Mounting losses and expansion into several business areas could derail India’s first profit-making payments bank. For mobile wallet Paytm, banking could be its best pathway to an IPO
Digital wallet Paytm’s parent One97 Communications’ loss for the fiscal year ended March 31 2019 almost trebled to Rs 4,217.20 crore from Rs 1,604.34 crore in the year ago, Mint reported citing the company’s annual report.
Its loss increased despite revenue increasing by around 8.2 percent during the year to Rs 3,579.67 crore as expenses almost doubled to Rs 7,730.14 crore during the year ended March 31. The company said in its annual report, as reported by Mint, that losses mounted due to high expenditure for brand building and for establishing businesses.
The Noida-headquartered startup, which was reportedly valued at around $15 billion, has so far raised around $2.8 billion (source: Crunchbase) from investors including Softbank, Alibaba and Warren Buffett’s Berkshire Hathway.
Most of the funds it has raised so far have gone into cashbacks and other cash-burning activities to build business in the areas of mobile wallet, e-commerce, ticketing, and lately starting a payments bank, among other things.
Since its inception, the company has focused on expansion over profitability. And, to that end it has tried to get into multiple business lines.
Its most successful product is the Paytm mobile wallet which has grown on the back of cashbacks ranging from 50-100 percent. The wallet benefited from the government ban on high value banknotes in November 2016, taking out almost all the cash from people’s hands and making them search for alternatives. But that success was short lived. Its customer base increased from 125 million to 185 million in three months and to 280 million by November 2017, according to a report by Euromoney.
The idea, perhaps, is that Paytm will acquire a large number of consumers and these losses are the cost incurred in acquiring and retaining them . Once they board the Paytm platform, they will partake of its various financial services offerings and Paytm will reap returns by being the conduit through which its customers will transact.
Paytm wallet's revenue comes from advertising and commission from merchants, and not from its wallet users. Naturally, more usage ensures better revenue from advertising and commission from merchants. But Paytm failed to retain its users as people moved out to cash transactions once cash levels in the system began to increase.
Besides, the market saw fresh entrants into the digital wallet space, including Facebook’s WhatsApp Pay, Google Pay, Amazon Pay, and PhonePe (owned by Flipkart). The market, however, is projected to see huge growth. According to a study by Assocham-RNCOS, mobile wallet transactions in India are projected to cross Rs 275 trillion by 2022, from Rs 1.54 billion in 2016. And this market will be shared by a dozen odd wallet operators.
The fight isn’t going to be easy. It is likely that the success of mobile wallets could depend on cashbacks. If Paytm wants to win the race, its core mobile wallet business will continue being a cash guzzler.
Besides, it has also spent a large sum of money to secure sponsorships of Indian cricket tournaments between 2019 and 2023.
Another problem is its aggressive strategy of trying almost everything – from selling gold to e-commerce to payments banks, to insurance and stockbroking to mutual funds to travel and movie ticketing. And, many of these attempts have proved to be unsuccessful or have guzzled a lot of cash.
For instance, One97 Communications’ e-commerce venture Paytm Mall has proved to be a failed venture as it could not compete with giants such as Amazon and Flipkart (now owned by Walmart), among others, amid heavy discounting that resulted in heavy losses.
A more recent venture was the Paytm Payments Bank which is probably the only venture to report some profit. According to a report by Business Line, Paytm Payments Bank has become the first payments bank to turn profitable. It reported a profit of Rs 19 crore in fiscal year ended March 2019. But, the sector is not in a great shape. Five of the 11 payments banks have already shut shop.
Despite the slender profit of this venture, not enough to make a dent in Paytm’s overall loss, the banking side of the business is probably where Paytm founder Vijay Shekhar Sharma is seeing a ray of hope. And, that may also possibly explain why Sharma is apparently looking at buying Yes Bank founder Rana Kapoor’s 9.64 percent stake in the bank.
If Sharma does buy into Yes Bank, he will need considerable cash. But it is not clear if this reported investment will be in his personal capacity or through the company. In the coming years, Paytm’s parent One97 Communications will need more cash – much more than the company has raised to date – before the businesses start making profits. Considering the kind of investors who have so far shown faith in Sharma’s vision and capabilities – and also Paytm’s potential to grow in a country where digital mode of payments is still at its nascent stage -- raising funds may not be very difficult. How long this faith will remain is a question.
To turn things around, Sharma needs to consolidate – or at some point his investors may force him to do so. A few businesses that are not making sense are the e-commerce arm Paytm Mall and selling of gold digitally.
What Sharma and probably investors need to understand that Paytm can’t do everything and be successful. The total losses being incurred are significant and if growth at any cost remains a priority, then those losses could keep increasing. If ever the fund taps run dry or even slows down, then it will be difficult to maintain the momentum.So Paytm needs to focus on a few things and do them really well. Otherwise, the dream of Sharma and his investors to take Paytm down the initial public offering (IPO) route in two years may not come true.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.