Inc42 UpNext: Can Paytm Money Be Paytm’s Trump Card In The Fintech Race?

To celebrate India’s rising startups, Inc42 is profiling a new soonicorn every Friday in the Inc42 UpNext: Unicorns Of Tomorrow series. For the next few months, we will be speaking to founders and cofounders at these potential unicorns and shining light on their journeys and growth stories. This week’s focus is on rising digital investments, mutual funds and savings platform Paytm Money.

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As India’s FDI equity inflow fell for the first time in six years in 2018-2019, with a huge decline of 56% and 74% in telecom and pharma respectively and many other sectors, financial advisors are seemingly finding it difficult to convince investors despite the great opportunity that the market represents.

However, the short-term bleak economic scenario can not be coupled with the long-term opportunities which are destined to grow manifold with more digital platforms mushrooming every passing day. According to Karvy Wealth Report, individual wealth in India is expected to grow at CAGR of 14.19% till FY23 and is likely to nearly double in size to INR 762 Lakh Cr by that year.

Further, the Deloitte India 2019 Predictions said, “Of every rupee invested in mutual funds and fixed deposits by the end of next year, at least 21 paise is likely to be invested using a digital channel.”

Deloitte India has estimated digital-invested assets under management (AUM) to grow by around 80% from approx INR 250 Bn in 2018 to INR 450 Bn in 2019. In other words, digital investing is expected to grow at more than double the rate of overall investment in mutual funds.

While conventional players in the game like ICICI Prudent, HDFC, Aditya Birla Sun Life etc have been in the game of mutual funds and investment market for a considerable amount of time, former Freecharge exec Pravin Jadhav, who also worked as chief growth officer at Servify for a short time in 2017, felt a huge untapped opportunity in the investment market.

“When you are investing in a mutual fund, advisors, distributors make huge money from your investments regardless of whether you make profits or not…. We wanted to change this model.” averred Jadhav.

Jadhav and Paytm’s Vijay Shekhar Sharma collaborated in 2018 to create Paytm Money which currently offers mutual funds among its products, promising 1% higher returns. The company recently also got PFRDA approval which means soon it might enable NPS investments on its platform too.

Inc42 sat with Jadhav, whole-time director, cofounder and CEO of Paytm Money to understand the company’s design thinking and Indian investment market.

Paytm Money is headquartered and operates from Bengaluru; its 250+ member team is led by Jadhav. The company has partnered with 40 AMCs (Asset Management Companies) covering 100% of industry AUM of the mutual fund industry. Paytm Money aims to become a full-stack investment & wealth management services company and bring wealth creation opportunities to millions of Indians.

Every Startup Begins With An Idea

“The value of an idea lies in the using of it.”  – Thomas Edison

Back in 2017, after having left Freecharge, Jadhav was helping a friend build his startup Servify, and was also exploring other options. Specifically, he was looking to start up again and soon he landed in a conversation with the management at one of India’s leading wealth management companies.

“This was the conversation which gave me an understanding of what technology could do in wealth management.”

Jadhav had known Paytm’s Sharma since the beginning of Paytm or say, when there was no Paytm and when One97 Communications offered mobile, DTH recharge and other similar services. Jadhav texted his idea to Sharma.

He recalled, “I think it was around March or April 2017. After a four-hour-long conversation with the wealth management company, I came back home and I saw that there was a missed call from Vijay. It was quite late. So, I simply dropped a note with the idea that there’s a big potential in India to build something to do with investments and wealth management.”

“Do you think that Paytm will actually get into investments and wealth management?” Jadhav asked.

Sharma was very quick to respond. “We should chat about this.”

Paytm’s AWS Moment?

Jadhav’s Idea clicked with Sharma, whose Paytm and Paytm Mall were already unicorns by then. And, Sharma was keen to expand Paytm from payments to other fintech areas as well. And, as far as pursuing new ideas are concerned, a parallel could be drawn between Jeff Bezos of Amazon and Paytm’s Sharma. Both invest heavily in new projects.

Bezos, who started Amazon in 1994 as a portal to sell software, games, music and books, set up Amazon Web Services in 2002. Its on-demand cloud computing platform has become indispensable to many startups and companies as well as governments.

While at the time many questioned Bezos’ conviction towards this business, AWS today delivers over 56% of Amazon’s entire operating income. The growth of AWS allowed Amazon to focus on next-generation technologies such as drones and other logistical improvements in its ecommerce wing.

Having set up Paytm in payments, Paytm Mall in ecommerce, Sharma is keen on adding new projects that could be his ‘AWS’ in future. And Paytm definitely needs a big revenue centre at this time.

While the Indian economy seems gloomy, so does Paytm’s wealth. The group’s reported consolidated loss more than doubled at INR 4,217 Cr for FY19.

Starting Up Paytm Money From Scratch

That’s the reality for Paytm today, but when Paytm Money was being founded, out of a population of close to 1.4 Bn, only around 15 Mn people used to invest in mutual funds, at the time when Jadhav was speaking to Sharma. Clearly, there was not only a lack of awareness but he felt a huge gap between investors expectations and existing market delivery models.

Following week, Sharma and Jadhav discuss the idea in detail in Bengaluru. And, while both agreed to start up immediately, Sharma urged Jadhav to visit Paytm’s Noida office and meet the business development team. The idea was locked. “The discussion was now pertaining to its design thinking and implementation.”

After his Noida visit, Jadhav who used to live in Mumbai move to Bengaluru and started working from scratch.

“In 45 days since then, I was able to put together a small team of six people. These six people, some of them were my old colleagues who joined first are still with the company,” Jadhav said.

None of the members had any working experience in this particular field. While Jadhav couldn’t tell if it was by design or by accident, veteran investor Vinod Khosla highlighted this a few weeks back in a public interaction. “Top innovations come from somebody who has never worked in that area. For instance, Elon Musk hadn’t worked in automobile and the automakers sort of laughed at Tesla, a Silicon Valley startup. It’s true, he made lots of mistakes, but he fixed them quickly and he figured out a better way than they (big companies) would have figured out. By applying conventional wisdom. You know, no fintech startup has come out of anybody who knew fintech,” Khosla said.

Jadhav said his personal experiences with investments helped him in the journey of getting investors. “We started exploring the existing models, their issues and non-existing business models. What could we do, what kind of products we should offer, user experience, what kinds of products we should build?”

Eliminating ‘Offline’ Touchpoints For New Investors

 So, what did Jadhav find? Where did he think Paytm Money could get an edge over others?

“Many. We spent a lot of time in understanding what are the customer nuances pertaining to investments, what are the investors’ concerns?”

Two years back, he explained there were a plethora of issues that needed immediate attention. That time, if somebody wanted to make some investments they first have to seek a meeting with an advisor or distributor. Then, they will be asked to provide the relevant documents, get identity verification done and set up the payments, the entire process used to take up to a week or more.

Jadhav wanted to change investments the way Paytm changed payments.

“Since the beginning, our notion was that we have to make the entire process digital. We wanted to invest in technology. The motto was ‘no offline people, no offline meetings’. Your [Customer’s] KYC should be in real-time; your onboarding should be in real-time; your payments should be in real-time; transaction processing should be in real-time; your portfolio updation should be in real-time. So that’s the core philosophy — we wanted to bring transparency to each and every domain and every aspect of investment.”

Jadhav said he was appalled by the inefficiencies in the existing models so Paytm Money decided not to take any risk of using legacy systems which it was not confident about. “And especially when we aimed to focus upon first-time investors, we wanted to build a trust similar to what people have on banks.”

The Communication Model: How Paytm Money Educates Investors 

“Mutual funds are subject to market risks, and we make sure you know it”

Section 80(C) of India’s Income Tax Act 1961 would be familiar to every salaried, middle class and affluent individual. Jadhav was no different. He had been actively investing in mutual funds for a couple of decades. However, what always irritated him the most was the terms and conditions, “It’s a bit awkward to read through all those texts before investing.” Jadhav said details and explanations for the investment plans were missing. There was no indication of charges, risk assessment or any other details that could help new investors make educated bets.

“We wanted to educate our first investments without making them bored and taking too much of their time. We adopted the communication model that was easy to understand and most visual in nature. So, if you are to communicate your ideas about what risk is, we put a nice graph in front of them and we would show it to them.”

Paytm Money turned to video to create awareness and made it possible for users to invest starting at INR 100. “This is also where we broke the general perception that if you want to invest in mutual funds you will have to invest at least INR 5K monthly. Here, you not only can start with INR 100 but you will get all the details which others might offer to only high-end investors.”

It was not limited to just that. Paytm Money adopted a transparent model pertaining to fund managers. They show all details regarding their performances and laid out the risks transparently.

Paytm Money Targets Low Ticket Sizes 

According to Jadhav, the average SIP amount is reported to about INR 5K to INR 6K per month. However, at Paytm money, the average SIP value is less than INR 1000. Further 85% of the transactions are under INR 500, said Jadhav. And so, the company is not really growing with high ticket transactions. It is going after the investors who are investing for the first time.

The model speaks for itself, Jadhav added. “In the last 11 months, the platform has become so stable, so seamless that we hardly need to spend any money on user acquisition.”

He added that the company offers no cashback, no incentive, nothing at all. Yet, it has managed to have 3 million users in 11 months. This has been possible purely because of word of mouth marketing and its efforts to create awareness about investing small.

Further, the company does not charge anything against the investments. Instead, it is exploring other methods to generate profits, keeping mutual funds absolutely free. “We are looking at additional services that could be tagged under premium services. Further, the company is looking to enter the lending market too, where it could utilise customer investments and generate profits.

Paytm Banks On Paytm Money Success

Having got approval from the Pension Fund Regulatory and Development Authority, Paytm will soon launch a National Pension Scheme service. It has already applied for NBFC to enter the digital lending business. Recently, the company also announced that it had received SEBI approval for stockbroking services.

Amid huge competition in payments from UPI apps and services, Paytm is fast losing its huge market share in digital payments. And now, it is turning to expansion and adding more revenue channels such as education and healthcare, as it looks to overcome the 162% jump in losses this year, compared to last year.

The news of massive losses for Paytm Group comes at a time when One97 and Paytm are looking to go public with an IPO planned in the near future. In such a scenario, can Paytm Money’s growth counterpoise Paytm’s losses, just as AWS has done for Amazon? That’s the big question, which could have a deep impact on the whole digital payment ecosystem in India.