Daybreak - Personal loans helped Paytm make a comeback. But it can't rely on them anymore

Episode Date: November 24, 2023

In November 2021, *Paytm’s parent company One97 Communications went public with a $2.4 billion IPO. What followed was a bloodbath for the fintech giant. In a span of a year after the IPO, Paytm’s stock lost 75% of its market value. No other large IPO in the last decade had seen such a bad fall in stock value within the first year of listing.But last year, in a dramatic turnaround, Paytm saw its stock value go up by 90%. What could've Paytm possibly done to bring about this crazy turnaround?It was personal loans. They’re the reason Paytm saw a more than 60%  jump in  revenue in the year ended March 2023. But now, Paytm can't rely on it anymore.Tune in to find out why.*Paytm’s founder Vijay Shekhar Sharma is an investor in The KenDaybreak is produced from the newsroom of The Ken, India's first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, analytical business stories.  

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too? It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. Can not underestimate the importance of all-rounders. If you've watched the cricket World Cup recently, then you will know exactly what I'm talking about.

Specialists may help you break records, but all-rounders, you can count on them to step up and take charge of a whole bunch of very different challenges. But why am I talking about all around us today and rubbing salt on your barely healed wounds from last Sunday? Well, it is to help you understand what is going on with Ptm, one of India's leading fintech companies. Let me take you back to November 2021 when Ptm's parent company, 197 Communications, went public with a $2.4 billion IPO. It won't be a stretch to describe what followed was a bloodburt. One year in after the IPO, Ptm stock lost three-fourth of its market value. No other large IPO in the last decade had seen such a bad fall in stock value within the first year of listing.

But then, in July this year, very dramatically, Ptm's share value saw a 90% jump. And as of now, each Ptm share is worth almost 90% jump. What could have Payton's possibly done to bring about this crazy turnaround? Personal loans. Personal loans became the fintech's go-to driver of growth and revenue. Since September last year, Paytm has doubled the amount of personal loans that it has given out. In fact, it is personal loans that now lead its entire loan business, and they are the reason why Paytm saw a more than 60, percent jump in revenue in the year that ended in March 23.

So personal loans basically became the much-needed all-rounder that the struggling fintech needed. But here's the thing. Paytm does not have an NBFC license of its own. What it is essentially doing right now is acting as a customer acquisition channel for banks and other NBFCs or non-banking finance companies, which means that it is vulnerable to the whims and fancies of its lending partners. Now, that is not a good place to be, especially if it is personal loans that have been the main driver of Ptm's rise back from all moustaches. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nick Da Sharma, and I don't chase the news cycle. Instead,

thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Friday, the 24th of November. The story of Ptm's IPO, as you can imagine, has become a big red warning sign for the rest of the fintech industry in India. The company's founder, Vijayshikar Sharma, was naturally throwing punches in every direction to try and change this narrative. And then halfway through last year came the moment of truth for the company. It had to make a tough choice. So, it decided that instead of putting all its effort into the low-margin payments business, which, by the way, is heavily discounted,

it would make a serious bet on its loan distribution business. And by the end of FY 2023 in March, Ptm had distributed almost 12 million loans worth over $1.5 billion. Quite the comeback it's been for the fintech giant. For starters, its vitals are healthy now, you know, since the company's shares are trading above 900 on average. In fact, it saw results within months of time. changing its game plan. The company had achieved operational profitability in the December

2022 quarter itself. And now, personal loans contribute nearly 12% to the fintech's revenue. This product has also made Ptm's overall financial services vertical more powerful. The share of revenue from this vertical grew by almost more than 60% in the September quarter of this year. So, what made Ptm decide? to make this bet on personal loans specifically. There are two reasons why Paytm picked it over other products. First, these are small loans with quick turnarounds. And the second, the interest fee charge on these loans is higher,

which means paytm can demand a bigger cut from its lenders like banks. So Paytm decided to sell as many of these small in amount but high in margin loans as possible to keep a steady stream of revenue. But right now, Ptm has decided to do something that might seem a bit strange, to be honest. It is cutting its dependence on personal loans, the very thing that got it out of trouble. Stay tuned to find out why. The reason why personal loans actually worked for Ptm is because its lending strategy to get to this point has been pretty straightforward.

Paytm basically wanted to make short-term borrowing a habit for its users. You can think of its strategy as a ladder. First, PayTM started reeling in users by offering them PayTM Postpaid. This is a buy now pay later or BNPL loan service. Users can borrow up to $20,000 at 0% interest for up to 30 days. This loan can be used to make online purchases, bill payments, recharges, bookings and so on. And then, Ptm decided to pitch small ticket-sized personal loans to those users who had a good credit history with these post-paid loans.

In fact, on an average, 40% of PTAM's personal loan borrowers come from the post-paid funnel. And finally, the idea was to offer large and long-term loans to those who had taken small personal loans. The plan sounds quite efficient, right? But it could only prove to be efficient for so long. The Ken reporter, my colleague, Ronakumar Gunjan, spoke to a bunch of former and current PtM employees.

And one of them explained to him that the personal loan strategy only works when users move up the ladder, from postpaid to small personal loans and then to larger long-term loans. And if one step of the ladder is taken away, it is no longer fit to use. So since the start of this year, Ptm has seen a bunch of its small personal loans go bad. Many users just simply stopped repaying these loans. So Paytm has to slowly do away with offering these smaller loans, which were its main channel to get people to borrow more.

And that is not all. Paytm has a bigger, more existential problem standing in the way of its lending business, which I mentioned earlier. Paytm does not have a non-banking finance company or NBFC license. And without it, Paytm is just a channel for loan. providers like banks and other NBFCs, which basically means that it is at their mercy for its loan business to work. It was banks that started finding the small personal loan segment risky.

So Paytm had no choice but to do away with the product. So how can Paytm keep its loan business alive after all this? Hang on to find out in the next segment. Paytm has dealt with many crises before. And Vijayshaker Sharma, the founder, has a signature way of of dealing with them. He likes to experiment. A senior Ptm executive told Ronak that Sharma usually wants to launch five new products to compensate for the failure of one. But this time, during its strategic shift from payments to lending, Petyam found a couple of experienced leaders in the top leadership

to lead the effort in a more sustainable manner. And these leaders have decided that Ptm's next big money generator in the loan segment is going to be merchant loans. They are planning to use one specific Ptm product to push these loans. Soundboxes. These are the point-of-sale devices that you see in your local supermarket or Kirana store, the ones that announced that the merchant has received your money. In fact, it was these soundboxes and Ptm's card payment machines that initially made merchants pick Ptm over other payment companies. Now, Ptm has a massive network of 38 million merchants that use its payment services. But so far, it has only distributed less than 200,000 merchant loans worth a little over 3,000 crore rupees. So, as you can see, there is clearly

a lot of ground that Ptm still has to cover. And this is where the soundboxes come into the picture again. Almost 90% of the merchant loans that Ptm has given out so far have been the merchants that use Ptm's 7 million point of sale devices or soundboxes. And it is planning to roll out close to 1.5 million offline devices like soundboxes and card machines every quarter for the next couple of years. And to capitalize on its huge base of merchants, the fintech plans to hire more offline staff to double down on sales. But hold on. This model also is not the safest bet. First, more physical soundboxes and a bigger on-ground sales force are going to cost the company

quite a bit of money. And merchant loans do not have the kind of margins that personal loans have. The interest rates are not that high. And don't forget, the existential problem still remains. Banks and NBFCs are still in the driver's seat of Ptm's lending segment. The only safety net that Paytm can create for itself is by working with multiple lenders. But if the whole industry, which is banks and NBFCs, come to the conclusion that merchant loans like personal loans are also too risky, then Paytam will be stuck at a dead end. Daybreak is produced from the Newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras.

Head to the ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.