End-to-End Ecosystems Will Shape The Future Of Digital Payments: Fintech Giant Paytm’s Business Model Shows Why
With changing consumer behavior, favourable government policies coupled with the tech innovations catalyzed by the pandemic, India is poised for a huge growth in the digital payment market system in the future. While the fintech revolution has set the course for the Indian digital financial ecosystem, it is Patym’s unique financial offerings that have turned out to be the real game changer.
Paytm has been acquiring customers and merchants at very low costs to cross-sell high-margin services & is the first fintech to introduce a subscription as a service model with respect to devices for merchants. In fact, Goldman Sachs describes Paytm as the most compelling growth story, citing its business model and revenue growth. As most other fintechs are struggling with revenue and are urging the government to introduce fees on UPI transactions, Paytm has already set a benchmark on how fintechs can monetize their businesses efficiently in the current set up.
A cursory scrutiny of the digital payment market reveals that it took just five years for a sizeable chunk of fintech to emerge and set base in India. Quite a feat, considering that a significant portion of the population does not have any existing bank accounts.
According to a 2021 report by Unbanked Global Index Database, “India’s digital payments industry will grow to more than 300% of its current size by 2025.” The report adds, “COVID-19 boosted the adoption of digital financial services: About 40 percent of adults in developing economies who made a digital merchant payment using a card, phone, or the internet, and more than one-third of adults in developing economies who paid a utility bill directly from an account, did so for the first time after the start of the pandemic.”
In this backdrop, Paytm’s model has carved a niche for itself in the consumer market and is continuing to win trust for its open and transparent functioning style. What makes its monetisation method unique is that it offers a comprehensive ecosystem of payments and financial services, and is the only company that caters to a two-sided ecosystem of consumers and merchants.
The company’s latest operating figures speak for themselves. Paytm has started off the ongoing financial year on a strong note, with 89% year-on-year revenue growth in Q1FY23 at Rs 1,680 crore, while EBITDA (Before ESOP) loss reduced to Rs 275 crore, marking an improvement of Rs 93 crore Q-o-Q. The company’s contribution profit grew 197% Y-o-Y to Rs 726 crore, leading to an increase in contribution margin to 43% of revenues in comparison to 35% in Q4FY22.
Meanwhile, the company’s merchant base has grown to over 28.3 million, with deployed payment devices increasing to over 4.5 million, thus accelerating its subscription revenues. Similarly, Paytm loan distribution business in partnership with marquee lenders has now reached an annualised disbursal rate of Rs 29,000 crore. It has disbursed loans worth Rs 4,517 crore during the first two months of Q2FY23.
Here are some key factors that have shaped the Paytm success story:
- Diverse payment services for consumers: Consumers can choose payment instruments—both third party like cards, net banking as well as Paytm Payment Instruments like Wallet, Paytm Postpaid (BNPL), UPI, Fastag to make online payments for mobile recharge, education, utility bills, money transfers & other services using the Paytm app. Consumers can also make online payments on third party apps and in-store payments through QR codes and devices.
- Platform Engagement to Enable Merchant Partners’ Growth: High consumer adoption encourages merchants to join Paytm and also commerce offerings to leverage consumer traffic to grow their business. This creates a self-reinforcing loop, which demonstrates high frequency, high repeat rates, and leads to powerful consumer stickiness and retention.
- Catalyzing subscription-led Ecosystem for Merchants: Paytm enables its partners with tech solutions allowing them to accept payments through a wide variety of instruments and by deploying subscription-based devices that help with reconciliations. Entry level merchants can use a free Mobile QR to accept payments, typically using Paytm Payment Instruments or UPI. Small retailers can upgrade to Soundbox devices which allow real time voice verification and better reconciliation for merchants, hence enhancing their trust in digital payments, and generating subscription revenues for the company.
- Using Two-sided Ecosystem and Insights to Upsell High-margin Financial Services: Paytm’s large outreach and insights from payment and commerce services, enables the company to upsell high margin and low customer acquisition cost (CAC) financial services to their consumers and merchants. Paytm has also pioneered in distribution of innovative small ticket lending products which were not existent earlier, thus creating new markets which are possible only digitally. For consumers and merchants, the company offers various lending products, with their financial institution partners.