Paytm and its Game Changing Strategy

PhonePe, Paytm, and GPay are the most prominent players when it comes to digital transactions in the country. In the previous years we have seen a fierce war between these fintech giants to be the number one payments app in the country.

According to the data released by NPCI, as of December 2020, PhonePe holds 46.4% market share, GPay holds 34.4% market share and Paytm holds 15.4% market share in the Indian digital payment space.

Paytm, has been making remarkable progress over the past few years, despite its disappointing debut on the stock market last year. While PhonePe may be the market leader in UPI volumes on paper, Paytm has been working on a secret project that has propelled it far ahead of its competition. The company has been focused on building a comprehensive ecosystem that goes beyond just payments, encompassing financial services, e-commerce, and entertainment. With this project, Paytm aims to become a one-stop-shop for all of its users' digital needs, providing a seamless and convenient experience.

Since Paytm was one year late in the UPI race, PhonePe became a market leader in a very short time. Both the companies have very similar business model, they try to create an irreversible ecosystem for their consumers with three types of products

• the entry products,
• the retainers, and
• the up sellers.

These three categories have two types of customers:

• the retailers, and
• the merchants.

These companies spend more than INR 1000 for customer acquisition. When you start using the applications, these companies charge commission from the consumer to start recovering the costs. The same thing happens with retailers and when a new application comes in and starts offering better cash-back to the customers, it is very easy for the customers to shift from the application. In this industry there is very less difference between the offerings of two competitors. This massive and frequent shift was happening with Google pay, Paytm, and PhonePe customers. They kept on offering better cash-backs and deals and the customers kept on switching. This is the reason why there was a dire need for a customer retention tool. Here the three-product strategy comes in, the entry products, the retainers, and the upsell.

Paytm is using the same framework to retain their merchants. Paytm, PhonePe, and BharatPe had almost the same offerings for the merchants. They all had QR codes as an entry product, but they were lacking retainers. Paytm was able to gain an edge by introducing a game-changing product - the Paytm Soundbox. This device was designed to address the challenge of confirming transactions during rush hour at shops, which can often be difficult due to network congestion. Paytm was quick to identify this problem and launched the Soundbox in 2020, distributing it to merchants at a rapid pace. By the time PhonePe and BharatPe came up with similar devices in 2022, Paytm had already captured a significant market share among merchants. As of August 2022, Paytm had deployed 30,00,000 Soundbox devices, compared to BharatPe's 3,00,000 and PhonePe's 1,00,000. This highlights Paytm's ability to identify and address merchant pain points and underscores its commitment to providing a seamless and convenient experience for all its users.

The Paytm soundbox is more than just a feature - it has become a customer retention tool that has helped Paytm to dominate the merchant lending space. By leveraging the data collected through the soundbox, Paytm has become a major loan aggregator company and has been able to upsell to its merchant customers through PoS and loan disbursals. This is where Paytm’s upsell came into the picture with PoS and loan disbursals. People only look at Paytm as a B2C company and are unable to see the B2B space in which they are operating. Indian banks have never properly explored the merchant lending space. While salaried people easily get loans due to consistent source of income, merchants and small business owners do not get loans very easily. This is because the conventional banks do not have enough data to understand the risk of lending to small business owners. According to a report by Parliamentary standing committee on finance, the MSME sector of India faced a credit gap of INR 20 – 25 million. These MSMEs contribute 30% to India’s GDP. This was an unaddressed problem in the Indian market and this is where Paytm and BharatPe came up with their merchant lending feature.

Paytm's algorithm tracks cash flow at merchants' end every time a payment is made through the QR code or when merchants pay their supplies using Paytm. It also notes monthly inventory value, spending patterns, estimated projected savings, income consistency, and other parameters. The algorithm uses this data to calculate the risk of lending to merchants, just like credit card companies use spending patterns to assess individual creditworthiness. This allows Paytm to grant loans without paperwork and collateral. As loan recovery begins, the algorithm becomes smarter based on the merchant's repayment history and credit score.

This business of Paytm has become so powerful that the loan disbursals of Paytm went up by 327% in January 2023. This is how Paytm was able to identify a gap in the business and retain its merchants better than any of its competitors in this crowded and hyper competitive digital space of India.

Key Takeaways

The lessons that we can learn from this competition is that if you want to beat your competition, always jump to the next curve, and build a barrier to entry.

Secondly, customer retention is always more important than customer acquisition because acquisition comes at a cost, retention will actually help you cover these costs. So, if you are in a hyper competitive space, always ask yourself what the retainer hooks in my product that will help me upsell the other products in my portfolio because unless you have these hooks, your business is laying on a very weak foundation.

Lastly and most importantly, when you build retainers, see that the customers who stick for the retainers are capable enough to buy the upsell products or not.