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Paytm from Idea to IPO
Plus: Tinkoff/Revolut, ICE, DeFi
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Paytm from Idea to IPO
Ten years ago, the idea of the pivot was popularised by Eric Ries through his book, The Lean Startup. Ries recognised that startups frequently need to shift strategy before they find success. In some cases, the capacity to pivot is retained inside a company’s DNA as it grows, helping the company to evolve with changing conditions. A good example of this is Netflix, whose founder wrote his own book on the subject, No Rules Rules: Netflix and the Culture of Reinvention.
I don’t know whether he’s read either of these books, but Vijay Shekhar Sharma reflects these ideas in his company, Paytm and its holding company, One97. His company is now over twenty years old, but it has shifted direction multiple times – from phone services to marketing to mobile phone top-ups to payments to e-commerce to full-scale financial services. Along the way, it’s attracted funding from Ant Group, Softbank and Warren Buffett. Today, Paytm is the largest fintech in India, readying itself for an IPO, expected to launch over the next few months.
Sharma hasn’t written a book of his own – and has no plans to – but he has written 36,000 tweets that chronicle the growth of Paytm. In order to get a handle on his company ahead of its IPO, let’s look through them.
Vijay Shekhar Sharma has been an entrepreneur since his college days in New Delhi. While there, he started a website with some friends, indiasite.net, which he sold in 1999 for half a million dollars. In 2000, he went on to form another company, One97.
In those days, before smartphones, if you wanted to find out the latest cricket score while on the move you could call a number – 197 – and the mobile operator would keep you updated. One97 provided operators with the content. As well as text based content, One97 also offered music – by calling the same number you could stream a song through your mobile phone, in a very early incarnation of Spotify. Sharma and his team built the technology platform underpinning these services and participated in a revenue share with telecom operators.
Over the next few years, mobile content grew into a big business, worth $1 billion by 2006. But One97 faced stiff competition. Its market share slipped and eventually it lost its biggest client, wiping it out of the business.
Thus came Sharma’s first major pivot. In response to the challenges faced by One97, he shifted the firm’s focus towards marketing. His technology was capable of identifying cross-selling opportunities among telco company customer bases, so he sold those leads to the telcos. If a customer was known to take long distance calls from the US, say, but not make them, a cheaper international call plan could be offered. One97 was paid for every successful cross-sell it generated.
Soon, telecom operators began doing this work for themselves and One97 was squeezed out of the market. So in 2010, Sharma tried something new. At the time, most mobile phone users prepaid for phone usage by paying cash at a local store. One97 launched a service – Paytm (“Pay Through Mobile”) – which allowed them to pay online instead. The process meant setting up a digital wallet at Paytm, attached to the consumer’s name and mobile number. In those early days, wallets remained empty most of the time – two or three dollars would come in to finance the mobile top-up and they would go out to the mobile operator. But the building blocks were in place for a new payments system.
Over time, the number of wallets on Paytm’s platform increased and Paytm developed more use cases. In 2011, it added the ability to pay for digital satellite services. Then it added bus tickets and utility payments. In all cases, these were high frequency, low value transactions where paying via mobile phone became a more efficient alternative to cash.
Throughout this period, money came in and it went out. As we discussed in our piece on Ant Group back in July last year, mobile wallet platforms derive value from two sources: the data they accumulate on customers’ spending patterns and the surplus cash that sits within the system. Paytm had access to data but not to surplus cash. That changed in 2014, when the company received a “semi-closed prepaid payment instrument (PPI)” license from the Reserve Bank of India. The license enabled Paytm to launch a wallet which customers could download money on to from their bank accounts. The only restriction of the license was that cash withdrawal was not allowed.
Armed with its PPI license, Paytm negotiated a lucrative partnership with Uber which had just launched in India. Uber was struggling because it could not facilitate two-factor authentication for payments, a regulatory requirement in India for digital card transactions. Paytm proved an efficient alternative. The partnership also brought Paytm to the attention of a more affluent demographic, whose members opened Paytm wallets so that they could use Uber. In the last quarter of 2014, Paytm was doing $30 million of gross merchandise value in its traditional top-up/recharge market (averaging $1.80 per transaction); the Uber partnership contributed $0.8 million (averaging $4 per transaction) in its first quarter.
At about this time, Vijay Shekhar Sharma met Jack Ma of Alibaba for the first time. Alibaba was already a huge success, doing $127 billion of gross merchandise value that same last quarter of 2014. Sharma was a fan. He’d heard Ma speak at an event in Hong Hong in October 2011 and became influenced by what he was building in China. “In that year, I learnt that if you want to learn what is happening in mobile internet in the world, you don’t go west, you go east.”
In 2014, Paytm needed to raise funds and in October, Sharma flew to China to see if Ma was interested. Through Ant Group, Ma ended up investing $500 million in the business for a 25% stake.
Ma influenced Sharma into expanding into mobile commerce. Unlike Paytm, Alibaba had started out in e-commerce and entered payments as a means to facilitate e-commerce by launching Alipay (now part of Ant). Although Paytm’s starting point was different, the convergence of commerce and payments was a trend Sharma could nevertheless tap into. Paytm launched a marketplace with 250 merchants and 100,000 items.
According to Sharma, “We stand for payments. But an independent payments business is an orphan business, without a marketplace to anchor it. It’s like the symbiotic relationship between a rocket (payments) and a launcher (marketplace). Our marketplace allows us to build relationships with merchants… We went to all the existing marketplaces to deploy our wallet. Seeing their disinterest, we decided we had to take a call to build our marketplace ourselves.”
Over time, more merchants were added to the payments platform across different verticals. Paytm added more taxi services alongside Uber; it added hotel bookings, flight bookings, entertainment, toll roads and more. Paytm received a commission from merchants and offered its service free to consumers. The company incurred a cost when money came onto its platform via bank transfer or card payment (at a rate of ~1%) but earned revenue when money went out – either via a fee from the merchant (2% for small merchants) or directly from the consumer if they wanted to transfer cash back to their bank account.
By mid 2016, there were around 140 million wallets on the platform, up from 40 million at the beginning of 2015. Meanwhile, mobile top-ups contributed a shrinking share of the business. By the third quarter of 2016, payment volume on Uber alone was about a third the size of mobile top-ups.
Alibaba also influenced Sharma to expand the payments business into offline markets. Consumers were already using Paytm to pay for items offline informally using Paytm’s peer-to-peer functionality, launched in July 2015. That functionality allowed customers to transfer funds between each other free of charge, and was increasingly being used by small merchants to take payment. Sharma was initially sceptical of formalising it. He worried about lack of internet connectivity at offline locations, the sales effort required to acquire customers and the distraction from growing Paytm’s online presence. However, when he saw QR codes in the wild on a trip to China in November 2015, he changed his mind.
He built a dedicated salesforce and used a network of agents who were trained to help onboard merchants in return for a commission; a call centre was also available to service self-directed merchants. By the end of 2016, Paytm had around 1.5 million merchants signed up. Today that number is around 20 million.
Government Giveth, Government Taketh
In November 2016, Paytm got a huge boost via government intervention. On 8 November 2016, the Government of India announced the demonetisation of all Rs500 and Rs1,000 banknotes in an effort to curb the shadow economy. Around 80% of paper money was taken out of circulation, leading to prolonged cash shortages. Demand for non-cash payment mechanisms like Paytm’s digital wallet ballooned. “Overnight, we went from a new thing to a must-have,” said Sharma. In the weeks that followed, Paytm acquired 20 million new users, taking its user count to 180 million.
However, just as the Government gives, so the Government can take away. In 2016, the Government also introduced its Unified Payments Interface (UPI), an instant real-time payment system to facilitate inter-bank transactions. Unlike the closed system of Paytm, where both customer and merchant have to be on the platform for it to work, UPI is an open interface – effectively granting everyone mobile access to the payment system.
UPI itself is a non-profit owned by the Reserve Bank of India and over 50 commercial banks. It works by virtualizing accounts, with users allocated uniform addresses like email addresses. Transfers can be made by specifying a virtual payment address, UPI identification, a mobile number, a bank code, digital ID or QR code, making it extremely flexible. Transfers are instant and can be made 24 hours a day, 7 days a week. Today, there are 224 banks and payment providers plugged into the UPI system.
Use of the system has expanded enormously since launch. In April 2021, 2.64 billion transactions were made on UPI – double the run-rate coming out of 2019 – equivalent to around $67 billion in value. Ticket sizes are typically quite small so the UPI share of total payment value remains quite low. But as a share of transaction volume, UPI now makes up over a third of digital payments.
The first non-bank to launch on UPI was Walmart-owned PhonePe in August 2016. At the time, it was only eight months old; it had been bought out by Flipkart years before Flipkart itself was acquired by Walmart. In December 2020, PhonePe was spun out of Flipkart and received a capital injection directly from Walmart ahead of a possible IPO of its own.
It took another year for Paytm to launch a parallel service to its wallet that worked on UPI infrastructure; it came to the market at the same time as Google Pay. Paytm started strong, taking a share of around 37% of UPI transactions by October 2018. But it began losing share as competition intensified in 2019. PhonePe and Google Pay in particular invested heavily in marketing and customer cashbacks and gained share.
Today, Phone Pe is the biggest player in the system, with a 45% share as at April 2021. It’s no wonder that Jamie Dimon is nervous about what Walmart could do to disrupt financial services in the US! Google Pay has a market share of 34% and Paytm lags with 12%. Amazon is in fourth place with ~2% market share and Facebook, which entered the market much later in November 2020 via WhatsApp, has failed to gain much traction.
However, UPI payments do not contribute direct revenues – they are offered as a free service, with zero merchant discount rates imposed. Rather, they have become a customer acquisition tool for companies intent on cross-selling other financial products using the data gleaned from payments.
In addition, the Government has recoiled at the highly concentrated market share that has built up in the UPI system. It imposed a 30% cap on UPI share initially from January 2021, but since extended.
Instead of chasing share, Paytm’s strategy in UPI has been to focus on the merchant side. This is reflected in its position as the leading beneficiary bank in the UPI system. More broadly – across both UPI and its legacy wallet business – Paytm’s growth in the consumer-to-merchant payment category has been rapid. According to Sharma, “Paytm wants to be the champion of merchant payments; Paytm wants to be the champion of the payments that drive economic commercial value. We are totally clear about that. Person to person money transfer does not drive any economic commercial value; we call it money transfer…”
A Full-Service Financial Institution
Over the years, Paytm has invested very heavily in acquiring users. It’s the series title sponsor for all major cricket matches, domestic and international, played in India; it advertises heavily across multiple media; and it has offered cashbacks and discounts. It now has around 350 million registered users of which around 50 million are active.
However, the competition from UPI and the Government’s recent initiative to make all wallets interoperable reduces Paytm’s capacity to capture value from its closed payments model. Despite the rising penetration of digital payments, Paytm revenue growth has stagnated at around 2% per year over the past few years, down from 100%+ per year in the years prior.
So it’s time for another pivot.
Says Sharma, “We are payment, commerce and we are a financial services company. So Paytm wants to be the financial services company in the end and that is what we are headed towards.”
Paytm has been authorised as a licensed “payments bank” for several years. In August 2015, it received a license, allowing it to offer savings and current accounts, remittance services, third party mutual fund sales, insurance and pension products. Its only restrictions were a Rs100,000 cap on deposits and a prohibition from offering loans. The license was created to target unbanked customers and although eleven were granted, only three were taken up. Paytm launched its payments bank in May 2017 with wallet customers migrated over by default.
Regular readers of Net Interest and specifically More Net Interest will be aware of the travails Ant Group has had over recent months with its regulator in China. By taking a payments bank license, Paytm subjected itself to regulatory oversight earlier in its growth. However, it hasn’t been exempt from similar kinds of run-in that develop from blending commerce with banking.
In 2018, the Reserve Bank of India questioned Paytm’s strategy of acquiring customers with cashbacks via its marketplace. It instructed Paytm Payments Bank to stop onboarding new customers and more formally to separate its banking business from its commerce business. This required the bank to appoint a new CEO (the incumbent at the time wasn’t a banker) and relocate to a separate office away from the parent company.
Three years on, the bank has around 60 million depositors holding around $430 million in deposits. It has plans to upgrade its payments bank license into a small finance bank license which would allow it to lend as well as to take deposits in excess of Rs100,000 per customer. Right now, Paytm generates around $20 million in annual revenue from financial services (against $400 million from payments and $80 million from e-commerce) but its goal is to grow that over time.
Its financial services offering includes:
Credit. Paytm offers four credit products in partnership with banks and other financial institutions: merchant credit, short-term consumer loans, co-branded credit cards and Buy Now Pay Later (BNPL) credit via its wallet. Paytm takes a commission on the origination of loans from its partners, but when it gets its small finance bank license, it will be able to retain loans on its own balance sheet.
Funds. Paytm launched Paytm Money in 2018. The app offered funds from 25 mutual fund houses in India, covering 90% of the market. It recently added retail brokerage where it charges zero fees for cash trading and a small flat fee for derivatives trading.
Gold. Paytm has a partnership with a precious metals refinery, allowing customers to buy, store and sell 24-karat gold. Customers can buy gold for as little as Rs1 and resell it online.
Insurance. Paytm offers insurance products from over 30 insurers across term life, health, motor insurance, and consumer electronics. Commission rates for insurance distribution are typically quite high, as PolicyBazaar, a standalone online insurance distributor, shows.
More detail on each of these product lines will no doubt come with the IPO filings. The question, though, is whether this is the final pivot. Fintechs have grown all over the world from different seeds – credit cards, foreign exchange, payments, ride-hailing, mobile phone top-ups. Yet they all converge on the model of the full-scale financial institution super-app. Paytm’s success depends on it retaining the flexibility that has enabled it to pivot all the way to IPO.
More Net Interest
One founder who has written a book – actually, three – is Oleg Tinkov of Tinkoff. We discussed the bank back in January here. Tinkoff came to the consumer fintech fray via credit cards, which gives it a profitable foundation from which to expand. So far it has limited its activities to Russia, but management has long hinted that it would ultimately export its model abroad. This week, Tinkoff’s CEO said that he has shortlisted 3-4 countries in Asia in which to expand, with China not one of them. The company will apply for a banking license and launch via its Tinkoff Black debit card product.
The slow international roll-out stands in contrast to another Russian-founded fintech, Revolut, which is active in multiple countries (including the US, despite the questioning of its Chairman). Revolut is currently profitable thanks to crypto trading rather than credit cards, and a bank license – if it is forthcoming – would boost profitability further. It is reportedly in the market looking to raise funds but if secondary market trading can be relied on, it is valued at $11 billion, which is where Tinkoff – many years older and much more profitable – was trading four months ago.
It’s always worth listening to Jeff Sprecher, the founder and CEO of ICE – the parent company of the New York Stock Exchange and other market infrastructure businesses. We’ve quoted him here before, notably in Plumbing the World’s Markets: The Story of ICE. Sure, he’s been an operator in the exchange industry for 20 years, but he still has the hallmarks of an outsider, seeing the business in novel ways. Who else would cite eBay as an inspiration for his business model?
This week, he spoke at an industry conference and drew parallels between his business and consumer internet businesses.
We’re actually in the institutional network business. We built institutional networks. Underpinning those are large databases, some of the most potent and powerful databases in the world that are helping across those networks. And investors seem to understand things like Amazon and Facebook, which are consumer facing networks and have paid less attention, in my mind, to institutional networks. But the value of the network is that every new client that comes on makes the network more valuable to the people that were already there. And every new piece of information or service that you can provide across the network has a bigger and bigger distribution as a result of that.
He’s currently in the process of creating a network around the mortgage business, which has historically leaked value.
And so the network effect is having all of the people that participate in mortgage… that network, if we’re successful in expanding this really scales become very large… And the opportunity set there, if you really want to look out 5 years or 10 years or what other -- now that you have that massive network of consumers, lenders, title companies, lawyers, notaries, counties and capital markets all on one network, what are the other opportunities? And one of the things we’re finding, just to show you a little leg is a lot of people coming to us saying, are you aware that my business benefits from a new homeowner?… the event of buying a home stimulates a lot of consumer behavior. And we are at the center of that. We have the best dataset, knowledge base bar none of what’s going on, if we have that end-to-end transaction.
It’s a bet, and it’s five or ten years out, but it’s not often you hear CEOs of large financial institutions outline moonshots like that.
Thanks to all of you who emailed me with feedback on last week’s DeFi piece. Like me, several of you have tended to wounds in the Wild West of crypto trading. I’m persevering and I’ll be writing more in coming weeks. If you have any insights into projects worth exploring in this fascinating space, please reach out – I’d love to hear from you.