Decoding Paytm’s aggressive lending and collections playbook

In the process it has strengthened its topline as well. But what kind of scale will Paytm need to make money, cover its losses and justify its valuation? That question will eventually be answered over the next few quarters.

The company has managed to grow its disbursals 250% to Rs 12,554 crore in March 2023 from Rs 3,553 crore in March 2022.

This is backed by balance sheet support from its partner NBFCs, such as Aditya Birla Capital, Hero Fincorp, Piramal Finance, Clix Capital and others.

What is also helping Paytm stand out in this competitive space is its in-house collection capabilities. Two sources in the know have told ET that Paytm has arrangements with these lenders promising certain levels of collection efficiency.

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“Given that FLDG arrangements are not encouraged by the central bank, someone like Paytm can bring confidence to its partner lenders with its collection pitch, it can help collect loans that were disbursed through its platform over a year or so,” said a top fintech executive, on condition of anonymity.

In the third-quarter earnings call, Paytm chief operating officer Bhavesh Gupta said that the company receives collection revenue for the loans that it had originated over the last 12 to 14 months.

Also read: Paytm CEO Vijay Shekhar Sharma expects more revenues from expanding UPI use cases

The take rate on this hovers between 0.5% to 1.5% depending on the type of loan. For Paytm Postpaid, a buy now pay later (BNPL) offering, it is between 0.5 and 0.75%.

Given that last year Paytm was originating much lower volumes, the contribution of the collection business remains negligible in INR terms. But over the next 12 months, Paytm will see this line item expanding as it disburses more loans and collects more.

Creditmate has helped

And this is where Paytm’s acquisition of debt collection platform Creditmate has come to bear fruit.

“Paytm has capabilities to send collection reminders and collection requests, and track repayments. Additionally, they are also partnering with on-ground collection agencies to build physical collection capabilities,” said one of the persons in the know cited earlier.

According to data shared by the company, across personal loans, postpaid loans and merchant loans, Paytm has a collection efficiency of anywhere between 25% to 30% (for loans that are due for 90 days or more).

Also read:UPI Lite has gained traction on Paytm, says fintech company

Interestingly Paytm as a payments bank cannot lend from its own books. Its competitor BharatPe, which offers postpaid as well as merchant loans, recently acquired a Mumbai-based NBFC. Cred, which operates at the premium end of the customer segment, also has an inhouse NBFC today.

“Fintechs are vying for the NBFC licence to stay compliant with the regulator’s digital lending guidelines, but Paytm, as long as it is a payments bank, will have to operate as a loan sourcing platform,” said one of the executives quoted earlier.

Stabilising take rates

Paytm currently gets around 22% of its overall revenue from financial services, which includes three major business lines: BNPL product Paytm Postpaid, merchant loans meant for businesses that own a Paytm device for payments, and thirdly, personal loans for Paytm users.

Currently Paytm operates at around 3.5% to 4% commission in the loan disbursal business. Add to that certain collection margins of around 0.5% to 1.5%.

A recently released industry report on Andromeda, one of the largest agent networks for banks and NBFCs, said that Paytm makes around 3.5% to 4% of the loan disbursed as commission for every loan sourced for its NBFC partners.

“As per industry standards, Paytm is pretty much on the higher side, but the question is for its topline to sustain, Paytm needs to constantly expand its creditworthy user base,” said the founder of a new-age NBFC that operates in the same space.

Paytm is betting big on its massive user base of around 350 million and very low penetration for continuous scaling of its disbursal game strategy. Currently Paytm has touched 4% of its monthly transacting users for Postpaid loans, 0.8% for personal loans and 5% for merchant loans.

The founder quoted above wondered up to what percentage Paytm could expand the pie without getting into risky segments. Perhaps that question will be answered over the next few quarters.

In all this, Paytm’s payment bank licence could become the actual hindrance. As an NBFC with massive equity backing and the capabilities of its top management team, Paytm could have raised large amounts of debt and used that for onward lending.

Given that it cannot lend on its own books, Paytm will always have to operate in the 4% margin game and look to aggressively disburse loans in the hope of getting a strong topline.

Boosting topline from other routes

While financial services is Paytm’s fastest growing revenue channel, its payments business needs to keep pace, too. And that is why the payments major is innovating on UPI across UPI Lite, UPI 123, and credit cards on UPI in the hope that it can keep drawing new users into its ecosystem.

The fact that both Paytm Payments Bank and the Paytm payment gateway cannot onboard new clients is not helping at this point. In March 2022, the RBI asked Paytm Payments Bank to stop onboarding new customers. And then, in November the central bank stopped onboarding of new online merchants on the Paytm payment gateway.

The RBI has asked Paytm to get clearance from the central government on the foreign money that it pumped into its payment subsidiary. Once the government clears this investment, Paytm can apply for the licence afresh.

The RBI has mandated every payment company offering services to online merchants to comply with its payment aggregator and payment gateway guidelines.

Also, Paytm Payments Bank is awaiting some clearances from the regulator to resume account opening again.

Also read: RBI grants in-principle approval to 32 entities for payment aggregator licence

“UPI is a great customer acquisition tool, and Paytm needs this to keep firing so that more and more customers use Paytm actively,” said one the executives quoted earlier in the story.

Currently, Paytm has around 82 million users active on a monthly basis (over the last year). Last year, this figure stood at 60 million.

And it is not only on the consumer side that Paytm has placed a big bet; it is also on the merchant side, where Paytm wants to own the entire payments channel.

With merchants using Paytm QR codes or point-of-sale terminals and consumers using the Paytm app to make payments, the company can own the entire payments cycle.

Paytm has 68 lakh subscription merchants who pay for its payment acceptance terminals. Madhur Deora, group CFO of Paytm, said during the third-quarter earnings call that Paytm had incurred capital expenditure of around Rs 200 crore, which mostly went into deploying point-of-sale terminals.

The company is also building next-generation soundbox terminals to enhance the payment acceptance experience for its merchants. On Wednesday, COO Gupta said that it was building a cobranded credit card product on RuPay that can be used on UPI.

While it has an entire range of products, Paytm will need to boost its topline more to be able to compete with its fintech peers, most of whom are still at the pinnacle of their private market valuations.