Paytm sees green shoots of recovery, but not out of the blues yet

Paytm sees green shoots of recovery

Even as Vijay Shekhar Sharma looks to build a leaner and focussed entity in the payments and financial services space with the potential sale of non-core assets, there are green shoots of improvement in the company's key metrics since April, indicating that the company has been able to arrest the slide.

These include growth in Unified Payments Interface (UPI) transaction value and volume in May, merchant transactions and device subscriptions apart from a rise in gross merchandise value (GMV) of UPI transactions compared to March, when some of these figures saw a big drop.

With curtains on its popular mobile wallet product, the company’s gross merchandise value will be mostly dependent on UPI. From around 75 percent during the December quarter of last financial year, UPI is set to contribute 85 percent of its GMV during Q1 of FY25 and subsequent quarters.

The number of UPI transactions as well as the value of transactions had risen marginally in May, compared to the April figures.

Paytm’s UPI beneficiary transactions, a large part of it being merchant transactions, stood at 2.8 billion in January this year. It came down to 2.5 billion in February and March but has since stabilised despite the number of active consumers on Paytm falling.

The beneficiary transactions stood at 1.7 billion during the first three months of 2023, which is a growth of more than 30 percent this year even during February and March, the peak months of the crisis.

Paytm Payments Bank Limited (PPBL), which powered most of Paytm’s products and services, including UPI, has been the largest beneficiary bank in the UPI ecosystem for a long time. The Reserve Bank of India placed crippling restrictions on the payments bank on January 31 following persistent compliance lapses.

Since April, Paytm’s payment service provider (PSP) function has been taken over by private sector lender Yes Bank following the RBI restrictions on PPBL. Yes Bank has seen roughly 2.5 billion transactions added to its beneficiary transactions between March and April because of this change. These numbers seem to be holding up well at around 2.5 billion transactions in April and May going by the Yes Bank beneficiary transactions even though direct Paytm numbers are not available.

According to Paytm’s disclosure, its merchant GMV on the UPI platform came down to 92 percent in March compared to the January figures but went up to 94 percent in May, indicating that the company had only seen a drop of 6 percent in GMV compared to January.

“With 80 million monthly transacting users (MTU) - a 24 percent quarter-on-quarter drop - as of April 2024, Paytm has beaten market projections stating a much higher decline. Merchant subscriptions at 10.7 crore as of March 2024, seeing no decline from the December quarter. Further, the strong retention of our consumer and merchant base showcases the stickiness and higher platform long-term value for our financial services distribution strategy,” Paytm said in an email statement to Moneycontrol.

The merchant stickiness has been seen even among the device (soundbox and point-of-sale machines) subscribers of Paytm, which has remained at 1.07 crore users, even though a few of them became inactive during March-April.

“On the merchant side, while the device merchant base has increased marginally, the active device base has declined by 10 lakh due to higher attrition in February and March. Subscription revenue was also impacted due to lower merchant addition, lower active device merchants and temporary rental waiver for ring-fencing certain cohorts of merchants,” Paytm said in the investor presentation after the Q4 FY24 results.

Customer business facing headwinds

To be sure, not every number holds up this well. The company’s consumer-initiated transactions on UPI have been dropping since April 2023 and have accelerated since January this year after the RBI slapped sanctions on PPBL.

Paytm’s UPI market share has dropped from 13 percent in early 2023 to 8.1 percent in May this year. Almost 4 percentage point drop has happened since the RBI action.

Compared to April, the drop has been minimal as the company had 8.2 percent market share in the month.

“We continue to see revival across our UPI business as we have seen the total value of transactions grow month-on-month in May and have seen a stabilisation in transaction volume. As stated in our Q4 earnings release, excluding disrupted products (such as the wallet), we are now seeing a positive growth trend in payment GMV since the month of April 2024,” Paytm said in the statement.

The monthly transacting users had hit a high of 10.4 crore in January this year, which dropped to 8 crore in April. The company’s customer GMV dropped 15 percent in May from the high of January this year. However this had dropped to 22 percent in April, indicating a relative recovery.

“This is mostly owing to the required change in the @paytm handles that had to be migrated to the bank handles. Paytm has to prod every customer to consent for the change in handles and a few million customers have not taken any action yet. Since most customers are likely to have multiple UPI apps, this is not an urgent matter for most of them. However, Paytm’s incentives for consent for new handles are likely to accelerate the migration,” says a senior banker, who works with Paytm.

Some of the decline in customer market share of Paytm over the last 18 months has been compensated in the payment processing margins by the increasing merchant transactions. The growing popularity of credit cards on UPI at merchants has also lifted Paytm’s payment processing revenue.

Lending recovery key to protect margins

A larger proportion of UPI in the overall GMV will likely reduce Paytm’s margins since the wallet business had higher payment margins. However, this can be prevented if Paytm manages to accelerate its lending growth which has been declining since December 2023.

Since the RBI’s constant nudge to non-banking financial companies from the middle of last year, most NBFCs started reducing their exposure to small-ticket loans. Paytm also decided to reduce such loans by 50 percent back in December.

Since the RBI action on PPBL, Paytm decided to stop all the low-ticket loans called Postpaid and focus on merchant loans as well as high-ticket personal loans for premium customers.

Paytm’s lending in January was around Rs 2,500 crore, without adding the postpaid loans, which the company discontinued in February. In April, Paytm managed to distribute Rs 2,000 crore worth of loans, which was only Rs 500 less than the January figures, indicating the company recovering some of the lost ground.

“We have added more lending partners during the last quarter, including pilots with banks. This type of loan contributed the vast majority of consumer loans in Q4 FY2024, and is our key focus as it has a bigger total addressable market, wider interest from large banks and non-banks, easier tech integration and more regulatory clarity,” said Paytm statement.

The company’s lending strategy shift has been largely due to the RBI’s credit risk weight move rather than the PPBL impact. The slowdown has been mostly because of the credit asset quality deterioration and it will take a few quarters for the financial services revenue to regain the levels it reached in the December quarter of FY24.

Worst is behind

Paytm’s key revenue comes from its payment processing, contributing to almost 65 percent with financial services (lending) and marketing services (ticketing, credit card, advertising, co-branded credit cards and gift cards) contributing the rest.

“While investor expectation would be continuous high growth, given the circumstances, even maintaining the same GMV as Q4 of FY24 during the first quarter of FY 25 will be an achievement,” says a fintech founder, who has previously worked at Paytm.

Paytm had said during the financial results that the worst is behind and the recovery has started and it hopes to recover fully by the end of the second quarter of FY25. In fact, markets seem to believe the narrative. The company’s share price has risen by 30 percent since hitting the all-time low in early May.

However, concerns remain about when the company will claw back its strength visible during the last fiscal's second and third quarters before the shares go back to the price Paytm saw before the RBI action on PPBL.

“Regaining the growth in lending is going to be slow because of the company’s shift towards distribution-only strategy, which is likely to impact the revenue. While there is room to grow the lending, given the big changes, we will wait to see how the financial services revenue picks up in the coming quarters,” says an analyst who tracks Paytm.