India has been swept up in the global gold rush for financial technology startups. As the frenzy grows, Paytm, the country’s largest homegrown digital payments company, is in a pitched battle with international giants like Walmart (which runs a service called PhonePe) and Google.
Paytm’s story shows how the landscape has changed. When it was founded nine years ago, Paytm faced little competition. Mobikwik and a handful other local firms were its only rivals at the time.
Since then, executives and investors have woken up to the opportunity in the world’s second-most populated country, which is growing in wealth and smartphone penetration but has traditionally lacked adequate financial services. The chance to bring finance to the masses is a huge opportunity, as India’s digital payments sector is expected to grow from $200 billion in 2018 to $1 trillion in 2023.
For now, Paytm is the industry leader, with a market share of around 60% in 2018. However, in recent years, deep-pocketed global giants have rolled in to get a piece of the market, sparking an expensive battle to win over customers.
“When it comes to financial resources, Google won’t find it difficult to find more funding or investment. Similarly for PhonePe, Walmart already has deep pockets,” says Arnav Gupta, a research analyst with Forrester. “Paytm, they really need to get more and more funding to compete against both of these players.”
Another formidable competitor is waiting in the wings. Facebook-owned WhatsApp, which started a beta test for its payments feature in February, has won more than a million Indian users. While regulatory approvals are keeping it from a full-fledged launch, experts warn that Paytm could be dethroned almost instantly, if and when the Facebook service goes live.
As the competition heats up, Paytm is throwing cash not only at its payments business but also at other ventures. “We are expanding from payments to consumer internet and a much larger new-age financial services play where our initial efforts have demonstrated traction and proven its ability to cross-pollinate multiple offerings to our users,” says Vikas Garg, Paytm’s deputy chief financial officer. The plan is to “double down” by offering “more financial products and services across lending, insurance, investments, and stockbroking to the masses.”
Paytm’s story starts in 2000, when Delhi College of Engineering alumnus Vijay Shekhar Sharma, or VSS, founded One97 Communications, a mobile value-added company which offered cricket scores, horoscopes, jokes, and movie songs. VSS eventually recognized that simple feature phones—the iPhone came to India in 2009—would be replaced by smartphones. The name Paytm was born in August 2010, when he got into mobile commerce by launching a company to help people to pay by phone.
Paytm was growing sluggishly until three years ago, when the government’s demonetization policy wiped out 86% of the cash in circulation in India. The government effort was controversial, as it sparked cash shortages and economic difficulties, but it gave Paytm a shot in the arm. These days, Paytm has more than 300 million users.
“It created a new business model, scaled it up and built a strong brand with good national salience and reach,” said Harish HV, an independent analyst who tracks the startup sector. “It covers a huge number of customers and establishments, which is a key strength for it.”
The company pioneered low-cost digital payment acceptability in India using QR-code technology in local shops and retailers. About 14 million merchants use its platform, enabling over 800 million transactions a month. Paytm serves the largest network of unorganized merchants across 650 districts in India, penetrating even tier 3 and 4 towns and villages. The government’s digital push, and payment-enhancing features such as traffic fines and highway tolls, have also helped the platform grow.
Most people only focus on Paytm’s massive user adoption, deputy CFO Garg says. “What is not seen is that many of the product offerings on Paytm are the first to markets. Our teams have worked on the ground interacting with users and merchants to gather their insights to build from the ground up,” he adds.
The company has a multi-prong effort to get new customers. Offering the app in multiple languages helped build up users across India’s regions, especially in tier 2 and 3 cities, says Sukriti Seth, a consultant at Noida-based TechSci Research.
Its greatest strength is its ubiquity. Paytm has a high average transaction frequency coupled with low average transaction value. “Paytm is becoming a habit for consumers who use it for daily items rather than discounts-driven usage,” Aman Kumar, chief business officer at Kalagato, told Quartz earlier this year.
A major concern, however, is that Paytm has acquired many of its new users on the back of hefty discounting and cash back offers. “On account of brand building and business expansions, Paytm is currently incurring huge losses,” says Seth of TechSci. While this is an inevitable part of introducing India’s first-time internet users to a new practice like digital transactions, it comes with a heavy financial burden.
Indeed, the nearly decade-old company has not been able to reduce its losses. In fact, they are getting worse.
Dealing with disruptors
Even before competition started heating up, Paytm went through a series of ups and downs.
In 2016, the National Payments Corporation of India launched Unified Payments Interface (UPI), a simple system that allows users to transfer money via an app without the need for any bank account details. India clocked 1.2 billion UPI transactions this November, up 132% from a year earlier. While other countries looking to learn from India, the government program has undercut private companies like Paytm.
The first UPI-based application, BHIM, was free for merchants and customers. “The moment any of these banks or startup tech firm starts charging, it’s very convenient for customers to move to BHIM. The switching cost is almost next to zero,” says Forrester’s Gupta. In 2017, Google Tez (now Google Pay) piggybacked on UPI payments and had immense success.
For the likes of Paytm, UPI has been bad news because it is making mobile wallets obsolete. Paytm sought to counter, and in May 2018 the company integrated BHIM UPI onto its platform, but it hasn’t been a big success so far. While UPI payments have risen overall, they’ve dipped on Paytm, while rivals Google Pay and PhonePe lead by a mile.
Separately, know-your-customer rules set by the Reserve Bank of India threw a spanner in the works for prepaid instruments like Paytm, locking out people who didn’t verify themselves in time. In October 2018, there was internal turmoil with VSS allegedly being blackmailed by his own employees.
The upside for Paytm is that it survived these storms and diversified along the way. The downside is that it is still spending heavily.
Despite the turmoil, there’s one thing Paytm has had little trouble with: fundraising.
To ward off rivals and expand into new initiatives, the company has tapped a continuous inflow of funds. On Nov. 25, Paytm raised $1 billion from US-based T. Rowe Price and Japanese investing giant SoftBank at a staggering $16 billion valuation. It was the second time Paytm had raised more than a billion dollars in less than three years.
SoftBank now has a 20% stake in the company. Alibaba’s shareholding is around 40% in the parent company, and 42% in Paytm Mall, which became an independent entity in August this year. In addition to deep pockets, these marquee foreign investors also bring years of experience.
Chinese internet giant Alibaba, for instance, has participated in several funding rounds. The conglomerate, with its marketplace and financial services arm Alipay, is an inspiration of sorts for Paytm. The Indian company “is an ecosystem like Alipay or WeChat,” says Gupta from Forrester. “That’s the exact model that I can see Paytm following.”
Apart from the e-wallet and mobile payments, Paytm also provides users with things like online shopping, ticket booking, and features to buy gold. In the future, the Noida-based firm is planning to invest around $30 million to include live TV, news, cricket, entertainment videos, and games in its app.
Paytm’s newer ventures have had some successes. Within two years of setting up operations, Paytm’s Payments Bank became India’s only profitable payments bank with over 52 million users. The firm’s wealth management arm, Paytm Money, is among the largest platforms for mutual fund investments in India, on-boarding less market-savvy Indians with lower-ticket investments.
“Both these entities have an extremely strong and capable leadership team that runs these businesses independently of Paytm,” says Garg, the company’s deputy CFO. “We are confident that we can replicate this success into more financial services like lending, insurance, credit and also ramp up other consumer businesses like travel, movies, and gaming.”
Paytm is also making a play in India’s $100 billion education sector with admissions, doorstep delivery of stationery and uniforms, education insurance, and loans.
Experts see merit in trying out new ventures. The “vast majority of payments monetization is likely to be driven by cross-selling other services,” a recent Bernstein analyst note said, citing lending, working capital, cash advances, and cash at point-of-sale as examples.
What’s more, Paytm launched in Canada in 2017. There, it is solely a bill payments app. Users can add credit cards, utility bills, loans, and rent, and get rewarded points for making payments. These can be redeemed at Starbucks, Uber, Sephora, Netflix, and Tim Hortons, among others. It is the top finance app on both the Google Play Store and Apple App Store in the country.
More recently, in October 2018, in a joint venture with Softbank and Yahoo Finance, Paytm introduced a barcode-based payments app in Japan called PayPay. As of last month, it had racked up 20 million customers.
“We, in India, are capable of building a low-cost, highly scalable model in an extremely competitive environment,” says Gard. “The winner of the Indian market can achieve success anywhere.”