Davos WEF 2018: Paytm To Sell Loans, Insurance As It Builds Three-Stack Model, Says Vijay Shekhar Sharma
Paytm is looking at a broking licence to get into trading and selling mutual funds and insurance as it looks to build a “three-stack” business model.
The first stack is the payments option, which is used for customer acquisition and breaking even. The second is the e-commerce business which generates the margins but at the cost of aggressive spending. The third stack are the financial services offered by Paytm Payments Bank, where it’s making “large profitable delta margins”, Paytm Chief Executive Officer Vijay Shekhar Sharma told BloombergQuint’s Menaka Doshi on the sidelines of the World Economic Forum at Davos, Switzerland.
It hasn’t been a smooth sail for Paytm though. The bank rollout has not been at the pace Sharma wanted, given the hurdles in the ecosystem. The rate of customer acquisition is also lower than his initial expectations. The company hopes to acquire 50 million accounts by May this year, but Sharma didn’t give the number of customers Paytm has currently.
In future, the financial services company will continue to aggressively build upon its offline payment ecosystem which has grown six-fold growth in the last one year. “Paytm’s purpose in 2018 will be more use cases in more places,” Sharma said.
The Alibaba Group-backed company that has an online wallet, payments bank and an e-commerce marketplace has been among the biggest beneficiaries of the government’s digital push after demonetisation. The cash crunch after the note ban pushed people to make cashless payments through mobile phones. Paytm is completing more than half a billion transaction in one quarter, which doesn't include UPI transactions. Of these, offline payments contribute more than a third, Sharma said.
Offline payments are when a user goes to a store or a merchant and pays using Paytm by scanning a QR code, he said. That has always been the “killer” unique selling proposition for Paytm as growth in online payments depends on other online merchants, like a Zomato or a Swiggy, Sharma said.
Here are edited excerpts from the conversation.
How has the year been like since last Davos?
It was an incredible year. We could expand on what we built. We built payments, and then we expanded to bank, we also forked out our commerce business formally, raised money there. In an overall way, a more structured ecosystem where we offer customers financial services, obviously payments is the anchor way of that, commerce, and hopefully the next set of services we will offer this year.
What are they?
Logically, content, commerce, and financial services. I actually not just started out with content, we have a $60 million business on content. Content in mobile world which we have been doing since 2001. This year we will try content. The good thing about our business is we try out new things. Our commerce business started in 2014, and it took us two and a half years to understand where it would go. We are not in a rush to finally set this is the bet, we are always in a rush to try many new things. So we are trying content.
If you have noticed, in the Paytm app we have updates section, which we have changed to an inbox, it is changing in the next release again, and we have a few things lined up. The intent of starting messaging was not about person-to-person chat, but more about consumers getting access to brands, and visa versa. We got a surprise with the number of transactions per second, which we call messages per second, EPS, speed etc, that we are scaling that system back again to bring our merchant offering, which is the ultimate offering in messaging.
Let’s talk about digital payments. You got a leg up from demonetisation. Have you seen the growth sustaining of Paytm?
Since demonetisation, the numbers are up year-on-year. If I took the month-to-month number, it is up by 30 percent. Offline payments, where you pay at a restaurant/store and scan the QR code to pay, has accelerated six times year-on-year. Which is the USP Paytm will continue to build on aggressively. We have launched our zero percent payment/UPI/card system.
Can you share with us how this scale of offline payment is dramatically changing?
We do about more than half a billion transactions in a quarter, and run rates have been in the range of 200 million to 250 million plus if UPI transactions are added. We don’t add UPI transactions into Paytm by the way. These are payment transactions. You talk about 200 million run rate on payment transactions. There offline is more than one third.
Your big focus will be to continue growing that?
Paytm is reaching 7 million merchants. India has about 40 million SMEs, retail is big enough. This is our bet. The point will be, you go anywhere in the country, and you can use Paytm for anything. You can use Paytm for those who are not merchants too, like in a temple or donate to somebody, or a coconut seller, a street vendor, also can accept Paytm. They are not structurally Paytm merchants, they accept money in their savings accounts. Out bet is we will make India digital, and a problem no more left to be solved.
That’s very noble, turning into a viable business is a trick right?
People say you give cashbacks, will you remain viable? What I like about it is, till the time people don’t understand what business you are in, and what the business model, you are in the lucky shape. In internet economy, unlike in a physical world economy, where the numbers are very simple -- revenue, ebitda, PAT, lets add another element, which is contribution margin where when you are selling something, have you got COGS (cost of goods sold), have you got cost of payment sorted, have you got all cashbacks accounted for, have you got all market accounted for. So we have accounted for anything that we had to pay to someone, any margin that we have to pay to the banks or any other payment systems, any cashback that we give to the consumer for that transaction and all kind of online marketing that we go for. We are actually contribution positive company, which means we are not ebitda positive yet, we are a contribution positive company. And our ebitda number year-on-year it became better from negative 4 to negative 1.5.
So more consumers are using our services, and we are happy with the number of used cases. Paytm’s obligations, and purpose this year is, more use cases, for more payments, at more places.
Why bank, what are you going to do differently. Are people adopting all the features of the Paytm Bank?
First and foremost, one thing I learned about banking is that it is like coexisting with the ecosystem. The ecosystem includes other banks, regulators, and many entities. If we were to say, we would have launched the bank on our date, we would have launched it six months before than the actual launch date. It didn’t happen for various reasons, like I said, we are in an ecosystem. Now the product, we launched with a plain vanilla product, because the intention was to launch a unique product. Before you go into full-blown feature-led products, you want to launch a plain vanilla product. So we offered a digital-only bank account which meant we were not giving a debit card. Surprisingly in banking, the physical debit card is a feature. And it took time for us to build the debit card feature with the franchise, figure the cost – so what I am trying to say is, our rollout of the products at the bank, thanks to the ecosystem would not have been done at that pace, had we not been a bank.
What we have been able to achieve is, if you have money in your Paytm savings bank account, by the way, we have only a savings bank accounts and not a current account facility, in the savings bank account, the money is liquidly available and linked to a fixed deposit account. If your money is in the wallet, you earn zero percent, if your money is in the savings account, you earn four percent, and it is hooked to a fixed deposit account where right now we only transfer overflow more than Rs 1 lakh automatically. And soon we will launch, on demand, switch the money from savings account to a fixed deposit account.
What is new?
When you swipe out, and you create an FD, there is an FD breakage fee. A customer who gets a few thousand per month will get the same benefit as a high-value customer.
India has a trillion dollar savings in gold and about two fifty billion dollars in bank accounts. So we have four times more savings in gold. So your savings account, we are connecting to fixed deposit. Because people save in gold, fixed deposit or property. Our product is, you have a phone app where you get money, you can swipe out or automatically trigger for us to make an FD free of cost or buy gold which you can redeem, pledge, deliver, in small units. As small as, Re. 1 unit.
So three things that are innovative – unit of buying, the cost of buying – not any extra charges, and the ease of buying using the phone.
How many customers do you have now? Is it lower than what you hoped to have at the time of launch?
They are lower than that because some days back Aadhaar-led things happened in the country. We were not very aggressive with Aadhaar-led customer acquisitions because we knew that there are concerns. An agent may just activate bank accounts without customers knowing about it.
Are you referring to the Airtel Payment Bank incident?
It’s an agent-led problem and not about one company or another. You go and ask for a KYC upgrade of your wallet and the person doesn’t realise that a bank account is being opened. Six months back, we launched with an OTP which very clearly says share this OTP to only get KYC of your wallet done, share this OTP if you also want to also open a bank account. We relaxed the account opening from instant to a 48 hour grace period, we text you to ask did you request to open a bank account? If you did not then just give us a missed call. We go through a process.
How many customers do you have for the bank?
We will announce that when we reach the benchmark of 50 million, hopefully within a month of year. We found out that the largest private bank in the country has 44 million customers. So this is our target, to topple that 44 million.
How do you make money though?
The core business model is, customers trust us with payments, intimately sharing their bank details with us to share with the merchant or depositing money in our bank accounts. Whichever way they become loyal to us. First use case of various payments - online, offline, recharge, bill payments etc. all this is free. Then what happens is, the customer is on our app, we have traffic on the app. Then we have a commerce business on top of it. The base user is a payment user. In the second stage, the user becomes a commerce user, could be bus tickets, train tickets. The third stage is both that these help us generate customer data and capability for us to create financial services, like lending, insurance and wealth. Payments is a customer equation and breakeven product, commerce is where our margins are, higher margins. If a bank sold a bus ticket directly, it would make 10 percent., by selling cinema tickets will make 50 percent. We are getting this from the vendor.
But what is the cost?
CAC which is the customer acquisition cost is free. That happened on payment. We have an effectively CAC neutral customer acquisition equation and margin in commerce, and wealth management, financial services as the next stack. Our business model is a full stack and not a single stack. People misunderstand if in a single stack we are profitable, I don’t need to be profitable in a single stack because that is where your problem is.
How is the Mall doing?
Our business model in the Mall is different than Amazon, Flipkart. Their business model is proxy of retail. I am a large seller, I buy nearly everything. They make it structured like a marketplace. Paytm is not a retailer but a platform where retailers sell. We upgraded that to we will only have authorised sellers with shopkeepers and inventories. The change from the erstwhile marketplace to the Paytm Mall is, Paytm Mall is exclusively of the authorised retailers and shopkeepers of that brand. So in this case, a Samsung phone effectively will be sold by a shop in your city. The erstwhile marketplace where you had all kinds of crap coming in, is now perfectly clean. We have perfectly cleaned out because we only deal with authorised brands.
GMV applies to Paytm Mall?
We have a run rate of $3 billion of GMV. When we launched Mall, we doubled our market share in six months. We totally believe we can topple market leaders in retail.
Are most of you making profit?
We are not making profit this year or next year or the year after.
You stack in the first two levels in not making profit for the next 5 years?
The middle stack is in aggressive spending. The third stack is making large margins. The ecosystem has an advantage of making money somewhere else.
I understand that any new business takes a while to get there. There are other milestones you want to achieve before you achieve profitability. What I’m trying to do is keep it real. So while we talk about your plans, we also talk about what the profitability is.
A bank that is a subsidiary of ours, could become profitable earlier because a bank’s customer equation cost has nothing to do with the aggressive customer equation cost of Paytm’s ecosystem. Bank is happy with bank account customers who are depositing money, and bank resells payments services. Logically, it should make money. There is nothing to cash back there. And we not not giving disproportionally large interest rates. So very initially the line item in the bank could be profitable.
Third stack. Financial services. Which is now what? Insurance?
Insurance, lending, wealth are three financial services. And wealth very clearly we talked about already, fixed deposit is a wealth product for us. We don’t charge the customer but effectively its a float based large sum of money that a partner bank makes and shares money with us. So it effectively makes money.
So the partner bank will share money with you?
Who is the partner bank?
But you are making a much slimmer margin on let’s say a term product than a bank would typically make.
Wealth is upgrading form digital gold to fixed deposits. Because gold is a very popular service. We talk about 400 kg of gold. reserves of large hundred kgs. Transaction of large number of people. Millions of people with a gold account, with a locker with us.
How many kgs of gold have been purchased on Paytm?
400 kgs. We could be one of india’s biggest jewellers. Except we are not a jeweller. And then, more than a million customers with lockers, with gold balance, in cloud, which they can get delivery on demand.
But where do you make money in that?
Because the refiner is directly selling to you, there is a margin.
So you are sharing in the margins of all your other partners.
A jeweller sells from a refiner. Your effectively selling as a jeweler. And we are getting directly from the refiner.
Have you started mutual funds already?
We will in Paytm Money start trading and selling of mutual funds.
And what else do you have planned for wealth management?
In wealth, people have in India, FD, gold and real estate as deposits. So we will do gold. We will do FDs and we will do stock market-led entities like mutual funds.
Are you going to get int broking as well?
Yes. A broking licence.
Have you got one? are you in the process of acquiring one?
We have applied. We are looking at one.
So you will enable the sale and purchase of equity shares as well? Bonds, equities, mutual funds...
Commodities, all of that.
What about lending? How lending? Are you lending outside the payment bank structure?
Lending has disbursement, underwriting, collections, risk and then book.. So we basically drop everything before book and take our cake. And that is their cake. So partner banks, NBFCs, lend to our customers where we do disbursements, we do underwriting, we do collections and we do risk.
And they share the margin with you? Or is it a fee?
No, it is a margin. it is a percentage of the total spread.
It’ll never show up as your book. It will show up as their book. but you will earn off it.?
This is a clear unambiguous statement. Paytm is not building loan book. paytm is enabling loans to to the consumers but taking significant amount of scope and obligation upon themselves including first loss risk. That’s what our lending business is.
When are you starting this?
We started consumer lending in a very beta way with ICICI. Its a clear product of ICICI, that goes to the customer but again it goes through this value chain of ours.
And so you are going to partner with a whole variety of partner banks?
So same thing with wealth management? You’ll do all kinds of MFs, insurance, everything?
That’s right. Pru is our partner in one of those cases. Another AMC is another partner and so on. The same with insurance. Paytm is all about a large number of customers and their transactions on us. Then we have the opportunity to cross-sell, up-sell directly product built - so nobody in between - at a scale that is big enough to justify our existence.
Whats this I heard about a Paytm coin? Are you introducing Paytm coin?
Short answer no. But what we have as Paytm cash looks like that because it is pegged to the rupee. It is directly exchangeable with the rupee.
Those are your points, like frequent flyer miles?
That’s right. People got confused between cashback and points. So we will wait for some time and then launch again.
So you will call it Paytm coin?
But your not launching some sort of...
Coin currency, which is crypto and hopefully not leveraging the ICO revolution? Never say no is the answer.
So what else is planned for the year?
The stack is so huge. There is a base. The cake is really thick in terms of a number of things that we have to do. This is the year to sustain scale, grow and dominate.
What can go wrong?
Spreading too thin.
Do you have the management bandwidth to deal with all of this or is it still a Vijay Shekhar Sharma run shop?
Management bandwidth and the number of things we want to do is a risk.