Paytm Payments Bank saga: Road to profitability gets longer?
How easy will it be for Paytm to tread the path of monetization with recent RBI restriction
When the biggest IPO in history of Indian stock markets - Paytm launched in November, 2021 the story to support its sky high valuation was the number of the active users that the platform had. And monetization of these users would open taps of profitability sooner than later. Specifically, Paytm has 3 ways to monetize and turn profitable - ability to monetize UPI, wallet interoperability & lend from its own balance sheet after transitioning to a Small Finance Bank.
As far as monetization of UPI and interoperability of wallet is concerned, both would require an industry wide directives from RBI (Reserve Bank of India) and Finance Ministry. But one lever that is much more in control of Paytm is the transition to Small Finance Bank from its current status of a Payments Bank. To understand why it is so, let me take a step back.
Payments Banks: Furthering financial inclusion
Paytm in 2017, got its Payments Bank license. It is useful to understand how a Payment Bank differs from the commercial banks (like HDFC, ICICI, SBI bank etc.). Although banks are one the more complex financial organisms, at its core it employs a simple principle to make money - borrow money at lower interest rate and lend at higher interest rate. The difference between the interest rates - called ‘spread’ is the profit the banks make. The savings bank interest (or FD interest) rate given to you can be considered as what banks pay you for borrowing your money, and the educational loan interest that you might be paying (for that pricey MBA!) is what the bank charges you.
But, Payments bank are slightly different animals. They can’t lend money (or issue credit cards). So how do they then make money? They do have a few ways like giving lower interest rates on the their savings bank account and parking the same money with some other bank at a higher interest rate or government securities. In addition they can partner with other financial institutions to sell their products (think Insurance policies, Mutual Funds etc.). Some of them also have transaction charges. At this point it is natural for you to think why would you even open an account with such a bank when you are getting higher interest rate on savings account elsewhere? Add to that restrictions like holding a maximum balance of INR 1 Lakh at any given point of time. Well, it is because Payments Bank don’t need you to maintain minimum account balance or have any account opening charges. While these benefits might not be necessarily valuable to you, it certainly can be to the less privileged section of the society and the unbanked rural areas. RBI floated this concept so that banking services can find deeper penetration to places commercial banks haven’t been able to reach yet. So, while RBI regulations needs commercial banks to maintain physical presence (read bank branches), Payments banks can be all digital. Many companies including Paytm, lapped up these licenses in 2017.
The Paytm Payments Bank saga
Now that you are up to speed with idea of Payments banks, it time to look at the recent state of affairs that revolves around Paytm Payments Bank. RBI on 11th March directed Paytm Payments Bank to stop onboarding new customers and appoint an IT audit firm for undertaking a comprehensive system audit of its systems. There were rumors that data had been leaked to Chinese firms which the group CEO came on air to clarify was not the case. Chatter was also heard about flouting KYC (know your customer) norms for account opening. While the exact reason is yet to surface the RBI was clearly not happy. And this is not the first time. Such incidents have found mentions in Paytm IPO RHP papers too.
If the RBI’s ban on HDFC Bank to issue new Credit Cards due to recurrent technical glitches is any precedent for directives on restrictions by RBI than we know that it can take anywhere between 8-15 months for them to get lifted. And while revenue loss is one thing, there is another layer to it which is more damaging.
Any Payments bank on successfully and satisfactorily running its operation at the end of 5 years can apply for the license of Small Finance Bank (SFB). And SFBs can do one important thing, which a Payments bank can’t - lend. Though they still have restrictions, like 75% of loans should be towards priority sectors, it still has much more freedom than a Payments bank. Paytm Payments Bank was about to complete this 5 year period and could have applied for Small Finance Bank license in May, 2022. And that meant it could have had better monetization from users on its platform (both merchant & customers). But this directive from RBI changes it all.
Competition heating up
India currently has 6 Payment Banks - Paytm Payments Bank, Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank, NSDL Payments Bank and Jio Payments Bank. It will be useful to look at their market share (both by volume & value) that happen using their respective UPI.
Paytm UPI transaction towers above all other Payments Bank’s UPI. A serious competitive edge. But, this restriction of adding new customers could change the dynamics. Airtel has quietly built its Payments bank from strength to strength which turned profitable in Q2FY22 and is the closest competitor of Paytm Payments Bank.
Compared to a 2 year revenue CAGR of 57% of Airtel Payments Bank, Paytm posted a measly 9.15%. And with a annualized revenue of INR 1,000 Crs in Q2FY22 Airtel is closing the gap with Paytm. Given both Payments banks started around similar time, the restriction on Paytm can give the Airtel enough time to strengthen its position as it can become a SFB real soon.
An indispensable piece for Paytm’s profitability
While Patym has an umbrella of products & services which it provides through a number of associates and JVs (Joint Ventures), Paytm Payments Bank has stood out in its performance.
Not only it is a profitable entity, as of FY21 it is the only profitable entity among all the Associate companies & JVs that One97 Communication Ltd. (holding company of Paytm) has. It term of size too (revenue) it is the largest. Clearly, Payment Bank is a big piece for Paytm if it has to solve the profitability problem.
As a private investor who is largely dependent on listed secondary markets (with minimal access to unlisted space) keeping an eye on profitability, to me, is a must. Because, while narratives can be built on hope and can get ahead of reality, financials represent what the business has actually done. And recent post-listing performance (especially for new age growth companies) has shown that listed space is much more brutal with investors unwilling to spare any below expected performance, something that at times can be easy to get away with (at least for a while) in unlisted space. Let’s see when Paytm starts treading the path of profitability!
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Disclaimer: Views presented in this article is personal opinion of author and doesn’t not represent any firm’s view that he is currently associated or might have been associated in the past. No part of it should not be considered as a recommendation to buy or sell any stocks etc. This is an educational article at best. Although care has been taken for correctness of the data, author does not take any responsibility for any errors or omissions. Readers should consult their financial advisers before taking investment decision.