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.
The three payment companies that you have mentioned have already achieved scale, but there is no profitability in sight. Breaking even in a payments business will be an achievement in India. At most, with the best assumptions, the payments part will make not more than 5% PAT margins. Payments will always be a data collection business in India.
The claim that CAC is zero for payment companies in digital lending is absolutely wrong.
Also, we have not seen enough market cycles, so it won't be fair to conclude that loans disbursed via startups/payment companies have better underwriting & asset quality as compared to loans disbursed directly by banks/NBFCs.
Hi Shubh,
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
The three payment companies that you have mentioned have already achieved scale, but there is no profitability in sight. Breaking even in a payments business will be an achievement in India. At most, with the best assumptions, the payments part will make not more than 5% PAT margins. Payments will always be a data collection business in India.
The claim that CAC is zero for payment companies in digital lending is absolutely wrong.
Also, we have not seen enough market cycles, so it won't be fair to conclude that loans disbursed via startups/payment companies have better underwriting & asset quality as compared to loans disbursed directly by banks/NBFCs.