Vijay Shekhar Sharma, founder and CEO of Paytm, said in a recent online conference that the company will be profitable by the end of 2021. The fintech’s licensed banking arm already is, but payments by themselves don’t make money.
He is using expansion into a variety of financial services to generate new revenues, with data from payments as the backbone for product ideas. For example, he announced in July that Paytm was launching a stock broking feature to its mobile wallet.
But some of these acquisitions have a strategic, longer-term goal, especially when it comes to a recent foray into insurance.
From insurance to lending
“We’re finally starting to build a full financial stack,” Sharma said. Paytm launched a licensed payments bank in 2017 (which cannot lend by itself, and has smaller government deposit guarantees), followed by gold sales and third-party mutual funds. Patym also launched an e-commerce site, which is a distant third in India behind Flipkart and Amazon.
The payments bank generates revenues from the interest-rate float and from transaction fees. It does not charge for digital money transfers (unless customers carry out transactions on paper).
To lend, though, Paytm Payments Bank will need to find partners with a balance sheet. Earlier this year it began offering debit cards via Mastercard, but not yet credit. Although Sharma is pursuing such deals, he says the greater goal is to build up insurance assets that can be then used to lend.
Earlier this year, Paytm acquired Reheja QBE General Insurance. Paytm has already built an agency force to sell third-party employee benefit plans, but now it will be able to create and sell its own products.
“We’re chasing revenue profit pools,” Sharma said. “We’re small in insurance, but if we want to be a big company in 10 years, we need to be big in insurance. Life Insurance Corporation [of India], AIA, Berkshire Hathaway: all the large pools of capital available to be deployed are in insurance. In 10 years from now will we be able to bring capital to lend? That’s where insurance players a role: insurance is a profit pool because it lends.”
The profits of payments
That vision, however, won’t get Paytm to profitability right away.
Although it is India’s highest-profile fintech, with backing from Alibaba and Softbank, Paytm has not been able to sufficiently dominate digital payments to monetize it directly.
Founded in 2010, the company’s fortunes soared in 2016 when the Narendra Modi government removed rupee banknotes from circulation in an attempt to stamp out financial crime. Indians flocked to digital wallets and Paytm said by 2017 it had registered 280 million users.
Today it makes money primarily from serving merchants: with 17 million businesses, Paytm leads this sector, and can charge admin fees for things like bill payment.
Since then, however, banks, telecom companies and e-commerce players have all jumped into the mobile wallet space. KPMG estimates there are now 45 standalone mobile wallets in India.
But that’s not all. American competitors such as Google Pay and Amazon Pay leveraged India’s own digital infrastructure to win a large share of the market.
These companies can launch apps on the back of United Payment Interface, part of the government-built “India Stack” that combines biometric identity with mobile-enabled payments. There are at least 50 companies offering services off the back of UPI, says KPMG.
Just how digital is India?
The market is even more crowded than that: today Sharma says Paytm has 350 million users that have used the service at least once. But he says big numbers about India’s online population are overblown. UPI, the backbone for digital payments in India, has perhaps 130 million users. Paytm itself has probably around 160 million to 180 million active users – or about one-third the approximately 500 million Indians who are online.
This is a low portion considering the efforts that have gone into the government’s building digital infrastructure, the emergence of businesses like Paytm, a demonetization campaign, and COVID-19. Sharma says use cases are still immature: the majority of people aren’t yet convinced that digital offers are better than those involving cash, or they don’t trust it.
For this reason, Paytm ended its cashback schemes to win new business. “We figured out who the loyal customers are, the ones who aren’t just there for cashbacks,” Sharma said. The company offered incentives for three years to build a customer base. Now it needs to monetize.
Sharma says ending cashbacks last year cut costs while revenues grew: “We wanted to see if there were actual customers sticking around on our platform, and there are.”