Paytm’s Balancing Act

These next few months will be some of the most interesting in Paytm’s 14 years. The Q3 results show that once again the company is at the cusp of a major shift.

The past three or four quarters have shown a company that’s leaning on loans and lending for growth rather than payments. But lending itself has suffered a bit of a setback, as we wrote.

So the next few months for Paytm are likely to be about experimenting with new insurance and investment products (with the help of AI, of course) and pushing the accelerator on merchant services. Will this balancing act pay off?

Let’s see, but after a look at these top stories from our newsroom this week:

• National Startup Day 2024: The National Startup Day 2024 this past week marked a pivotal moment for Indian tech. Here’s why it’s the start of the next decade in Indian tech
• Flipkart’s Fintech Dreams: Flipkart is betting big on Super.Money and is aiming to offer lending, insurance and other fintech products and services. Here’s the big plan
• Funding Crystal Ball: As per Inc42’s analysis of historical data and feedback from the ecosystem, we predict an overall 36% increase in startup funding in 2024. Plus, eight other predictions for Indian startup funding

Paytm’s Q3 Snapshot

Paytm’s Q3 results drew a thumbs-up from the public market on a rare Saturday when the stock exchanges were open. The stock finished the week at its highest price (INR 783) since early December, and the positivity stemmed from the fact that Paytm continued to trim its loss.

In Q3 FY24, the fintech major slashed its net loss by 43% to INR 222 Cr from INR 392 Cr during the corresponding period last fiscal.

However, as expected, the company’s recalibration of its loan portfolio towards the end of Q3 had a chilling effect on Paytm’s lending business during the quarter. Revenue from financial services, which includes Paytm’s lending business, grew 36% YoY in Q3 FY24 to INR 607 Cr.

The Fate Of Paytm Postpaid

But the next quarter’s report (January to March) will give us a clearer picture of how eliminating loans under INR 50,000 will impact Paytm’s profitability. It will be interesting to see how Paytm makes up for the potential shrinking of the lending business.

“Postpaid is a good product but its contribution to the P/L is very marginal. The GMV loss is easily getting compensated by high-ticket loans,” president and group CFO Madhur Deora said during the company’s earnings calls after the Q3 results on Saturday (January 20).

Besides this, Paytm claims to have added 20 Mn users to its waitlist for the relaunched high-ticket personal loans product. “We have been able to source and build high quality loans, including home loans. We also have demand for business loans,” CEO Vijay Shekhar Sharma told analysts, adding that insurance and equity trading are other key focus areas.

The fintech giant said there will be further decline in the Postpaid loans in Q4 FY24. “The numbers will stabilise by the end of Q4 or early Q1FY25,” Deora added.

What About Other Verticals?

Despite a quarter-on-quarter decline in the lending business (part of financial services) in terms of loans distributed, the financial services vertical itself had a bigger contribution to the overall revenue than the previous quarter.

To further plug the lending revenue gap, Paytm is eyeing growth in the insurance distribution business, also part of financial services. It is offering embedded insurance and DIY products to Paytm consumers, and will focus on its merchant ecosystem for business insurance solutions

Besides this the equity broking and MF distribution business is said to be filling in for any shrinkage in the lending business. The company said, “Our focus is on retention of trading customers by offering a high-quality trading platform and building MF distribution by leveraging SIPs.”

Leaning On AI 

While growth might be slow in the short term, Paytm is looking to protect the bottom line by reducing expenses, which could have a bigger role to play in terms of bringing the company into the black.

The fintech major’s total expenses surged 27.5% year-on-year (YoY) to INR 3,216.3 Cr in Q3 FY24. Sequentially, the company’s total spending saw a 9.5% increase from INR 2,936.7 Cr.

In the earnings call, CEO Sharma told shareholders and analysts that Paytm will continue to add more machine learning and AI capabilities to its platform, and reduce its demand for workforce.

In late December, Paytm laid off close to 1,000 employees after transitioning to an AI-led strategy to improve efficiency. Employees from the operations, sales, and engineering team were laid off.

“Instead of expanding more business functions, we are trying to add capabilities of machines and systems on our platform. These capabilities will continue to grow. That means there will not be so much demand, in a linear way, of the number of people that we need,” Sharma said at the earnings call.

In many ways this is a correction for the company after increasing hiring for merchant acquisition in the second quarter and to meet festive season demand. While the company is likely to hire for areas that are growing, it will look to rationalise in areas such as lending where there is some decline in business.

“We added a lot of people in Q2 due to the festive season. We have seen a moderate expansion in the salesforce and now have a decent penetration. We will not see more expansion now compared to previous quarters,” Paytm’s Deora added.

The company has managed to show some operating leverage when we look at the biggest indirect expenses. Marketing cost of INR 169 Cr was up 24% YoY, while employee expenses grew by 39%, as compared to 38% growth in operating revenue. The company seems confident of continuing this drive for efficiency in the next few quarters.

“We had a sales team and operations team etc who were doing a lot of manual lifting and business processes etc. Today, with technology which is powered through AI, we are able to do that work much more efficiently with less number of people,” chief operating officer Bhavesh Gupta added.

Does this mean there are more layoffs from certain verticals in the near future?

The Bright Light Of Merchant Services 

But one area where Paytm cannot afford to take its foot off the accelerator is growing its merchants subscription business, which is key to closing the transaction loop on Paytm.

As of December 2023, Paytm had nearly doubled its merchant subscription base from 56 Lakh in December 2022 to 1.06 Cr. This included 14 Lakh devices added in the month. The company earns INR 100 to INR 500 per month per device.

This is critical for Paytm because as the zero merchant discount rate (MDR) rules are withdrawn in the near future, the revenue from merchant transactions will be vital for the company.

Acquiring merchants and retaining them requires feet on the ground, which CEO Sharma has acknowledged recently. In December, he said the company plans to hire over 50,000 salespeople to acquire more merchants and revamp its online wealth management services.

In recent months, Paytm rivals PhonePe, Google Pay, Amazon Pay, BharatPe, Pine Labs and others have looked to tap merchants with ‘soundboxes’, PoS devices and apps for merchants.

This is a critical battlefront for all apps that are looking to own the entire digital transaction from consumers to merchants.

Paytm was one of the first to launch a UPI soundbox in India for merchants to get payments confirmations, but others have caught up in a big way.

PhonePe has close to 40 Lakh merchants on its soundbox service, BharatPe claims to have 1.3 Cr merchants, as per its FY23 filings.  However, the latter does not yet have a large consumer proposition.

Paytm sees monetisation opportunities such as subscription revenue, MDR on payments including products on UPI rails like RuPay credit cards, government and RBI incentives such as UPI, merchant loans and marketing services. Needless to say, others would also want a piece of this pie.

With UPI alone there is a massive opportunity to tap into MDR as and when this becomes a reality for platforms. Lending and marketing are other potential areas where Paytm and others can leverage its potential scale on the merchant side.

Repeat rate on the merchant loans side was close to 50%, but penetration for the merchant loans business was relatively low at 6.1% of all device merchants, indicating that the company has a lot of headroom to grow in this segment.

Now the question is how quickly and how efficiently can Paytm push its advantage of scale in this race?

With smaller personal loans expected to slow down in the next few quarters, Paytm will have to turn the spotlight on the other parts of its business which have arguably proven slower to grow. It won’t be an easy balancing act.

In Focus: Startup Founders Expect Brighter 2024

The capital drought and the funding winter of the past two years forced many startups to cut corners to extend their runway while founders also increasingly turned to venture debt to fuel growth. And many founders believe that fundraising is about to get easier in 2024.

Inc42’s Indian Startup Founder Sentiment Survey, 2023, which polled more than 400 founders showed that a whopping 88% of the respondents said that they anticipate a positive shift in investor sentiment towards Indian startups in 2024.

See The Full Survey In The Indian Tech Startup Funding Report For 2023

Sunday Roundup: Startup Funding, Tech Stocks, IPOs & More

• Funding Drops: The startup ecosystem has made a slow start to the new year — last week, startups managed to raise $136 Mn, marking a 6% week-on-week drop
• Starlink In India: Elon Musk’s ambitious company is soon expected to get approval for its satellite internet services in India, where it is likely to compete with Reliance Jio
• Zoomcar Crashes: The Nasdaq-listed company saw its India entity’s net loss surge over 3.2X in FY23 and its stock has been battered since its recent listing

• General Catalyst’s India Plans: The US-based venture capital firm, which counts Indian unicorns CRED and Spinny in its portfolio, is reportedly in talks to acquire early stage investor Venture Highway
• ZestMoney Rescued? Delhi NCR-based financial services giant DMI Group has acquired troubled fintech startup ZestMoney in what appears to be a distress sale after the startup was close to a shutdown

That’s all for this Sunday. Inc42 Weekly Brief will be back next week with more insights, stories and updates from the Indian startup ecosystem.