Raghav Kumar (name changed), the owner of a small grocery shop in a northern residential suburb of Bengaluru, started using quick-response codes (QR codes) of Paytm and Google Pay to accept payments last April when the pandemic prompted many of his customers to use the technology for contact-less payments. However, when the shop was crowded and several customers were making payments simultaneously, it was hard to locate payment receipts. Kumar noticed that some customers were showing screenshots of the previous days’ payments for the same amount. Four months ago, he installed Paytm’s “Soundbox”, which reads out new payment receipts instantly, which helped him to keep track of the payments without checking the phone. Installing the nifty service cost him INR600 and he pays INR100 per month as subscription. Paytm had launched Soundbox early last year. Kumar displays Paytm’s QR code in the front and uses the Google Pay QR code only if a customer faces an issue with the Paytm facility. More than 95% of the transactions are done on the Paytm platform. “The Google Pay linked to my SBI account is prone to more transaction failures. Moreover, Paytm is offering me a loan of up to INR5 lakh. There are some rewards, too, like movie tickets,” says Kumar. Kumar’s Paytm business account is linked to Paytm Payments Bank (PPB), a separate financial institution for settlements. He makes sales of INR5,000 a day on average. While he has not availed of the loan facility that Paytm is offering at 14.5% interest, he feels such perks could come in handy at times. Instances such as Kumar’s helped catapult PPB as the topmost UPI beneficiary bank this January, from being placed 23rd both as remitter and beneficiary in January last year. Here’s the story of how Paytm scripted a turnaround of sorts. Turning an ugly duckling into a swanWhile apps like PhonePe and Google Pay depend on the networks of large banks to carry out transactions on the United Payments Interface (UPI), which is linked to customers’ bank accounts, PPB is focused on serving limited customers and functions. While the large banks often relegate the non-revenue generating UPI platform to the background, for Paytm, it is part of its core payments business. In keeping with the Reserve Bank of India regulations, payment banks cannot lend. Therefore, most of the licence holders do not consider it a profitable business on its own. However, from a service viewpoint, PPB has the lowest technical decline rate among the top 30 remitter-account banks at just 0.05% compared with 1.44% for State Bank of India and 1.35% for HDFC Bank. Even multinational banks with limited customers such as Citibank and DBS reported a technical decline rate of 1.62% and 0.14%. This is usually a result of the bank server not being able to process a transaction request owing to network congestion, a by-product of lack of investments in the information-technology infrastructure, the backbone for UPI transactions. A few other merchants that ET Prime spoke with also say that instances of Paytm failures are marginally fewer. Paytm claims that the failure rates in its wallet accounts are similarly lower than that of the top banks. However, that could not be independently verified. In January, for which the latest data is available, PPB was the top beneficiary bank, having done around 370 million transactions on the UPI platform, surpassing State Bank of India, Yes Bank, Axis Bank, and HDFC Bank. The banks’ front end being the UPI apps such as PhonePe and Google Pay. Contrast this with the first four months of 2020, when PPB was not even in the top 10. In fact, it was ranked 23 among the top banks in UPI transactions in January last year both as remitter and beneficiary. 81379176So, has this dramatic shift in a matter of 12 months convinced Paytm about UPI? Not exactly. These transactions probably constitute only 28% of the platform’s monthly transactions, which stood at 1.2 billion in February. According to data from UPI owner National Payments Corporation of India (NPCI), 330 million of those transactions were done on the payments-technology platform. “We have grown fast in the offline space in the last 12 months and we encourage them to use our payments bank account for settlement,” says Paytm vice-president Narendra Yadav. Praxis Global Alliance (PGA), a digital-markets analytics firm, estimates that Paytm has close to 35% market share in the overall payments space, while PhonePe and Google Pay have around 30%-32%. 81379186“Paytm has created a multi-faceted business that attracts several small shops and businesses with its all-in-one QR, soft point-of-sale machines, and payments-bank and payments-gateway channels,” says Shishir Mankad, head of financial services at PGA. “While it was not excited about UPI, which hurt it in the beginning, the focus on merchants has helped it reclaim some of the lost market share over the past 12 months.” The merchant growth since the pandemicDigital-commerce consultancy RedSeer estimates that 15 million new merchants have started accepting digital payments since the pandemic. Industry sources estimate that more than two-thirds of the transactions on Paytm’s platform consist of person-to-merchant (P2M) transactions as compared with around 40% on the UPI platform, dominated by PhonePe and Google Pay. Walmart-owned PhonePe estimates that for every P2P (person-to-person) transaction, a customer does eight to 10 more P2M transactions (including cash). With more and more merchants coming on board the digital-payments platforms, the company is expecting P2M transactions to surpass P2P transactions in the near future. “The use cases for P2P transactions are a monthly cycle while merchant transactions use cases are daily or weekly. Our cashback has gone to near zero since last year, and for the first time in four years, digital payments, and particularly UPI payments, are now growing because of the massive network effects at the societal level, and not because of offers or cashbacks. This is largely led by consumer awareness, merchant adoption, and trust in digital payments,” says Vivek Lohcheb, vice-president for offline business development at PhonePe. Noida-based Paytm started way ahead of its competitors and had created a network of salespeople to acquire merchants. It got the initial boost when demonetisation was announced, forcing a large segment of the population to use digital payments for day-to-day transactions. UPI still hadn’t gained huge traction at the time, and during the first few months, NPCI’s BHIM app was the biggest UPI platform. While consumers migrated to UPI-based payment apps, the merchants stayed on with Paytm, which offered — though reluctantly at first — an all-in-one QR code that provided the much-needed interoperability between the Paytm app and other UPI-based platforms. According to Mankad, the success of Paytm among merchants can be seen from the fact that the company’s payments bank has made it to the top of the 30 UPI beneficiary banks list without even factoring the wallet, card, and other transactions. “Who is likely to have more incoming transactions than outgoing payments? Obviously, the merchants,” he says. In Paytm’s case, the number of remitter transactions is less than half of the beneficiary transactions on its payments-bank platform. It says that more than half of its 20 million merchants are using PPB as the settlement platform. PhonePe claims to have over 17 million merchants on its platform. “When every investor started questioning the business model of startups, they were forced to move away from P2P transactions towards P2M, which additionally offers credit or other SaaS services opportunities like bookkeeping or GST payments. With cashbacks dwindling, it has become an ecosystem play with complex and adjacent businesses helping build that,” says Arnav Gupta, an analyst for financial services at technology-research firm Forrester. The bottom line, aka business opportunityThe lack of incentives like the merchant discount rate (MDR) or commission for payments processed has hurt banks, which facilitate more than 2.3 billion transactions on the UPI platform every month. Banks have been requesting the government to bring MDR back so that UPI can fund its own growth. Even a 20-30 basis points or a 0.2% margin can generate thousands of crores worth of business for the companies. If that happens, it will provide Paytm with an inherent advantage, as its payments bank processes most of its UPI transactions. It can lower the MDR margins than its competitors who use the larger banks, thus helping it attract more merchants. Gupta of Forrester feels that for payment firms, merchant acquisition is the right way to make a serious business case and build engagement. “However, even with MDR or transaction commission, you cannot build a good-margin business, which has to come through neo-banking services and lending.” Almost all of the mobile-payment firms are banking on credit and financial services to propel their business. Paytm says that it looks to lend close to INR1,000 crore during the current fiscal — almost double the INR550 crore it disbursed in the previous one. However, over the last couple of years, BharatPe has emerged as one of the biggest threats to incumbents, with its focus solely on acquiring small merchants and lending to them. It has even named Paytm as one of its primary targets. BharatPe claims to have disbursed around INR100 crore every month to merchants in the current fiscal, which puts it on a par with Paytm. “BharatPe’s singular purpose and clarity give it an edge. However, it is a riskier business, with many banks faltering. The jury is still out on that,” says PGA’s Mankad. However, as long as Paytm continues to get more merchants like Kumar, the grocer on board, it should be able to build a strong bulwark against competition. (Graphics by Sadhana Saxena)
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