How UPI Has Become A Strong Revenue Source For Fintech Pioneer Paytm

Paytm said that it estimates for Q1-Q3 FY 2023, it will receive ₹130 Cr of incentives in Q4FY23

Source - Paytm

In the Indian financial ecosystem, Paytm became a trendsetter when it launched its mobile wallet and QR payments almost a decade ago. From ‘scan and pay’ to ‘tap and pay’, Paytm’s payment solutions have changed the way everyday transactions are carried out. 

But what truly sets Paytm apart is its diverse business model and a wide array of services it offers while its competitors are engrossed only on UPI payments so far and are now slowly following Paytm’s footsteps into other areas. In fact, OCL’s associate Paytm Payments Bank is a leader in UPI P2M payments, as the largest acquiring and beneficiary bank.

During the recent earnings call, Paytm Founder and CEO Vijay Shekhar Sharma highlighted that Paytm's focus on merchant payments instead of consumer led UPI payment has created a scalable UPI revenue model in subscription. “I feel highly positive and inspired by the adoption of our device business, especially Soundbox which has led to significant scale in UPI acquiring and various subscriptions led revenues that you've seen our month-on-month numbers,” Mr Sharma said.

The fintech giant has achieved operating profitability in Q3FY23 with EBITDA before ESOP cost at ₹31 Crore, much ahead of its September 2023 timeline. The company’s revenues grew 42% YoY to ₹2,062 Cr driven by an increase in merchant subscription revenues, growth in loan distribution, and momentum in the commerce business. As per Government's notification of January 11, 2023, the company estimates that for Q1-Q3 FY 2023, it will receive ₹130 Cr of incentives in Q4FY23. 

Sharma also mentioned that Paytm’s revenue from merchant business in the payments industry is particularly higher than every other peer company. “Somebody chose P2P, somebody chose P2M, we chose merchant business. Our acquiring side market share, which NPCI does not yet declare, once they start declaring, you will see how well we are capitalized there over other UPI players, also standalone UPI players or other payment aggregators,” he added.

Paytm’s core payments business is growing rapidly with its two key margin drivers – payment processing and subscription revenues. The company continues to strengthen its market leadership in offline devices with the number of merchants paying subscriptions for payment devices like Paytm Soundbox and POS reaching 6.1 million at the end of January, an increase of 0.3 million in the month. The number of merchants paying subscriptions increased by 1 million in Q3 FY 2023. 

According to a previous filing with the stock exchanges, the company makes a net payment margin of 7-9 bps (basis points) of gross merchandise value (GMV) on processing of which UPI gives 3-4 bps and other instruments give 15-18 bps. With UPI growing faster than other instruments, Paytm expects blended margin to stabilize at 5 to 7 bps. 

There is zero MDR on UPI for merchants but it provides monetization opportunities to the company as it helps drive device subscriptions among merchants. This is in line with Paytm’s subscription as a service model with an average monthly subscription charge of an active device at ₹100 per month. The company expects to generate enough cash to fund capex in 12-18 months, taking the aggressive depreciation of its Soundbox and EDC devices in mind. 

The total merchant GMV processed through its platform in Q3FY23 aggregated to ₹3.5 lakh Cr, marking a YoY growth of 38%. Merchant payments volume in the month of January was ₹1.2 Lakh Cr, growing 44% from a year ago. The company’s target over the past few quarters continues to be on payment volumes that generate profitability, either through net payments margin or from direct upsell potential.

Paytm’s registered merchant base expanded to 31.4 million at the end of December 2022, offering a large total addressable market (TAM) for distribution of completely digital credit. The company helps its top financial institutions partners to disburse small ticket personal loans and merchant loans while Postpaid drives credit volumes with small loan amounts of good quality. 

Being a technology disruptor, Paytm has moved way beyond payments to carve a niche for itself. The company makes money from both UPI and non-UPI payments with a robust business model. As it is still in its nascent stage. As per Paytm’s management UPI has ~25 Crore signed up customers, and there are only ~1 crore devices in the market. Overall subscriptions for payment and other services form a large market. India could have potential of 10 Crore merchant entities and more than 50 crore payment customers in near term. The company’s primary intent is on building scale with highest focus on operational risk and compliances.