Paytm Has A Way Out Of The Payments Bank Mess, But It’s A Treacherous Path

“Could the Paytm Payments Bank MD be on this call and tell us what exactly is the issue?” asked the analyst who had the final question in Paytm’s investor call after the RBI action on the Paytm Payments Bank (PPBL).

There was no direct response from the One97 Communications Limited’s (OCL) leadership — Paytm founder and CEO Vijay Shekhar Sharma, president Madhur Deora and COO Bhavesh Gupta — to her question. And before the end of the call, the analyst again urged the company to have the payments bank’s management on future calls.

Before this, there was another nugget of information that was dropped by Sharma earlier in the call. He said the payments bank has not shared details with Paytm about the central bank’s opinion based on audits over the past nearly two years.

The CEO added “Paytm Payments Bank cannot share details with the parent company” due to the arm’s length nature of the operations and separation of management.

It would seem that even Paytm does not have all the answers yet.

And in the absence of this clarity, the trio of Sharma, Deora and Gupta will continue to be dogged by tough questions from advisories, retail investors, portfolio managers and mutual funds. Especially after the RBI came out and defended its actions. Further, unconfirmed reports based on sources also indicate that Paytm Payments Bank fell foul of KYC regulations and more worryingly, concerns about money laundering.

One solace for the founder could be the fact that many in the ecosystem are standing up for Paytm at this time, but that’s not enough to ease market fears.

After the RBI shock, Paytm’s share price is dangerously close to hitting a new all-time low. The stock hit the lower circuit on back to back days this week, falling by 20% almost immediately after the markets opened.

Overall, Paytm has dropped by nearly 36% in just two sessions and is currently trading at INR 487 per share. This could soon snowball into major value erosion and there’s no telling when the crash would end.

Undoubtedly, the Paytm leadership’s current focus is on assuaging investor fears. The company assured analysts of major brokerages and advisories that the payments bank’s management is in discussion with the RBI over the potential way forward. Here are the steps that the company says it is taking in the next few weeks before RBI’s February 29 deadline:

• Partnering with other banks for UPI, wallet, merchant services and mission-critical nodal accounts
• Migrating borrowers with loan repayments from Paytm Payments Bank to new NACH mandates and other banks
• Communicating consistently to consumers and merchants to tackle fear mongering or attrition

But this display of confidence cannot hide the fact that Paytm is in danger of losing its momentum towards profitability. There are potentially three major breaking points for Paytm, which threaten to either disrupt its path to profits, or worse, nullify the scale that it has painstakingly built over the past decade.

Bank Are Becoming Tougher Partners

The company is hoping to negotiate favourable commercial terms (interchange fees and merchant discount rate or MDR) with other banks as it looks to completely move away from Paytm Payments Bank (PPB), but this is not likely to be an easy negotiation for the company in the current market.

Sharma consistently claimed that commercial terms with other banks will be largely similar to Paytm’s arrangements with the payments bank, but other regulated banks and NBFCs are under the microscope of the RBI as well from the point of view of their fundamentals and exposure to loans.

The proliferation of unauthorised digital lending platforms has compelled the RBI to force regulated entities to review their exposure to digital loans as well. In particular, banks have been tasked with reevaluating their partnerships with fintech platforms such as Paytm. ZestMoney is perhaps the most high-profile casualty of this review and the lending platform ended up being acquired by NBFC DMI Finance in a distress sale.

Additionally, there’s pressure on banks to improve their net interest margins and curtail the high loan-to-deposit ratio. Simply put, net interest margin is the difference between interest paid and interest received by the bank. Commercial terms with lending partners and platforms are extremely critical to improving NIM

Bank stocks have been under stress since December when the RBI asked regulated entities to focus on higher deposits and increased the risk weights required for unsecured lending.

Lending platform Kissht and RING founder Ranvir Singh said governance standards are paramount in the digital lending stack today, and the RBI’s push is for responsible lending by banks rather than deploying capital at scale without adequate checks and balances.

“Though risk weights for unsecured loans have increased, there is an elevated interest from lenders and co-lending partners to disburse loans greater than INR 50,000. This will further usher in an era of more responsible lending where creditworthy customers will continue to be served adequately,” Singh told Inc42 in early December.

In light of this environment, banks are unlikely to allow fintech partners an easy way out in any negotiations pertaining to interest margins and commercial terms for lending and other services.

Plus, everyone knows that Paytm is running against a clock to sign up new nodal account partners as well as potential partners for wallet and UPI services. Essentially, the fintech giant has low leverage in any potential negotiations, though Sharma said that the support from banks in the past few days has been encouraging.

The company elaborated on how the migrations to other banks might impact operations. It told analysts that QR codes at offline merchants have a virtual private address (VPA) linked to Paytm Payments Bank, which would need to be changed to other banks.

Sharma said One97 Communications Ltd (OCL) is in discussions with the NPCI and the RBI as well as banking partners to find the best way forward for this migration. But as the company itself admitted later, it won’t be as easy as flicking a switch.

New merchant acquisition will be on VPAs associated with new bank partners, while existing merchants will be migrated to other banks from Paytm Payments Bank. Currently, the decision is split between a one-time transition for all merchants or a case-by-case transition across many banking partners. Paytm’s choice in this matter will be critical in deciding the extent of the impact from RBI’s action.

Paytm Loan Repayments In Jeopardy?

Besides moving merchant QR codes and PoS devices to new bank partners, there’s another potential hurdle for Paytm when it comes to its merchant services’ dependence on Paytm Payments Bank.

As the company revealed in the analyst call, out of 400K merchant loans, around 60,000 merchants have taken loans from Paytm’s platform, which have auto repayments through PPB accounts. These merchants were largely getting their daily settlements from customers on their PPB accounts, and will have to be moved to other accounts.

The same is the case for some of the company’s personal loan accounts as well, but the company said this is not as significant as the merchant lending business.

But all of these loan accounts have to be moved to other banks with new auto-repay mandates from National Automated Clearing House (NACH). Even though analysts or the company did not address the possibility of a spike in bad loans or collection hurdles due to non-compliant users, this is a very real possibility given that many smaller merchants might not be able to switch to a new NACH mandate in time.

There is also the question of whether the company can migrate these users to other banks with their existing KYC or whether fresh KYC might be required. This is another step that could add friction in moving loan customers from Paytm Payments Bank to other bank mandates.

Paytm COO Gupta told analysts that the guidance of the NPCI and the RBI will be critical to figure out the KYC approach, which would take another week or so to come.

Given the number of competitors in this space with high capitalisation, Paytm would need to accelerate the migration and pursue it aggressively if it wants to avoid damage in the medium term. The company said it has 30,000 salesforce people on the ground to ensure that merchants that need to be migrated to new mandates do so in a timely manner.

But it is missing complete clarity on a lot of aspects, even by its own admission.

The lending business saw a shakeup in the last quarter, and this latest curveball could further slow the company’s momentum.

The User Retention Problem

Paytm Payments Bank was the crown jewel in Paytm’s fintech stack, and losing this puts the company in league with the rest of the UPI apps. The Paytm app’s commercial terms with banks for UPI is unlikely to be very different from Google Pay or PhonePe, which have a massive lead in the UPI market.

It’s on the basis of this lead that both apps are able to upsell many of the allied services such as ecommerce, lending, insurance broking and more.

PhonePe processed 564 Cr UPI transactions worth INR 9 Lakh Cr in December 2023, followed by Google Pay which registered a total of 437 Cr UPI transactions worth INR 6.2 Lakh Cr.

Paytm was a distant third with 157 Cr UPI transactions (INR 1.9 Lakh Cr in value). To make matters worse, the number four player CRED was not far behind Paytm — with 105 Cr transactions even though their cumulative value was just over INR 37,200 Cr.

Paytm has to step up its UPI payments game significantly to compensate for any revenue loss from unfavourable commercial terms with new bank partners.

So far its third-place showing in the UPI race was offset by its Paytm Payments Bank licence, which allowed it to earn MDR revenue from non-UPI services.

Besides the potential challenges in scaling up payments revenue, the problem could also turn into a retention issue for Paytm.

There’s also the fear of miscommunication or misconceptions around whether Paytm app might cease to function after February 29, 2024. One analyst on the call with the management used an anecdotal example to suggest that less savvy customers might not be completely aware of the difference between Paytm Payments Bank and the Paytm app.

In other words, this could turn into a retention problem in the long run and Paytm’s ecosystem approach is in danger of becoming a less strong proposition.

Sharma assured analysts that the company’s communication and marketing strategy will be tailored to allay such fears of losing out on. The company said it is working aggressively to inform customers and merchants.

The Paytm Payments Bank Moat

Even though a very small proportion of the company’s payments GMV comes from the wallet business, this vertical does have a positive MDR impact, which is not matched by UPI.

For Paytm, the Paytm Payments Bank’s PPI licence and related wallet service was a revenue moat, but now it is planning to bring in a PPI partner to offer a new wallet service. And it claims that the commercial terms would largely be the same as Paytm Payments Bank as it is defined by NPCI.

The company added that it is in conversations with three banks to set up nodal accounts for wallets, with the partnerships being dependent on which banks can support the scale and velocity of migration that Paytm needs.

Sharma added that in terms of the competition, Paytm will start looking like other apps but it will have the advantage as it has always had in terms of technology, pace of innovation and the expertise in acquiring and retaining customers.

It’s too early to tell whether CEO Sharma’s claims are just fighting words or a close approximation of what’s to come for Paytm. It’s not just that there’s no clarity on what went wrong for Paytm Payments Bank, but also about the company itself not knowing which course of action to take.

The analyst call showed the picture from 30,000 feet. Execution of these plans will be the real challenge, and the market is not exactly in a forgiving mood at the moment.

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