Our focus on monetization in the last couple of years has allowed us to make continuous investments in growth while improving profitability. We achieved the key benchmark of positive EBITDA before ESOP costs in Q3 FY2023 as we sharpened our focus on growing our payments and lending businesses. Our focus on merchant payments with subscriptions has created a scalable UPI revenue model. Our March 2023 Investor Presentation provides in-depth insights into our business and growth drivers.
Here’s the link for the same – https://paytm.com/document/ir/financial-results/presentation/Paytm_Investor_Presentation_Mar_2023_INR.pdf
Payments Business: Growth with improved profitability
Our payments business has been experiencing robust growth, along with improved profitability. Our revenue model is built on multiple sources, including Merchant Discount Rate (MDR) from merchants, subscription revenue from merchants, convenience fees and platform fees from customers, and incentives from the government for the promotion of UPI and RuPay transactions, and payment infrastructure. Our payments business generated ₹459 Cr of Net Payments Margin (calculated as total payments revenue less payment processing charges), up 120% YoY and 4% QoQ.
Higher subscription revenue from devices, better payment processing rates negotiated with banks, optimizations achieved through better transaction routing, and improved margin in the online payments business by focusing on profitable GMV through account-level rationalization are the key drivers that have contributed to the improvement of net payments margin.
Payment Processing Margin and Subscription Charges – Two Components of NPM
The net payment margin consists of two components – payment processing margin and subscription charges.
We make net payments margin of 7 to 9 bps of GMV on payment processing, with UPI contributing 3 to 4 bps, and other instruments contributing 15 to 18 bps. As UPI is growing faster than other instruments, we expect the blended net payment margin to stabilize at 5 to 7 bps in the long term.
Subscription charges include an average monthly rental fee of ₹100 per active device whereas some high-end devices contribute up to ₹250 a month. We receive additional incentives from partner banks, RBI, NABARD, and others for select installations. The company follows an aggressive depreciation policy on devices, with 2 years for Soundbox and 3 years for EDC devices.
Financial Services Driven by Partnership Model
Our Financial Services business is driven by a partnership model and aims to provide customers with a seamless, fully digital loan experience that leverages Paytm’s expanding consumer and merchant base while also utilizing our deep insights on payment behavior.
We have adopted a low-and-grow scaling strategy, which involves starting with smaller loans and gradually increasing the loan amounts as customers build a trustworthy credit history. We charge a sourcing fee ranging from 2.5% to 3.5% of the loan value upfront on the disbursement of loans.
We also collect loans on behalf of our lending partners. Our collection process is built on Paytm’s payment rails, streamlining the collections experience. The process is predominantly digital and includes various methods such as notifications, campaigns, cloud telephony, and credit bureau score alerts. We make a collection fee of 0.5% to 1.5% of the current disbursement value which is typically received post closure of the loan.
Our financial institution partners are responsible for capital deployment, underwriting and risk ownership, credit bureau reporting, regulatory reporting and compliance (including digital lending guidelines), and customer KYC processes.
A total of 8.1 million unique borrowers have taken a loan through our platform, increasing by 1.4 million in the quarter ended December 2022. In Q3 FY 2023, Financial Services accounted for 22% of total revenues versus 9% in the quarter ended December 2021.
Expanding Lending Business
Our lending business has demonstrated significant growth, driven by factors such as low penetration, a high repeat rate, and the potential for upselling opportunities. This expansion in lending is evident across various loan types that cater to a diverse range of customers and credit needs, including Postpaid Loans, Personal Loans, and Merchant Loans.
We offer Postpaid Loans with an average ticket size of ₹5,000 and monthly billing cycles. The penetration for these loans currently stands at 4.0% of Monthly Transacting Users (MTU). We employ a low and grow strategy for these loans. Paytm Postpaid also opens up opportunities for upselling other financial products and services.
Our Personal Loans have an average ticket size of ₹1,20,000 with a 15-month tenure and offer significant cross-selling opportunities with, with over 40% of loans being extended to existing Postpaid users. The penetration for Personal Loans is at 0.8% of MTU, highlighting the potential for further growth in this segment.
Our Merchant Loans feature an average ticket size of ₹150,000 and a 12-month tenure. A significant portion of disbursals, over 85%, is accounted for by device merchants, with a repeat rate of 45%. The penetration of Merchant Loans currently stands at 5.2% of device merchants, which suggests room for expansion.
Continued Focus on Credit Quality
We continue to focus on credit quality, leveraging advanced machine learning models to assist lending partners in scaling with risk-based pricing. Our own collection technology platform aids in digital collections, resulting in lower operating expenses and the ability to scale effectively. To enhance capacity on the collection side, Paytm has increased its workforce and formed over 50 partnerships with on-ground collection partners.
We also leverage the traffic on Paytm Super App to monetize and provide marketing services to other businesses through our Commerce and Cloud offerings. These services include co-branded credit cards, advertising, and marketing, along with commerce solutions for merchants.
Commerce & Cloud: Monetizing Paytm Super App Traffic
Our co-branded credit cards, part of the Cloud business, generate both upfront revenue and lifetime usage fees. In the quarter ended December 2022, we activated approximately 1.5 lakh cards, bringing the cumulative total of activated cards to around 4.5 lakh as of December 2022. Our existing user base, particularly those who have already taken loans through our platform offers strong cross-selling opportunities for co-branded credit cards. In addition to this, we offer advertising and marketing solutions for businesses.
We serve as a destination for merchants looking to grow their businesses. The company helps merchants sell tickets, gift vouchers, deals, and more through the Paytm app. This enables them to tap into Paytm’s extensive user base and benefit from the platform’s reach and visibility. The commerce business is run with cash profitability, and the revenue take rate is approximately 6% of the Gross Merchandise Value (GMV).
Our revenue growth is fuelled by subscription revenues, loan distribution and momentum in commerce. Our contribution margin has expanded due to improved payments profitability and the growth of the higher-margin loan distribution business. We are seeing significant operating leverage in our fixed costs while we are committed to investing in long-term growth.
By leveraging our technology and strategic partnerships, we aim to further expand our reach and impact on the Indian economy.