Can Paytm Bounce Back After Torrid FY24?

Fintech giant Paytm hinted at potential layoffs and said it would trim non-core assets after reporting a wider loss in the fiscal year 2023-24 (FY24) and a drop in revenue in Q4FY24, owing to RBI’s action on the Paytm Payments Bank. 

“Led by capabilities of AI and focussing on core business, we are also working on significant cost efficiencies including leaner organisation structure,” founder and CEO Vijay Shekhar Sharma said in the Q4 shareholder letter. 

Paytm reported a 3X year-on-year jump in its net loss at INR 550 Cr in Q4 FY24, as compared to INR 167.5 Cr in the year-ago period. Meanwhile, revenue from operations also dropped 2.9% YoY to INR 2,267.10 Cr as against INR 2,334 Cr in the same period last year.

Sharma highlighted that Paytm’s employee costs have surged in recent years due to investments in technology, merchants sales and financial services. 

However, the CEO also added that Paytm will continue to invest in the merchant acquisition team, risk and compliance functions in FY25. The company is expected to reduce other employee costs. “We will definitely increase the number of people in skilled areas,” Sharma added, without specifying what these areas will be.

Beyond this, the company has outlined its key focus areas in the immediate future as it looks to bounce back in FY25. 

Big Emphasis On Governance And Compliance 

By mid-2023 Paytm seemed to be on track to achieve profitability, but a series of challenges have brought the juggernaut to a halt. 

In December 2023, the company had to rejig its lending business by culling low ticket size loans and the impact of this change was evident in the Q4 FY24 numbers. 

The bigger problem was the RBI’s action on Paytm Payments Bank, which all but nullified the competitive advantage that Paytm held over other payments apps, but also forced it to rethink its payments and merchants businesses. 

Having come through the past couple of months and transitioned out of the Paytm Payment’s Bank legacy, Paytm is looking to put governance and compliance first. 

Soon after the RBI’s action, it was said that the company did not have adequate controls and failed on many fronts such as KYC of merchants and lending customers. 

In response to this, Paytm said in its shareholder letter that it would be “enhancing governance structure across Paytm and its group entities”. The company said it would appoint subject matter experts as advisors or Independent directors to ensure the right leadership for corporate governance. 

It also said it would have greater regulatory engagement and a higher focus on compliance, both in letter and spirit. 

In a separate announcement, Paytm said it changed the designation of its chief business officer Ripunjai Gaur to senior management personnel. The change comes after a slew of high-level executives left the company in April and May this year. 

Focus On Core Payments Biz

The second major focus area in FY25, according to Paytm, would be returning to its core business of payments. 

The company said it would reaffirm its commitment to payments as the core business “by focusing on recovering the consumer and merchant base, making targeted investments to bring them back to the Paytm platform”. 

It’s unclear how Paytm would go about doing this, given that most of its payments business is through UPI, where the revenue upside is limited to a large extent. In Q4 FY24, the company’s net payment margin (revenue minus payments processing charges) increased 24% YoY to INR 853 Cr, but this includes the UPI incentives offered by the central government. 

Without the incentives, the growth was a modest 12% compared to Q4 FY23. This highlights the magnitude of the task in front of Paytm. 

Given that the Paytm wallet business has suffered a big blow after the RBI action, the company would perhaps look to acquire more customers and drive up UPI volumes to boost the overall revenue picture. 

The RBI action on the payments bank pushed Paytm back in the UPI race and now the company has to spend to acquire or retain users through incentives and cashbacks. 

“With 80-85% of our payments GMV now coming from UPI, our payment processing margin, including UPI incentives, is expected to settle at 5-6 bps,” the company said. 

Cross-Selling Financial Services, Insurance

Even in its Q3 investor presentation, Paytm claimed that it would widen its focus on insurance and investment tech verticals. In Q4 too the company is leaning on these two businesses. 

“We are seeing a strong product market fit for our insurance business, where we can leverage merchant insights to co-create shop insurance,” the Q4 presentation stated. 

Besides this, Paytm claims it will expand its insurance business by offering embedded insurance and DIY products that will increase the overall insurance penetration in India. The company said it would offer healthcare, OPD and cashless hospitalisation on a monthly subscription basis, similar to startups such as Kenko Health. 

The fintech giant is also looking to expand distribution of mutual funds by leveraging systematic investment plans, and other wealth management products through Paytm Services Pvt Ltd (PSPL). 

However, both areas are highly competitive and have entrenched players. Acquiring users from platforms such as Zerodha, Groww, Upstox, PhonePe’s Share.Market and others will be a huge task for Paytm. 

Even on the insurance front, it will not be easy for Paytm to stand out from the crowd. It’ll face stern competition in the insurance distribution vertical from the likes of Phonepe, Paytm, Flipkart, Policybazaar among other players, besides insurers that are selling directly.

Paytm Banking On AI-Driven Efficiency

AI has been a persistent theme in Paytm’s drive towards efficiency in the past few months. In December 2023, the company sacked hundreds of employees citing the increasing usage of artificial intelligence-led automation.

“We are transforming our operations with AI-powered automation to drive efficiency, eliminating repetitive tasks and roles to drive efficiency across growth and costs, resulting in a slight reduction in our workforce in operations and marketing. We will be able to save 10-15% in employee costs as AI has delivered more than we expected it to,” the company said at the time.

And now, the company claims, the AI implementation will result in significant cost efficiencies. “Our ongoing experiments and learnings in AI promise to revolutionise customer and merchant care for the financial industry, while also unlocking new avenues for revenue generation and cost savings,” Sharma told shareholders. 

Going forward, the company plans to further leverage AI capabilities to streamline operations and improve “customer and merchant care”. Combined with reduction in workforce, Paytm says this will result in INR 400 Cr-INR 500 Cr savings annually.

This is in line with what CEO Sharma claimed after the Q3 results as well. “Instead of expanding more business functions, we are trying to add capabilities of machines and systems on our platform. So the systems and capabilities will continue to grow which will necessarily create not so much of demand in a linear way of the number of people that we need,” Sharma had said at the time. 

Even as Paytm is looking to rely on AI for efficient growth, The Reserve Bank of India has cautioned NBFCs from becoming over-reliant on automation and algorithm-based credit models, which could force some digital lending platforms to rethink their dependency on AI and automation as well.

Lending Model Rejig

Lending business was one of Paytm’s engines for profitability, but the past few months have resulted in a major downturn in this key vertical.  In Q4 FY24, Paytm’s Postpaid loans distribution shrank 90% YoY to INR 720 Cr and merchant loans declined 28% YoY to INR 1,671 Cr. 

The company said it would be pausing its small personal loans business including the Postpaid portfolio, due to a decline in asset quality across industry. The company reasoned that the small ticket personal loans business involves distribution of the loans as well as collections and recovery, however, for larger value loans, Paytm would only rely on distribution for revenue, thereby reducing its risk exposure. 

The company said that the distribution-only loans have continued to scale well and it has added more lending partners during the quarter, including pilots with banks. “For loan distribution, the majority of the loans were towards the distribution only model (where collection is done by the lender). We will continue to have a higher focus on these loans going forward,” the company said. 

Going forward, the company will be focusing on prime and super prime category customers for the lending business. It said that the segment of borrowers is more price sensitive, and thus is expected to result in lower take rates (distribution commission) for Paytm.

In the earnings call, Sharma added that the company would also venture into secured loans in the near future. “We are trying secured credit also as a part of our experiments. Because it is not material, we have not mentioned much in the numbers yet. We are integrating a couple of secured credit lines, especially for small merchants, micro LAP (loan against property) makes a lot of sense.”