PayTM Business Model and the impact of the RBI directive

Wednesday evening, 31st Jan'24 , Some one at work mentioned, that PayTM has been hit by RBI for non compliance. I remember asking her, wasn't that way back in 2022? Yeah, only this time RBI meant to put this entire cowboy attitude to rest!

And social media went bonkers, with some predicting this is the end of the road for PayTM. The stock crashed 20% on Thursday, and anotehr 20% on friday, following the media frenzy. SO much so, that SEBI paused the selloff as soon as the stock hit the lower circuits. And the top management organised a press conference to clear the air. Amidst all of this, Jefferies downgraded their stand on PayTM to ‘underperform’ from a ‘buy’ and halved their price call to ?500 (the stock closed ?487 on friday btw). And there was news about JP Morgan sweeping in and now own 0.79% of the company.?

So, what exactly is happening? And what is the business of payTm that has been hit by the RBI directive? Lets dig into this juicy news item with the Fintech Chronicler.?

RBI puts severe restrictions on PayTM Payments Bank

But first, lets cover wat the directive was all about in short.?

Here are the key points discussed in the RBI circular:

• The RBI has directed Paytm Payments Bank Limited to stop onboarding new customers and to appoint an IT audit firm to conduct a thorough audit of its IT systems. This issuance was first done in March 2022.?
• The RBI cited persistent non-compliances with regulations for its decision, and has demanded for a thorough IT audit to be done, before revising their decision.
• Existing users can continue to use their wallets, or fastags issued by PayTM Payments Bank. But after the Feb 29th, users won't be able to top up these instruments. they can continue to use it, till their balances run dry
• PayTM's nodal accounts with Paytm Payment Banks have also been instruvted to be closed?
• This will impact UPI and QR payments for merchants whom the bank had acquired.
• It is important to note that Paytm Payments Bank Limited is a separate entity from Paytm,?the digital payments platform.?Paytm users will still be able to use the Paytm app to make payments,?but they will not be able to add money to their Paytm wallets or accounts through Paytm Payments Bank Limited after February 29,?2024.

PayTM Business Model

So PayTM, which set up in 2010, runs a number of inter related businesses, with Payments being the central theme. Here is a quick run through of all the thing PayTM is into.?

1. Payments:

• This is Paytm's core business,?offering various payment solutions like: Mobile recharge,?bill payments,?rent payments,?etc. Online & offline payments through QR codes and devices. UPI payments facilitated by their platform.

• This segment generates revenue through transaction fees and commissions.

2. Commerce :

• Leverages Paytm's user base to promote merchants and brands: Travel and event ticketing. In-app games and entertainment services. Loyalty solutions like deals and gift vouchers.

• Revenue comes from commissions on transactions and partnerships with merchants.
• Peviously this also included PayTM Mall, which was spun off as a separate entity, pre IPO.

3. Financial Services:

• Offers various financial products and services: Paytm Payments Bank (currently facing restrictions) Wealth management products like gold savings and mutual funds. Insurance and lending products in partnership with other institutions.

• Revenue comes from commissions,?fees,?and interest income.

4. Cloud:

• Provides cloud computing solutions to businesses: Infrastructure as a Service (IaaS) offerings. Payment gateway APIs and developer tools.

• Revenue comes from subscription fees and usage-based charges.

And btw, almost each of these business lines are regulated by a different regulator. PayTM payments Bank, the one which slapped with restrictions, is regulated by RBI. PayTM's wallet, PPI and Fastag business is licensed by NPCI, as is its UPI TPAP license.?

Ok, lets move on to the one that RBI has taken umbrage to.?

PayTM Payments Bank : How does PayTM make money ?

What is the business model of PayTM Payments Bank?

To get into that, lets first understand the business model of a payments bank. And let us do this, in the Fintech Chronicler style of 5 levels of difficulties!?

Sure, I’d be happy to explain payments banks at different levels of complexity. Let’s start from the simplest explanation and gradually move towards more complex ones.

1. Toddler Level: Imagine you have a piggy bank where you save your pocket money. What if I told you, you could use your piggybank to also buy your favourite candies and toys too? Well, exciting right? That is what Payments Banks helps you to do.?

2. Teenager Level: A payments bank is like a piggybank but it is only accessible through your mobile phones. You can put money into it and use it to pay for things online, like games or movies. Its not like a full fledged bank, because it can only accept money for you, and not lend you any. But it is pretty handy right, especially if you wanna sneak in that occasional movie date with your girlfriend, without your mom knowing right? Though if you wanna gonna date, please do ask your parent's permission first ok! That's the good thing to do.

3. College Student Level: Payments banks are a type of non-full service bank in India. They’re designed to enable easy transactions and extend banking services to the unbanked population. They can accept deposits up to Rs. 2 lakh, offer remittance services, mobile payments or transfers, but can’t offer loans or credit cards.?

4. Graduate Student Level: Payments banks are part of a financial inclusion initiative in India, with the aim to bring the unbanked into the banking system. They can issue debit cards, provide online banking services, and enable payments. However, they can’t issue credit cards or provide loans. Their operational model relies on having a wide access network, typically through partnerships with other entities.

5. Expert Level: Payments banks are a specialized type of bank introduced by the Reserve Bank of India (RBI) in 2014. They are aimed at providing financial services to the unbanked population, promoting financial inclusion, and deepening digital payments in India.

Payments banks are different from traditional banks in several ways:

• They can accept deposits up to Rs. 2 lakh per customer.
• They can issue ATM/debit cards but not credit cards.
• They can offer payment/remittance services, but they cannot lend money or issue loans.
• They can offer third-party products such as insurance and mutual funds.

Let's take the example of Paytm Payments Bank, one of the prominent payments banks in India. Paytm Payments Bank operates primarily through digital channels, leveraging the vast user base of the Paytm app. Customers can open accounts online, and transactions are conducted through the app or using the issued debit card. The bank focuses on low-cost digital transactions and aims to provide convenient banking services to its customers.

Payments banks earn revenue primarily through transaction fees, service charges, and commissions from third-party product sales. For instance, Paytm Payments Bank earns fees on transactions made through its platform and earns commissions on insurance and mutual fund sales. By focusing on digital transactions, payments banks keep operational costs low and drive revenue from high transaction volumes.

Payments banks play a crucial role in advancing financial inclusion in India by providing basic banking services to underserved populations. They facilitate digital payments and empower individuals to participate in the formal financial system. However, payments banks also face challenges such as generating sustainable revenue streams, ensuring regulatory compliance, and building trust among customers, especially in rural areas where digital literacy may be low.

Impact of RBI directive on PayTM Payments Bank

The biggest imapct i could see is:

1. Impact on Paytm: Paytm will not work with PPBL anymore and will move to other banks. This will have a 300-500 Cr impact on its annualized revenue as per the press conference that PayTM called for after the directive.
2. Operational changes for merchants: Merchants who have relationships with PPBL will need to change their relationships to other banks. PayTM is working with other regulated banks to ensure that this migration happens before the 29th of Feb and ensure business continuity.?
3. SoundBox subscription revenue to be severely impacted: Now this was one growing business area for the entity. With this pause, the soundbox subscription revenues will take a huge dip. Why? Because the merchants will now have to be migrated to other banks. And guess what? Most major banks are also coming up with their own soundboxes. And chances are they will either directly approach the PayTM merchants to migrate them to their subscription, or we will have other payments company undercutting payTM here amidst all the frenzy and confusion

This will obviously also hit their MDR driven revenues line item, although the impact on merchant GMV will not be much. Becuase lets face it, we have all kind of adopted digital payments, and UPI, as a default mode. Almost.

PayTM Financial Services: How PayTM earns

But lets admit it, that was really not gonna be the path to profitability for PayTM anyway.?

1. the margins on payments business was as low as 0.3%
2. A bank without avenues to lend was never gonna make money
3. Being heavily depended on cross selling third party solutions comes with its own challenges.

Then, what was the going to be the cash cow for PayTM ? Liek every other payments business it was to be lending. Specifically, the merchant lending business.?

So, payTM because it doesn't have the license to lend, partners with other regualted lenders, provding them access to a potential base, they didn't have previously. What's more becasue of the transactional data they were accumulating, they could also provide an alternative underwriting for this base as well.?

Not just with loan disbursement, but the payments wing also helped with collections as well. And this was doing pretty good, with? 163% jump over FY 22.

?

BTW they also do have a personal loan, or BNPL model operational, and that too is gonna take a hit in the short term, with their payments bank business being stopped in the short run. Which is why in my opinion the stock took a pounding because this was the touted growth engine for the coming years.

The money coming in from Financial Services & Others has shot up like crazy, with a growth rate of 246%! In FY 2023, it was ?1,540 Cr, up from just ?128 Cr in FY 2021. While in the same period, Payments grew on 44%.?

There still might be hope in the long run. if they work out their KYC challengesbecause their loan disbursement is a small fraction of their monthly transacting user base:

• ?Postpaid penetration is at 4.30% of average MTU.
• Personal loans penetration is at 0.90% of average MTU.
• Merchant loans penetration is at 5.90% of total devices deployed.

BTW, I tried seeing how much the income from loans the company made. While the actual realisation of the same would come from the subsequent years, becuase repayments happen over the year, I could see a 13% growth in that department. That too was a not so great sign to me. Because my loan book is growing 265% but my income isn't able to play catchup.?

Businesses Impacted and the way forward for PayTM

We now understand the businesses that comes under One Ninety Seven Communication Limited (OCL) the parent company of PayTM. Now lets see how inter-twinned were they with Paytm Payment's bank.?

PayTM and PayTM payments bank

Now, PayTM payment which works as a payment aggregator, had a whole merchant acquiring business. As per VSS in their latest press release, about 10-15% of their merchant base, had their nodal accounts with PayTM Payment Bank.?

These merchants will have to be migrated out pronto, before the 29th of Feb.?

Now, while paytm is working in the background to partner with other banks for this, I wouldn;t be surprised if some of the medium sized businesses move out completely, because the ambiguity and "Consistent regualtory lapses" is just too much of a hassle to deal with. Like we saw with Instamojo. Now that is something they didn't share in their press release, and trust me it will have a long term impact for sure.?

Fastag and Payments bank

Now, fastags could take a toll on their users (pun intended).?

Why? Because PayTM payment banks issued fastags will not be allowed topups after 29th.

And prepaid instruments, are generally regualted by NPCI. And as far I know, NPCI does not have any thing on PPI portability between issuers. I wonder why though. I mean, with the likes of JioFin coming in, I am sure there will be a lot of cashbacks and freebies being distributed. As a user, I would definitely like to switch to a provider, even if virtually or at the backend, if they're willing to pay the toll for a few of my trips a month at least!?

Anyway. This will be a segment that PayTM loses completely, if PayTM payment Bank does not submit the complete IT audit report, and amp up their KYC and AML within the week.?

Wallets and UPI business

Here, what i think will happen is, in the back end, all PayTM payment banks related accounts will be closed. users will be directed to a new bank for their wallets, and do a full KYC to set it up with the bank at the backend, PayTM as the front end.

The real winner will be the bank which wins over the contract. And that would be one with the most seamless onboarding journey. Reminds of the Account opening and verification journey I had designed and implemented on account aggregator back in the day.

I wish I could say that concludes it. But given the social media frenzy this is gonna go on for a while now! I mean, i shall definitely be checking in again a month later to track the progress they've made with regulators. Until then, I shall be back with yet another fintech deep dive the next week. Subscribe so that you stay looped in.?