Paytm hits Indian fintech, but faces crowded market near IPO

Paytm hits Indian fintech, but faces crowded market near IPO

Paytm, a pioneer in mobile payments in India and one of the country’s best-known startups, set out years ago to create an all-encompassing digital-finance ecosystem, like Ant Group company’s Alipay in China.

Now, as Paytm owners near a $2.2 billion listing that will see it beat ant in the public markets, the company is not the dominant player it wanted to be and is facing growing challenges in the increasingly crowded Indian payments market. Still working. It has already overtaken deep-pocketed rivals including Alphabet in a key area Inc. NS

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Google and Walmart Inc.

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-backed Indian startup PhonePe.

One97 Communications Ltd., which owns Paytm, is targeting a market valuation of $25 billion when the home goes public this autumn. The listing will bring huge profits for a star-studded list of investors including 43-year-old founder Vikas Shekhar Sharma and SoftBank Group. of the corporation

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Vision Fund and Warren Buffett’s Berkshire Hathaway Inc.

Ant has invested about $900 million in One97 and will be one of the biggest winners in the deal, which is taking place at a time of escalating tensions between India and China. Ant now intends to reduce its stake from 29.6% to 25%, according to people familiar with Ant’s thinking.

Ant and its affiliate Alibaba Group Holding Ltd—which owns an additional 7.2% of One97—first invested in the Paytm owner in 2015, before the business saw a boom in users. Initially, Ant had ambitions to replicate its success in China in other developing markets, and investing in Paytm was an important part of that project. It also bought minority stakes in other digital payments companies in Southeast and South Asia.

One97 Communications, which owns Paytm, is targeting a market valuation of $25 billion when it goes public.


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Dheeraj Singh/Bloomberg News

Of those companies, Pay-T-M and Paytm, an acronym for “pay via mobile”, gained the most local traction. According to people familiar with the matter, between 2015 and 2017, Ant sent engineers and technical staff to Paytm’s offices in Noida to help scale up its payments platform and tackle issues such as fraud prevention.

Paytm’s mobile-payment app experienced a surge in downloads during a period when the Indian government abruptly scrapped 86 percent of the country’s physical cash to root out corruption, tax evasion and counterfeit bills. Paytm became synonymous with e-wallets, digital accounts that can be used to pay utility bills and buy everyday goods and services like milk packets and train tickets.

Paytm claimed 225 million customers as of 2017, more than any other company in India, and Berkshire paid nearly $300 million the following year for a small stake in One97.

Paytm has already been overtaken in a key area by deep-pocketed rivals including Google and Walmart-backed Indian startup PhonePe.


Photo:

Dheeraj Singh/Bloomberg News

Mr. Sharma, who founded One97 in 2000 and is its chairman and chief executive officer, has drawn parallels between its modest roots in the past and the background of Mr. Buffett and Ant’s controlling shareholder, Jack Ma. He predicted a few years ago that Paytm would have half a billion users by 2020.

Fintech industry commentator Chris Skinner published a book titled “Digital Human” in 2018, which included an interview with Mr. Sharma, “He is an eternal optimist and a very fast talker.”

According to the company’s draft IPO prospectus, Paytm has not been able to reach that target of having half a billion users by 2020. . According to TechARC, a research firm, there were around 500 million smartphone users in India at the end of 2019.

Ant withdrew its direct involvement in Paytm after the development came in the way of Paytm. Ant’s global ambitions have also been complicated by geopolitical tensions.

Last year, the deadly border conflict between China and India sparked a public and political backlash in the South Asian country against mobile apps owned by companies in China.

Ant’s chairman and chief executive Eric Jing, a Chinese national, was replaced on One97’s board of directors along with Douglas Feagin, another Ant executive, and a US citizen, after India launched more scrutiny over Chinese investments. The change – which took place earlier this year – was initiated by Ant and came at a time when Mr. Jing needed to pay more attention to the internal affairs of the Hangzhou-headquartered company after its IPO, people familiar with the matter said. he said .

Top executives at Ant and One97 still maintain regular communication and occasionally consult each other on strategic decisions, the people said.

Unlike Ant, One97 hasn’t made an annual profit in recent years. Its revenue from payments and financial services grew, but total income declined in the last fiscal year as the pandemic hurt some of its other businesses.

Paytm has faced further competition after India introduced a government-run digital-payments network called Unified Payments Interface, which facilitates direct transfers between bank accounts.

While e-wallets have to be topped up with funds from time to time, in UPI transactions – which are also done through smartphone apps – money is deducted immediately from people’s interest-bearing bank accounts. Its relative simplicity and the fact that it can work in payment apps from various companies have made it the preferred method of payment for many consumers.

According to S&P Global Market Intelligence, in the fourth quarter of 2018, Paytm processed 35% of all UPI transactions, which along with its e-wallet share, made it the market leader at the time.

A lot has changed since then. Alphabet, which launched the payments app Google Pay in India in late 2017; And PhonePe, a payments app controlled by Walmart Inc-backed Indian startup Flipkart, spent aggressively attracting people to its platforms, which facilitate UPI payments. Paytm did not match this marketing spend, and its transaction share started falling.

Nine out of 10 mobile payment transactions in India are now UPI based, and e-wallets are not favored. In the second quarter of this year, Paytm’s UPI market share fell to 14%, while PhonePe and Google Pay together handled around 80% of all UPI transactions, according to an analysis of government data by S&P.

The overall pie is still expanding. Although India remains a largely cash-based economy, digital payments are growing rapidly, and the COVID-19 pandemic has led to more online and cashless transactions. According to S&P, since 2019, the annual value of mobile payments has increased by 70% to nearly $480 billion in 2020.

More global companies are entering the digital payments space in India. Facebook Inc.’s WhatsApp – which is ubiquitous in India – started offering mobile payments last year. Technology giant Prosus NV recently said it will buy Indian payments platform BillDesk for $4.7 billion. Smartphone penetration is still increasing in India, unlike China, where the market is nearing saturation.

Certainly, companies make very little money from UPI payments in India. “The path to profitability for fintechs like Paytm will depend on their ability to rapidly expand to impending financial services such as lending, insurance and wealth-management products,” said Sampath Sharma Narianuri, fintech analyst at S&P Global Market Intelligence.

Most UPI transactions are direct money transfers between individuals who do not pay any fees. To make money, Paytm is focusing on helping shoppers and merchants use its payment solutions and point-of-sale tools when customers make purchases. According to a person familiar with the matter, most of these are non-UPI transactions where merchants pay fees. Paytm now has relationships with 21 million merchants, up from 11 million in 2019, and said it is the market leader in facilitating payment transactions between consumers and merchants.

According to the company’s draft IPO prospectus, as of March, One97 served 333 million consumers, of whom nearly a third transacted on Paytm’s platform at least once during the past year.


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Indranil Aditya / Zuma Press

Rivals are not far behind either. PhonePe said in June that its payments network is accepted by 20 million merchants across India. “Everyone is targeting the same merchant,” said Satish Meena, an e-commerce analyst who was previously with the research firm Forrester in India.

Meanwhile, One97’s foray into other businesses faces the challenge of expanding into industries where established players have a dominant market share. The company has expanded into areas including hotel booking, wealth management, personal lending, and software and cloud services for businesses.

For example, Paytm Money Ltd., the company’s four-year-old brokerage and wealth-management arm, competes with India’s largest online stockbroker, Zerodha Broking Ltd., which is already profitable. The CEO of Zerodha recently said on Twitter.

According to a person familiar with the company’s thinking, Paytm believes that the ability to cross-sell services to its existing users lowers customer acquisition costs and gives them an edge over competitors.

One97 holds a 49% stake in Paytm Payments Bank Ltd., a licensed deposit-taking bank controlled by Mr. Sharma. According to analysts, it hopes to convert it into a small finance bank – a breed of banks specialized in India that can provide limited banking services – which will give it more flexibility to lend.

write to Jing Yang at [email protected]

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