Cashback going back to Paytm
Cashback haar kar; market share jeetne Wale ko Payment Giant kehte hai
What do you think is the most used consumer tech app in India?
If Zomato and Nykaa pops into your head, you are wrong!
It’s actually PhonePe followed by the likes of Gpay and Paytm. These apps are so integrated with our daily lives that we don’t consider them only apps.
Together 3 of them control over 94% of the UPI transaction value market share.
PhonePe, Google Pay and Paytm had 87 mn, 65 mn and 25 mn daily active users respectively in Dec-22. Paytm’s monthly transacting userbase of 89 mn is higher than total number of active retail investors in India! Zomato had 50 mn (Dec-22) and Nykaa had 9.6 mn (Dec-22) annual transacting customers.
But wait! Payments is a loss-making business. How do the payment companies make money if Ram sends INR 100 and Shyam receives INR 100? In last 9 months of 2022, Paytm generated ~ INR 500 Cr of contribution profit from its payments business. PhonePe too said that its payments business would make money in FY23.
Payment companies make money from processing utility bill transactions, offering payment gateway services to other companies and merchant commissions on wallet and credit card transactions made via their apps and on their installed point-of-sale devices.
Payment business at scale is profitable.
Ability to negotiate: The size of these UPI giants (processed transactions worth USD 142 bn in Feb-23) has enabled them to negotiate better rates from banks and payment processing companies. Paytm which used to pay 0.75% in charges in FY20, paid 0.32% bps in FY22.
Platform Stickiness: The UPI giants had a land grab for acquiring customers. Since, payments are a free and frequent use case, there is no incentive to switch to other platform/ app. Therefore, incremental cost for user retention is very low. Paytm reduced its user acquisition and retention cost from INR 242 per year per monthly transacting user in FY20 to INR 49 in FY22. An 80% reduction!
UPI incentive: Govt announced an INR 2,600 cr (previous year: INR 1,300 cr) incentive scheme in Jan-23 to compensate for zero commission on UPI payments based on value and volume processed.
Why only run a payments business when you can do a lot more with the payment data (cross-sell). Payment companies know everything from movies to your travel bills. You can under-report your income in the income tax return but can you under-report your electricity bill!
If you are company, and only doing lending or stock broking, you have a specific type of data. An instant personal lender would have CIBIL and bank statement data, a digital broker would have trade data, a wealth-tech company would have investment data etc.
Secondly, The fundamental requirement to be able to cross-sell is user engagement. Payment apps are the most used apps in India after social media and music apps.
What do these payment companies cross-sell?
Lending: Loan distribution has the largest profit pool in India. India is a credit starved nation. As per TransUnion CIBIL, more than 160 mn Indians were underserved in terms of credit at the end of 2021.
Limited data on the prospective borrower and lower ticket size made it unviable for banks and NBFCs to cater to this segment. This white space was quickly filled by instant personal lending companies such as Kissht, KreditBee, Cashe, MoneyTap, and payment companies like Paytm and Mobikwik.
Payment companies clearly have the upper hand when it comes to digital lending:
i) Better Underwriting: Instant personal lending companies distribute loans using CIBIL score or scraping mobile phone data (also leading to privacy concerns). Payment companies like Paytm/ Mobikwik have much superior payments data including utility bill, personal spends, bank account details apart from the regular CIBIL data.
ii) No customer acquisition cost (CAC): Instant personal lending companies incur anywhere between 4% - 8% of loans to acquire customers. Due to this, these companies lose money on distributing the first loan and depend on repeat loans (which may or may not repeat as Indian borrowers shop around for better rates on their loan) to breakeven. For payment companies this is just a cross-sell and so the acquisition cost is zero.
Both of these ensure that payment companies can profitably distribute loans on behalf of their lending partners with much better asset quality.
The preference of the NBFC partners is shifting towards payment companies. 29 digital lenders disbursed INR 18,537 cr of loans for the quarter that ended December 2022 (2% q-o-q growth). During the same period, Paytm alone disbursed INR 9,958 cr of loans (36% q-o-q growth).
Insurance, Stock Broking, Mutual Funds, Credit Cards and Other Financial Products: Because of high user engagement, it becomes very easy for payment companies to cross-sell financial products. These companies have a fair idea about the consumer’s financial position and therefore can target the consumers with the right set of financial products. These companies even know whether you own a 2-wheeler or a 4-wheeler based on the amount you pay at the fuel station.
PhonePe sold over a million two-wheeler insurance policies within 9 months of the product launch. Paytm Money is India's 11th largest stock broker (nearing its gap with Sharekhan!).
Movie/event and travel ticketing: A couple of years back, BookMyShow (BMS) was the undisputed leader regarding online movie/event ticketing as there was limited competition. But it had to send nudges to its consumers to visit the app in absence of any other use case. However, in case of payment apps, each time a customer comes, they could advertise details of new movie releases or upcoming events etc. Do you know, Paytm Insider is the official ticketing partner for 6 out of 10 IPL teams!
Travel ticketing business especially flight ticketing has limited entry barriers as the number of airlines that operate are few and therefore supply side of the marketplace can be built very quickly. This helped PhonePe and Paytm enter the flight and bus ticketing segment and scale rapidly.
To put it to context, Paytm’s commerce revenue stood at INR 373 cr in FY22. More than 80% of the combined revenues of BookMyShow and EaseMyTrip!
1) Payments business can be profitable if built at scale.
2) Payment apps can build much superior underwriting models as compared to instant lending apps.
3) Payment apps possess the relevant user data which is the most critical for an effective cross-sell.
Author: Kunal Shah
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Chief Editors: Hanu Bansal & Tushar Khandelwal
Fintech Mavericks: Chinmay Marulkar, Aman Jain, Arnim Dhakad, Ashish Purohit, Harsh Gupta, Keroli Somaiya, Parin Detroja, Sneh Baxi, Nakul Agrawal
Disclaimer: The opinions and views presented in this article are purely personal and don’t represent views and opinions of author’s employer or any other organisation
I suggest you should refer to Paytm's December 22 filings.
1. Paytm generated a contribution profit of ~INR 500 cr from its payments business (Payment Processing revenue - Total direct expenses excluding postpaid interchange costs). Hence, with scale this can easily cover the fixed cost attributable to the business. In fact, Paytm has already achieved adjusted EBITDA breakeven in the December quarter. EBITDA margin with was -27% in December 21 is now +2% in December 22 a 2,900 bps improvement within a year. And all this is due to scale! So, contrary to your comment, there seems a clear path to profitability insight in my opinion.
2. Paytm's CAC (Promotional Cashback and Incentives + Marketing Expenses) stood at INR 227 cr in the quarter ended December 22. The same number was INR 262 cr in quarter ended December 21. Therefore, overall CAC reduced by 13%. During the same period, Paytm's average monthly transacting users grew by 32% from 64 mn to 85 mn and the digital lending business grew by 357% from disbursing 2,200 cr in Dec 21 to 10,000 cr in Dec 22. From the above one can safely conclude that despite reducing marketing spend, the digital lending business grew exponentially meaning CAC in the digital lending business would be 0%/ negligible.
Therefore, your comment above seems to be absolutely incorrect.
3. Shubh, I have made a comparison in the credit quality of loans distributed by payment companies to loans distributed by other digital lenders (startups) and NOT with those distributed by banks and NBFCs themselves. These are every different things. I agree with your point that we have not seen enough cycles to be 100% sure about the underwriting quality of loans distributed via startups/ payment companies. Currently, we are in a credit upcycle. However, when a down cycle comes, I think the importance of alternate data for underwriting would increase even more for these lenders (banks, NBFCs). Therefore Payment companies who posses this alternate data would succeed as opposed to other pure digital lending startups.
Superb Kunal, What a clear crisp & valuable writeup