Everybody loves Vijay Shekhar Sharma.
He had everything going for him when he started his fintech company PayTM a little over a decade back: A modest background, a brilliant idea and an insatiable hunger to disrupt.
India’s largest IPO thus far has tanked despite the best efforts of the management, its heavyweight bankers and even some of the blue blooded institutional investors Blackrock, the world’s largest asset manager, CPPIB or the sovereign wealth funds of Abu Dhabi and Singapore who lent their support as anchor investors.
But when $5 billion was shaved off its $20 billion valuation, the stock market has once again proven why it is the best leveller.
But why did PayTM a.k.a One 91 Communication bomb when Zomato or Nykaa listings, its unicorn peers, both went bumper?
For one they are market leaders in their own space. Nykaa is also profitable, even though its net profit plummeted 96% in the September quarter right after its dream debut. Add to that a layer of regulatory risks and uncertainty; something a quick read through the PayTM prospectus would have made imminently clear.
“We expect to continue to incur losses for the foreseeable future and we may not achieve or maintain profitability in the future,” it said, and went on to add, “we cannot assure you that we will ever achieve or sustain profitability and may continue to incur significant losses going forward.”
For a moment, keeping aside the controversy around a 71-year-old former director urging India’s stock markets regulator to stall the offering, alleging he is a co-founder who invested $27,500 two decades ago, but never got his shares. PayTM has always maintained the claim is bogus and the allegations of fraud are mischievous. The shadow of misgovernance has always haunted the company and has even found its way into the DRHP.
The crux of the problem is the business model itself. On the back of the initial success around his core offering of digital wallets, Sharma went on to try and create a financial supermarket through strategic alliances with online travel and e-commerce. He got a massive leg up in November 2016, when Prime Minister Modi announced demonetisation; Sharma’s fledgling app, whose name is shorthand for “pay through mobile,” became an overnight sensation. A verb, synonymous with payments.
Much like his guru, Ma, Sharma too wanted to sell insurance, offer loans, asset management, broking, movie tickets and even sell shampoo and mobile phones. But by spreading the company so thin, so fast, most verticals haven’t gathered scale or profit, whittling the early advantage.
Today, PayTM lacks moats for users or merchants to download the app. Macquarie analyst Suresh Ganapathy says it has too many fingers in too many pies.
“Dabbling in multiple business lines inhibits PayTM from being a category leader in any business except wallets, which are becoming inconsequential with the meteoric rise in UPI payments. Competition and regulation will drive down unit economics and/or growth prospects in the medium term in our view,” Ganapathy co-published with colleague Param Subramanian on Thursday, the day PayTM listed and capitulated.
India has no walled garden like China. Ant thrived on being a duopoly and that made it mint money. PayTM is still bleeding after 10 years.
The PayTM surge ended when UPI killed all digital wallets with its neutral railroad that opened our payments landscape with real time transfers for both person-to-person and person-to-merchant.
The added features further accelerated growth but also made the space overcrowded with deep pocket big tech gorillas like Google, Facebook or deep pocket telcos/retailers like Reliance and Walmart (PhonePe) jumping right into the pool.
Today, Google Pay and PhonePe are the dominant force – cornering 40% of the market forcing PayTM, now in third place, to add the option. Finally, with QR codes becoming interoperable, PayTM’s presence at the merchants will also diminish drastically.
The battle in the payments app space now rests upon who offers the best user experience with seamless, feature-rich platforms. But it also translates to a fragmented market with no customer loyalty and churn depends on freebies and cash backs. Further with zero MDR, wallets on a standalone basis are unlikely to make money thereby forcing them to use payments to hook users and then offer a portfolio of services like insurance, wealth management, lending to monetise them, much like the Ant play book.
Pre-listing, the signs were ominous and valuations stretched. Months before the listing, key senior officials including Amit Nayyar, brought in to morph the company into a full service digital financial services powerhouse, resigned. Hedge funds became the company’s top five investors when the anchor book filled up and in private, domestic mutual fund managers told me they were miffed by the high handedness of the management in sharing data or giving access unlike say a Nykaa. The quality of the PayTM book was the trailer of the show that premiered on Thursday and tripped up.
Several commentators were swayed by Paytm’s access to customer data but let’s be honest, nobody had the edge over consumer data like Ma did till just a few months back. In a hypercompetitive market like India, PayTM has increasingly looked shrivelled, losing share, sheen and its core payments business. Take away the discounts and most of its businesses disintegrated into pieces.
Unless Paytm does a Bharat Pe and gets access to lending or has a shadow bank in its fold, scaling up will not be easy. The banking regulator has been sitting on its NBFC application for the last 2.5 years. Even its request to become a small finance bank from the current payments bank setup is being held up, after facing the regulatory RBI’s rap in 2019 for audit lapses. And the competitive landscape is changing dramatically fast. As I have argued before, new age brokers like Zerodha the home grown Robinhood have disrupted broking with their aggressive price offerings and low flat fees. Most importantly, in the US, Robinhood makes money by selling retail orders to institutional traders who front run them. But it’s not allowed in India. The still minuscule mutual funds game is overwhelmingly metro led with over 85% of industry AUM generated in regular mutual funds compared to platforms like PayTm Money. Targeting second tier cities can deliver only that much. Likewise, in the equally hyper-competitive insurance space, either you distribute products like a policybazaar or manufacture them like Acko and Digit. PayTm is trying both, so far with mixed results.
“For large fintechs, unless they have a closed loop ecosystem and a captive customer base, building scale with profitability will remain a big challenge.” Ganapathy and Subramanian argue. “… Unless PayTM lends, it can’t make significant money by merely being a distributor.”
Is it the end of PayTM? No.
It needs to hunker down and regroup. Better still and let me repeat myself , merge with Amazon. As I have argued in a previous column of mine, Jeff Bezos has come late to the payments party, has limited feet on the street and can leverage Paytm’s existing network. Global success stories like Paypal and even Ant were fundamentally built on e-commerce and not the other way round like Paytm. Afterwards, it’s time to think strategically and at valuations that are closer to reality.