Has Paytm found the secret sauce?

Written by Kapronasia || August 01 2023

Paytm seems to have found the secret sauce at last. After years of rolling out seemingly unrelated digital financial services, the Indian fintech giant is instead focusing on lending and seeing its revenue rise accordingly. In the first quarter of the 2024 fiscal year, Paytm’s revenue rose 39% year-on-year to 23.42 billion Indian rupees (US$286 million). The company reported an operating profit for a third straight quarter, despite higher employee expenses and no government incentives, while its net loss narrowed to 3.57 billion rupees.

A regulatory filing shows that Paytm’s loan disbursals in the first two months of FY2024 (April & May) surged 169% year-on-year to Rs 9,618 crore (US$1.2 billion) from Rs 3,576 crore a year earlier. Although Paytm does not have a license that would allow it to lend directly to borrower, it is able to disburse loans through partnerships with both banks and non-banking financial companies (NBFCs) such as Aditya Birla Capital, Hero Fincorp and Piramal Finance. It currently has seven such partners and plans to add three to four additional ones in the 2024 fiscal year.

Paytm typically takes a 3.5% to 4% commission on each loan it disburses, and its collection margins are about 0.5%, according to India’s Economic Times.

Paytm is betting, given its massive user base of 350 million, that it can keep expanding its lending business to the creditworthy borrowers among its many customers. As of May, it had only reached 4% of its users for postpaid loans, 0.8% for personal loans and 5% for merchant loans. While there are undoubtedly some risky borrowers it has to watch out for, chances are that there are enough low-risk ones to fuel its growth for some time.

Paytm’s large merchant customer base is key to its success. The number of merchants subscribing to Paytm's payment devices reached 79 lakh as of June, while merchant payment volumes for the quarter ended June 2023 stood at ₹4.05 Lakh Cr ($49.3 billion), up 37% on an annual basis.

Looking ahead, with an eye on leveraging its merchant base further in the quest for profitability, Paytm likely needs a payments aggregator license – which the RBI has yet to approve. This license would allow merchants to accept payments from customers by integrating Paytm’s tech into their apps or websites, removing the need to use traditional bank accounts or credit cards. For retail and online merchants, Paytm’s utility would rise. They currently need a banking layer to accept payments. With the license, Paytm could also offer merchants features such as instant settlements and faster refunds that would help merchants grow their customer base.

With revenue from lending and merchant services surpassing that from payments, Paytm is successfully transitioning to a business model driven by higher-margin financial services. While payments will remain a core part of its product offering, we expect that they will increasingly function more as the gateway to lead the company’s customers to more lucrative services – much as they have for Alipay and WeChat Pay in China.