Signage for digital-payments provider Paytm, operated by One97 Communications. (Photographer: Dhiraj Singh/Bloomberg)
Signage for digital-payments provider Paytm, operated by One97 Communications. (Photographer: Dhiraj Singh/Bloomberg)

Regulatory Changes Weed Out Non-Serious Players, Leaves Paytm Stronger 

The Reserve Bank of India’s move to allow transfer of funds between rival mobile wallets compliant with know your customer norms is a boon for Paytm as it weeds out the non-serious players in the payments industry, said chief executive officer Vijay Shekhar Sharma.

“I believe that it is a great asset because it also winds away the non-serious players who were just throwing money and were not serious for a long term,” Sharma told BloombergQuint in an interaction. Interoperability will benefit the industry in the long term, Sharma said, citing the example of the telecom industry where better network speeds increased customer base.

In payments, the better service and network is about the number of places where you are accepted and number of places you have payment acceptance.
Vijay Shekhar Sharma, CEO, Paytm

Vijay Shekhar Sharma and Paytm have been among the beneficiaries of Prime Minister Narendra Modi’s demonetisation, which resulted in an initial surge in digital transactions across the country. An e-wallet prior to the cash ban, Paytm also launched a payments bank in its aftermath.

The payments bank has “tens of million customers”, said Sharma, adding that he'll withhold the official number till the day they launch savings and check-in accounts on their platform. Sharma said that Paytm is also looking at setting up “ultra low-cost” branches, control points and ATMs. It has requested the RBI for 1,00,000 banking points across India, he added.

When asked about the future capital needs of Paytm, Sharma chose to respond with a famous line from a popular Bollywood movie “Mere paas ma hai, Jack Ma”, referring to the founder of Alibaba, which is an existing investor in the company.

Here are edited excerpts from the interview.

Where were you when demonetisation announcement did happen?

Last year, same day, there was a business award evening in Bombay and I a was part of that business award function and I had collected the award and I wanted to show a photo of it. That’s how I opened my phone and it was filled up with messages. I learned that what has happened, and I was uncomfortable in the room trying to understand, do people know. I asked Harsh Goenka that do you know what has happened. I needed to go out of the room and call my team and think what should we do next so on, so forth. So, last year today was an incredible day for a technological company, a payment startup, and whole technology ecosystem.

Foray Into Wealth Management

How close have you reached that goal of being able to offer wealth management, etc. to your payment bank’s customers?

Payment journey gave birth to payments bank opportunity. We launched depository accounts. We have not yet launched current account for businesses. But savings account is completely digital only yet, which means that you have a digital credit card, you have the capability to do money transfer and incoming and outgoing using digital methods. So, we are today the truest mobile first, a digital first bank in the country.

So next we are adding wealth management product there. So, we have a super liquid fixed deposit, fixed deposit account which is totally zero cost for money in and money out and your money can swipe in at your setting basis and can come out on your demand basis - 24x7, zero cost money in and money out from your savings account to your wealth management account and vice-a-versa. So, these services are continually being added. We are looking to do a formal launch once we have added our current bank accounts too. We are expecting by next month we could have publicly launched it. So, payment gave birth to payment bank and now payment bank is expanding the customer base to lending, insurance, and other additional financial services. Yes, last three years what we build is giving birth to the digital age or mobile age mobile services company.

Threat From Traditional Banks

Why is it that at some point you will not have to counter the threat from traditional banks? How do you see competition panning out in the next decade?

There is no secret about it that all banking and financial services companies sort of are the first right of refusal on the customer base and services that we provide because they either have a relationship or have product and capability. Due to their business plan obligation or due to their business strategies, they have not reached to the customers who are lower cost and lower value, higher cost lower value or in their ecosystem or business sense it ends up becoming non-optimum customers.

But in our technology first business model and mobile-first business model, even a customer who have Rs 100 to deposit and Rs 100 to take out from ATM ends up making money for us, and it is very easy for us to take care of whole customer flow. And whole customer process and technology system can allow lower cost base for our banking services to be delivered. I also believe that traditional banks can nearly do everything that we can do but it is just that we are built up and bottomed up without obligation of the cost that they are built up with. We are digitally savvy enough and suited enough that we do not have the obligation of building physical distribution at a scale that they have. I have also learnt that banking sector of the country does not want every customer. Jan Dhan accounts were government obligation to them, so they build up Jan Dhan ecosystem. But Paytm, would like to take every Jan Dhan account to our bank account and serve them very easily.

A vendor arranges earrings next to a sign for PayTM online payment method, operated by One97 Communications. (Photographer: Dhiraj Singh/Bloomberg)
A vendor arranges earrings next to a sign for PayTM online payment method, operated by One97 Communications. (Photographer: Dhiraj Singh/Bloomberg)

Key Risks

Do you think this advantage will survive in the next couple of years? What will pose the biggest threat to your business model from here on?

No technology is magically good enough for next 3-5 years. They are good enough optimally for 3 years. The customer’s need, and optimization of technology will be a continuous process and the traditional banks have a lag here. They source technologies from third parties and those third parties build technology once they are popular or correctly successful and those successful and correct technologies are built by parties like us who are themselves producing technology. So, this is lag.

So, Paytm, payment instruments, wallets, QR code, you can see that all these things came after two years lag in traditional banks also. Opportunity for us continuously remains that 2-3 years runway that we have in the business which we continuously move reaching forward and traditional banks come back later and the checkbox that, is our opportunity. Banks are banking product, we are technology company who learns banking. Banking companies are not technology companies and that’s the difference which continues to become long term.

We believe that disproportionate amount of target setting helps the team rally around those targets and achieve them. We are lucky that we have not just achieved those, but we have crossed those targets.

We will have 500 million bank customers who are biometrically verified and confirmed by 2020. We will be the largest bank by the customer base in the country.

Sustaining The Momentum

How easy will it be to keep pace with the uplift seen in the last 12 months?

There is no secret that people were obligated to use technology and mobile-based payment system from last year. But at the same time, they have come back to cash. What has changed is that the country has now known what is mobile payment and how does it work. This country also knows what are the different technologies that can be used in the banking ecosystem. Leg up to mobile payment will no more be now, necessarily, require from government only but business like us and banks have to build business services, charges, and capabilities that incentivise consumers and businesses to use digital. Right now, digital is becoming inferior as it has costs unlike cash, so that’s why cash remains preferred in some situations. The percentage of growth of payments may not be same but other services like deposits, lending, wealth management, those things will grow. I don’t think we look at it like the payment system should grow by those same numbers, but we are looking for an opportunity to be a financial services company.

Back In Black Soon?

Can reported numbers revert back to profitable growth in 6-18 odd months?

An important KPI that we look at is net of cost of banking like payment gateway, card network cost and net of cashback marketing etc., to see if we are profitable or not. Our cost, which is people cost and cloud technology cost are weak account below the net contribution margin, so Paytm is a net contributing profitable business. We don’t recover the cost of people or the cost of cloud platform. As an investment, we will continue to aggressively invest which means that till the time we are net contribution positive, or in a neck up state, we don’t have to bother about the cost of people and cloud technology because the number of things that we end up doing continue to grow.

Just like the Amazon’s business is popularly known to internally have some line items which are profitable, while the total sigma combined level doesn’t report a large profit, that is the state in our case.

Lot of our payment verticals are profitable and perhaps the whole payment vertical is profitable We believe that at a company level, internally, different lines will generate profit and at a combined level we will remain investing for 3-4 years.

Regulatory Overhang

There have been regulatory issues in your space. How has it impacted your business? Will interoperability hurt Paytm?

Let’s look at the first obligation of KYC. We are clear that we want to acquire banking customers and KYC is an entry of a bank customer, meaning we will grow faster in the bank customer space via the KYC route. Earlier the customers could have been Paytm customers without KYC requirements, but now we will do KYC. Thus, it accelerates our KYC and bank account openings. As a byproduct, it is a great asset because it rules out the non-serious players who were just throwing money and were not serious from a long-term perspective. It has become a few serious players oriented business now.

Whenever you have interoperability of one service vertical over the other, you see that one way or the other, the network effects are better. For instance, in cellular, the better network and better services ended up getting customers. In payments, the better service and network is about the number of places you are accepted at and the number of places you have payment acceptance. At Paytm, we have the largest merchant network in the country, many times bigger than any payments network. We see that customers from others are coming to us and we believe this is how it is supposed to be. When interoperability question came, we were supportive believing customers who have been using other payment instruments should converge towards Paytm because it is more useful to keep money in Paytm than at any other place.

Size And Scope Of Payment Bank

Where are you on the payment bank numbers? What is the scale of the bank?

Our CEO said that we are in tens of million customer numbers and we want to save the official numbers for the day we launch our check-in and saving accounts. However, it is a very healthy number.

As of banking points that is branch, ultra-low-cost branch, control points and Paytm-ka-ATM points, we have sent a request to the Reserve Bank of India for 1,00,000 banking points in the country.

When we are formally talking of the number of places our customers can walk in and take cash, deposit cash and carry on with the banking activities, it is close to 1,00,000 points in the first year itself.

How many rounds of funding and at what valuations do you envisage doing?

It is important to know that any high growth company has to have capital access. I am privileged to have Softbank, Alibaba and many of our shareholders who are few but for long-term having long-term capital access. That is one of the most important aspect of the plan we have been building. It is no secret that we will need more capital. But as of now, as we look at books and availability of capital, we are well capitalised beyond 2020. Also with the numbers that we are talking, investments and customer growth, we will talk about everything after 2020.

Watch the full interview here.

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