Paytm, Paytm Everywhere But Profitability Nowhere In Sight 

On May 15, payments firm Paytm tied up with foreign lender Citibank to introduce a co-branded credit card. Not surprisingly, the card came laden with the promise of cash-backs to help lure customers to sample the latest offering from the Alibaba-backed and Vijay Shekhar Sharma-promoted payments firm.

The new addition joined a plethora of products introduced by the Paytm ecosystem over the last few years, making it a mini financial conglomerate. From gold and savings bank accounts to mutual funds and forex services, Paytm and its associate firms are offering it all. If Sharma gets regulatory approval, insurance and peer-to-peer lending may soon be added to the list.

But there is one thing missing in all of this—profitability. The practice of heavy discounting through cashbacks, along with large operational expenses on items like advertising, marketing and network costs have meant that profitability remains a distant dream for a company that is now nearly nine years old.

Earlier last week, Vijay Shekhar Sharma, founder of One97 Communications Ltd.—the parent company of Paytm—acknowledged that profitability is some time away. The business is “sustainable” but profitability may be some time away as the company is spending more on on-boarding users and merchants, Sharma said on the sidelines of the launch of the Paytm First credit card.

To be sure, Sharma has said for some time that profitability will not be achieved in the near-term. “We are not making profit this year or next year or the year after,” he told BloombergQuint in an interview in 2018.

The company didn't respond to several requests over the past one month for a more detailed conversation on its profitability roadmap.

Burning Cash On Marketing And Network Charges

BloombergQuint reviewed the financial statements of One97 Communications Pvt Ltd., the holding company of Paytm, and other Paytm companies for FY17 and FY18 submitted to the Ministry of Corporate Affairs. Financial statements for FY19 are yet to be uploaded.

According to the documents, One97 has been loss-making for nearly five years now, largely to due high operational costs. In FY18, One97’s net loss rose to a little over Rs 1,600 crore from Rs 900 crore in the previous year.

Marketing expenses and network charges are the two biggest costs being incurred by most of the group companies. Network charges are paid to payment processing platforms like CCAvenue, Worldline and others, which facilitate payments.

One97 spent Rs 1,204 crore in FY18 on payment gateway expenses compared with Rs 241.43 crore in the previous year. On marketing, the spend was Rs 1,901 crore in FY18 compared with Rs 708 crore in FY18.

A similar trend was found for Paytm E-Commerce Pvt Ltd. and Paytm Payments Bank Pvt Ltd.

Revenue for Paytm Mall, the e-commerce business, ballooned to Rs 744.15 crore in FY18 from Rs 7 crore in the previous year. But its expenses rose even more to Rs 2,582 crore in FY18 from Rs 21 crore in FY17. It posted a net loss of Rs 1,787 crore in FY18 compared to Rs 13.6 crore in FY17.

Most of the company’s expenses in FY18 were linked to marketing and payment gateway charges, MCA documents show.

The group’s payments bank started operations in November 2017. The bank had mobilised Rs 371.4 crore in deposits by the end of December 2018, BloombergQuint reported last week.

While data for FY19 is not available, the payments bank’s losses had risen from Rs 30.7 crore in FY17 to Rs 51.4 crore in FY18. The expenses incurred in FY18 included Rs 662.5 crore on payment gateway charges, show the MCA filings. Another Rs 6.9 crore was spent on advertising.

In December 2017, the company said in a statement that it would invest around Rs 3,000 crore in three years to create an offline banking network of 100,000 consumer banking touch points. Revenue options, meanwhile, are limited. Payments banks aren't permitted to give out credit and mostly earn fee income by sales of third-party products.

A Tough Road To Profitability

When asked whether the businesses can be sustainable with such high expenses and low profits, Sharma said Paytm e-wallet is actually is cash positive, if one excludes the costs of cashback offers and marketing promotions. “The segment loss that we receive is for expanding the ecosystem by acquiring more customers and merchants on the platform,” he said.

One97 expects its loss to surge to Rs 2,100 crore in FY20 and may report its first profit of Rs 207.61 crore only in FY21, according to a report dated Feb. 17 by Livemint.

“Making money in India payments remains notoriously hard, leading to many players in the space pivoting towards broader financial services, or using payments as an anchor for user growth for other services,” said Gautam Chhugani and Harshita Rawat, analysts with Sanford C Bernstein, in a May 15 report.

A key reason for this is the upfront expenses not just on customer acquisition but on network charges and cash-backs.

The majority of marketing expenses for payments companies lie in television advertisements and physical advertisements and at the back-end e-wallets and other digital platforms are dependent on payment service providers who charge a premium, said Vivek Iyer, partner at PwC India. These firms are the payment gateway or ‘pipeline’ for customers to make payments in a secure and efficient manner.

Iyer added that the issue for wallet companies is their cost model. When a customers’ account is debited, save for taxes, the company bears the expense of crediting the account immediately with the cashback. “They actually take the hit consequently as they have to manage the cashback from their books” he said.

The cash-burn period for these firms have proved to be longer than expected, Iyer said.