BNPL), merchant loans, personal loans, and collection & loan recovery services. But growth is slowing due to overheating and the RBI’s regulations, asking for higher capital allocation. The entry of Reliance Industries Ltd’s (RIL) Jio Financial in the merchant payments market, particularly its subscription-based device strategy, is expected to compound Sharma’s troubles. Payments players like Google Pay and PhonePe also have plans to scale up financial services. To top it all, RBI’s decision to allow banks to offer credit lines on UPI at merchant outlets will enable major banks to encroach upon Sharma’s loans business. Paytm also has a discount broking business on the equity side, akin to what Zerodha does, along with the distribution of MFs and insurance. The third revenue line is the marketing business, but that remains unaffected by the RBI action.  

“ [Sharma] needs to focus on the one or two businesses that he believes has the potential to scale and achieve market leadership ”

BARNIK CHITRAN MAITRA
Managing Partner
Arthur D. Little
India and South Asia

“Paytm has to figure out the model, and frankly, knowing its record and DNA, it may have the user base, but it does not have a product that will work because everyone is happy using PhonePe and Google Pay for payments, MakeMyTrip for travelling, BookMyShow for entertainment,  Zerodha for discount brokerage, and  Policybazaar for buying policies,” says Kunal Nandwani, Co-founder and CEO at uTrade Solutions, an algo trading firm. So where does Paytm go from here?

Changing Tides

Over the past two years, Paytm has witnessed a significant shift from UPI (non-MDR businesses) towards non-UPI businesses in the payments vertical. “The growing demand for faster and real-time payments across merchant segments opens up opportunities to rethink revenue strategies beyond traditional MDR-centric business models,” says Deepak Chand Thakur, Co-founder & CEO of NPST Ltd, a banking and payment services provider. Paytm is doing exactly that by directing its focus towards medium- to large merchants in need of payment devices (such as Soundbox or card processing machines, which yield higher GMV) to create a subscription-based revenue model. Paytm has close to 40 million merchants, 10.6 million subscription-based devices installed, and innovative instruments like dynamic QR code, which seamlessly integrate with the merchant’s billing system. Sharma is looking for a larger slice of the non-UPI payments pie through the device strategy to ensure the business model sustains. The third line of non-UPI revenues under payments is platform fee, collected from select merchants or service providers utilising the Paytm app. Retail customers also pay a platform fee to purchase movie tickets or book entertainment shows, as well as for using services like bill reminders and autopay. 

Clearly, Sharma is on track to transform a low-margin payments business. But he faces two challenges. First, the device strategy requires a field force and capital expenditure. Second, Jio has also commenced installing its soundboxes at merchant outlets. “The merchant payments sector operates within a scale-driven paradigm. In India, the acquiring landscape remains local and predominantly offline,” says Thakur. Sharma will have to build the payments business around the device strategy, he adds. A big benefit is monetising merchants for loans and other financial products.

Caught in the Melee

Sharma stepped up his lending business long before the PPBL restrictions were put in place. Over the years, Paytm has onboarded eight lending partners, including Tata Capital and Shriram Finance. Sharma often calls it the 2×2 approach: the loan amount is less than Rs 2 lakh and the tenor is not more than two years. The model is simple—Paytm acts as a distributor and marketer of loans, services loans, and does collections. The value of loans originated for partners was Rs 15,535 crore in the Q3FY24. This business is growing by 50%-plus YoY on a low base.   

Paytm had paused the distribution of personal loans for a few days after the PPBL ban. This was because its partners were updating their risk committees, managements, or boards. “Certain aspects, such as merchant loans, require assurance that if a loan is given today, the QR code will still be functional 45 days from now. In the first half of March, RBI and various bank partners provided the final confirmation,” says a company insider. In its recent report, financial services major Macquarie raised the possibility of lending partners reassessing their relationships with Paytm for loan origination after the PPBL affair. On top of that, in the past 12 months or so, the unsecured loans market—particularly for entry level smaller ticket size loans to new-to-credit customers—has seen higher stress. Paytm, with Paytm Postpaid, its product in this space—with an average ticket size of Rs 6,800—has been hit hard. “The BNPL business has collapsed for all players due to RBI’s caution regarding consumption-related small-ticket loans,” says a market player.

Deepak Chand Thakur
Co-founder & CEO
NPST Ltd

Paytm is aligning its policies closely with RBI’s directives. Postpaid constitutes one-third of its volumes but yields significantly lower margins compared to other loan products. The company’s personal loans business is dependent on Postpaid, as these borrowers graduate to a higher limit of up to Rs 1 lakh after one year. Paytm’s primary focus is now on merchant loans and big-ticket loans. Merchant loans, where the average ticket size has increased to Rs 2 lakh, have an average tenure of 13 months. Sharma was quick to diversify the loan basket to longer maturities of one to three years. As its customer base grew, Paytm shifted its approach from hunting for new customers to farming existing relationships. The bigger ticket size loans are based on whitelisted customers who have some history of repayments and good credit behaviour. Paytm is also eyeing banking partners, which generally offer bigger ticket size loans.

Experts say Paytm’s loans are concentrated in the risky unsecured space. Unlike banks, which also deal in mortgages and vehicle loans, Paytm has no diversification strategy to save itself from problems in one segment. “The biggest challenge is the ability of Paytm to attract new lending partners to its network,” says an NBFC player, who declined to be named. Some suggest that KYC and other compliance issues will make the partners sceptical about associating themselves with Paytm. Jio’s entry into lending (possibly via free soundboxes) is another challenge, they add.

Diving for Pearls

However, there are bright spots. Less than 5% of those who use the Paytm app use the loan facility, and this offers a huge opportunity. Then, Paytm adds 1-1.2 million devices every quarter, and once it has data for 6-12 months, its lending partners can start offering loans based on that data. Second, Paytm has till now offered credit facilities to just one-third of merchants who installed Soundboxes. Insiders say there are also discussions on diversifying into secured loans for lending partners. These could be small property loans or auto loans, such as for two-wheelers.

Then there’s Paytm’s investment business—which comprises equity, MFs and wealth management—and is yet to see scale. On the equity side, Paytm operates as a discount broker, tapping opportunities in the F&O segment and equity trading. In the MF space, it prefers customers creating more SIPs. But it won’t be easy. Zerodha, Groww, Upstox, and Angel One control close to two-thirds of the market in the broking space. Unlike Paytm, Zerodha’s customer base is aligned to cross-sell MFs or other stock lending-related products. “Paytm’s customer base mostly visits the website for ticketing, discounts or to pay utility bills, etc. It is going to be a challenge to sell them equity, MFs, or insurance,” says a market player. 

Currently, subsidiary Paytm Insurance Broking operates as an insurance aggregator. Four years ago, OCL decided to buy 100% stake in Raheja QBE General Insurance Company. But the transaction could not be completed. In April 2022, Paytm announced its intention to enter general insurance via the organic route with the company’s board approving Rs 950 crore in investments over the next 10 years. But there hasn’t been much progress. “You need to hold a licence to create products, rather than distribute, to earn annuity in the financial services industry,” says a person who runs an NBFC. 

In the insurance aggregator space, there are market leaders such as Policybazaar, Coverfox, and Easypolicy. Despite having the first-mover advantage, the 15-year-old PB Fintech—that owns Policybazaar—is finally expected to report profits in FY24, which speaks volumes about the competition and low margins in this space. In addition, there are insurtech or digital-only insurers like Acko and Digit, which are carving out a niche in the digital space. Paytm will face significant challenges to scale and make money in these businesses. 

Paytm’s marketing services business (called Commerce & Cloud earlier) is primarily about providing marketing solutions to its merchants, especially brand marketing, advertising, and loyalty services. “This business will likely witness minimal impact from the ongoing upheaval post the recent RBI restrictions,” states a report by brokerage Motilal Oswal. Merchants offer deals, gift vouchers, discounts, coupons, ticketing, etc., and Paytm can sell those. On the commerce side, it has travel, entertainment and deals, and gift vouchers. This business will continue to look for new use cases where it enables different commerce services for merchants on its app. The co-branded credit cards distribution business for HDFC Bank, Kotak Mahindra Bank and SBI comes under the advertising vertical, and Paytm has acquired more than 1 million consumers for them. That’s 125% growth YoY.

The Way Ahead

Before RBI’s action, Paytm was on course to report net profits in the near future. Now, Motilal Oswal estimates payment revenues could decline by 27% in FY25, attributed to the decline in GMV, impact on wallet transactions, and loss in merchant and customer base. “We project a 28% cut in payment processing margin primarily due to reduced business volumes and an adverse mix as the share of high-yielding wallet business sharply declines,” it states in its report. Global financial services firm UBS, in its February report, expects FY25 to be weak for Paytm. OCL, the holding company, has already guided for a margin hit of Rs 300-500 crore on its annual Ebitda. But Madhur Deora, Paytm’s President and Group CFO, is optimistic. “Over time, we expect our profitability to keep improving, because many of the relationships that we have currently with PPBL, they’re all solvable through third-party partnerships,” he told investors during a February call.

But, there will be a cost. “We expect Paytm to increase its marketing spend to win back lost customers, resulting in elevated Ebitda losses in FY25, which drives our EPS cuts,” the UBS report says. Sharma will have to bank on higher-margin products like bigger ticket size personal loans as their Ebitda contribution is significantly higher than postpaid loans. Paytm claims lending and advertising in particular contribute a significant amount of high-margin monetisation. 

OCL’s stock, trading at Rs 412 a share with a market valuation of close to Rs 26,200 crore as on April 8, 2024, has seen a big fall from its IPO price of Rs 2,150 a share. Investors will be watching Paytm’s ability to recover the lost business at the earliest. Experts say it all seems good if Paytm has infinite money. But being a publicly listed company and the fact that its shares are now priced at nearly one-fifth of what they listed at, any equity dilution would impact the market ratios. 

Paytm looks particularly vulnerable as it would be difficult to obtain licences from regulators for an NBFC, AMC or even insurance firm, dashing Sharma’s hopes of owning a bank. Maitra of ADL says Paytm’s international investors would be happy with a good buyout or M&A offer, which allows them to capture some upside. “If I were a sensible private equity or a venture capital investor in Paytm, I would welcome a consolidation with a strategic player with deep pockets and the intent of investing in the growth of the business,” he says. 

The other option for Sharma is to go the whole hog as a platform company as it already has a brand. “They have the ability to build a new product or business, but they’ll have to completely reinvent themselves, which is a very hard thing as regulators, investors, and the market are against it,” says uTrade’s Nandwani. 

Sharma is focussing on innovation to take Paytm to the next level, betting big on the power of Gen AI. “We believe that Paytm will have to become a completely AI company,” he said recently. At a technology conference in Tokyo, his first public appearance after RBI’s action, he emphasised the importance of taking charge of the situation and business initiative instead of relying solely on teammates or advisors, acknowledging that they may not always have the correct understanding. As he works hard to fix the leaky boat, new challenges may emerge. 

While Paytm continues to chase new opportunities and recalibrate its strategy, the rapidly changing operating environment will throw new curveballs. Sharma could take a leaf out of Jamie Dimon’s playbook. “I don’t know what will happen in the future, but what I focus on is keeping JP Morgan really strong and keeping my regulators happy,” the CEO of JPMorgan Chase & Co. had said. 

Will Sharma be able to do a Dimon? Only time will tell.