Paytm To Get Additional Revenue From PPI Interoperability For UPI: Analysts

Brokerages Morgan Stanley and Citigroup expect Paytm Payments Bank Ltd’s (PPBL’s) move to enable interoperability of its wallet for UPI transactions to bring in additional revenue for the associate company of fintech giant Paytm. 

PPBL on Monday (March 27) said it would allow its full KYC wallet customers to now make payments by scanning any Unified Payments Interface (UPI) QR code and pay any online merchant who accepts UPI payments. 

The development came on the back of the National Payments Corporation of India’s (NPCI) new guidelines issued on March 24 that said wallets will be interoperable for UPI payment from April 1, 2023.

Morgan Stanley said that the development could lead to PPBL receiving additional revenue.

“If well adopted by Paytm wallet users/merchants, the benefit could be meaningful, as Paytm Payments Bank is the largest issuer of KYC wallets with more than 100 Mn users,” the brokerage said in a research note. 

However, Morgan Stanley also noted that One97 Communications’ subsidiary would have to pay higher wallet-loading charges. The cost of wallet loading service charges that PPBL would have to pay to the remitter bank would be 15 basis points (bps) for transactions above INR 2,000 done via UPI, which was zero till now, it said.

The brokerage said it is difficult to fully quantify the potential impact of the changes currently due to limited data availability as well as lack of clarity on potential Paytm wallet adoption at other merchants.

It must be noted that Paytm has an estimated market share of around 60% in wallets.

Citigroup noted that universal acceptance of wallets across all UPI QRs and devices would increase the salience/ relevance of wallets, which is a positive development for Paytm given the startup’s large market share in the segment.

“Wallet loading charges will be paid by issuers like PPBL to remitter banks. For Paytm itself, these changes impose regulator-defined interchange commercials in place of the extant bilaterally-agreed commercials between Paytm and PPBL, and is, therefore, a positive from governance perspective,” it said.

Citigroup maintained its ‘buy’ rating and a price target (PT) of INR 1,061 on One97 Communications or Paytm, while Morgan Stanley maintained its ‘equal-weight’ rating and INR 695 PT on the stock.

Paytm shares fell by 0.6% to INR 617.5 on the BSE on Tuesday (March 28).

What Is Interchange Fee?

Interoperability between wallets for UPI transactions was announced by the Reserve Bank of India (RBI) last year. However, there were obstacles in its implementation as payment companies were finding it difficult to pass on the interchange fees in merchant transactions.

In its recently issued circular, the NPCI stated that UPI transactions made via prepaid instruments such as wallets will carry an interchange fee between 0.5% to 1.1% for payments above INR 2,000 to online merchants, large merchants, and small offline merchants.

Commenting on the impact of the move on PPBL, One97 Communications said that the bank would earn 1.1% interchange revenue when Paytm wallet customers make payments on merchants acquired by other payment aggregators or banks.

PPBL will now earn additional interchange revenue from merchants acquired by other payment service providers, payment gateways, and payment aggregators.

As per the circular, the issuers of Prepaid Payment Instruments (PPIs) will also have to pay 15 bps as wallet loading service fee to the remitter bank for loading a transaction of over INR 2,000.

Welcoming NPCI’s circular, Paytm said, “As the pioneer of mobile payments and QR-based payments, this move presents incredible growth opportunities for India’s payment ecosystem.” 

Besides wallets, Paytm is also one of the top players, along with PhonePe and Google Pay, in the UPI ecosystem. In February, Paytm processed 113.7 Cr transactions (15.1% of the total UPI transactions) worth INR 1.36 Lakh Cr.