How UPI has become a strong source of revenue for fintech pioneer Paytm

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

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

During the recent earnings call, Paytm founder and CEO Vijay Shekhar Sharma highlighted that Paytm’s focus on merchant payments rather than consumer-led UPI payment has created a scalable subscription UPI revenue model. “I feel very positive and inspired by the introduction of our device business, especially Soundbox which has led to significant scale in UPI purchases and various subscription driven revenues as you have seen our monthly numbers,” Sharma said.

The fintech giant has achieved operating profitability in Q3FY23 with EBITDA before ESOP cost at ₹NOK 31 million, well ahead of the September 2023 timeline. The company’s revenues grew by 42% year-on-year ₹2,062 Cr driven by an increase in merchant subscription revenue, growth in lending distribution and momentum in the trading business. According to the government notification dated 11 January 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 operations in the payments industry is notably higher than all other peer companies. “Some chose P2P, some chose P2M, we chose trading. Our acquiring market share, which NPCI is yet to declare, once they start declaring, you will see how well capitalized we are there over other UPI players, even standalone UPI players or other payment aggregators,” he added.

Paytm’s core payments business is growing rapidly with its two main margin drivers – payment processing and subscription revenue. The company continues to strengthen its market leadership in offline devices with the number of merchants paying subscriptions for payment devices such as 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 an earlier submission to the stock exchanges, the company provides a net payment margin of 7-9 bps (basis points) of gross merchandise value (GMV) on processing of which UPI provides 3-4 bps and other instruments provide 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 generate device subscriptions among merchants. This is in line with Paytm’s subscription as a service model with an average monthly subscription fee on an active device at ₹100 per month. The company expects to generate enough cash to fund capex in 12-18 months, considering the aggressive depreciation of the Soundbox and EDC units.

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

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

As a technology disruptor, Paytm has gone far beyond payments to carve a niche for itself. The company monetizes 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 registered customers and there are only ~1 crore devices in the market. Overall, subscriptions to payment services and other services constitute a large market. India can have a potential of 10 crore merchant units and more than 50 crore payment customers in the near term. The company’s primary intention is to build scale with the highest focus on operational risk and compliance.